Comments on: Chandler: Policy makers are repeating the mistakes of the 1930s http://www.creditwritedowns.com/2010/02/chandler-policy-makers-are-repeating-the-mistakes-of-the-1930s.html Finance, Economics and Markets Fri, 10 Feb 2012 00:37:00 +0000 hourly 1 By: Vangel http://www.creditwritedowns.com/2010/02/chandler-policy-makers-are-repeating-the-mistakes-of-the-1930s.html#comment-58428 Vangel Mon, 08 Feb 2010 19:47:00 +0000 http://www.creditwritedowns.com/2010/02/chandler-policy-makers-are-repeating-the-mistakes-of-the-1930s.html#comment-58428 Marshall: <b>Cut the budget deficit, get government out of the way, it all sounds so easy.</b> I did not say that it is 'easy.' I merely point out that it is necessary if a true recovery is to be allowed to happen with the least amount of damage. I can't see how it is better to tax productive individuals so that we can subsidize inefficient businesses to prevent them from going under. Why do we use tax revenues to pay off the losses of reckless bankers who refused to evaluate risk properly? How do they ever learn if we keep bailing them out time after time? Marshall: <b>So if the political preference is for the government to deficit spend less, what other sector is ready and willing to reduce its net saving position?</b> Who are you to decide that someone should reduce his/her net savings position? And why exactly is borrowing and printing money preferable to the market solution? Marshall: <b>The reduction in fiscal deficits cannot occur without an offsetting reduction in domestic private or foreign net saving (the latter being the inverse of the trade deficit). If the answer is no other sector is willing or able to reduce its net saving, then income growth in the economy will have to adjust downward. This is the type of coherent analysis that a tautology, an accounting identity, can reveal.</b> Deficits can be eliminated by defaulting. If there is no money to pay back the debts the solution is to stop spending, not to pretend that there is no problem and to keep doing what created the problem in the first place. Marshall: <b>Minsky had a similar analysis regarding the post-war period. Private balance sheets were simplified and deleveraged in the course of WWII, and private net saving was built up. Minsky concluded that is why you got a unusual period of financial tranquility into the late '60s, citing in particular the large share of bank assets made up of default free paper - Treasury debt - at the end of WWII. The problem was a) economists took this period of financial tranquility as the new normal, propagating the efficient market hypothesis and other rationale's for financial deregulation, and b) the private sector, including the financial sector releveraged, and liquidity mismatches became more prevalent in the latter as they came to rely on short term liabilities for positioning assets. The reality is that from Reagan on, serial asset bubbles were used (or at least tolerated by policy makers) in order to prevent the private sector (especially the household sector) multiplier from decaying as it otherwise would. Alongside this was the tendency of the nonfinancial sector to either reinvest profits abroad, or engage in financial engineering, all of which reduced the competitiveness of US productive capacity and hollowed the goods producing side of the labor market out.</b> I have never been much of a fan of Minsky. His, Financial Instability Hypothesis, is somewhat of a joke because he blames capitalism for underestimating risk during periods of prosperity without looking at the role of the central bank interventions that mispresented the time preference of savers. The way I see it people like Minsky miss the obvious; as a group, the bankers did not make very many errors even though they engaged in activities that had to end badly for the institutions for which they worked. They simply responded to the incentive structure and did what they must to get as big of a piece of the pie for themselves as they could. While they may have ruined the institutions that they worked for most of them earned much more than they would have had they seen reality as it was and acted prudently. As long as the incentives are put in place by the manipulators the smart people who work in Wall Street will take full advantage of them, even if they take the entire system down. There is no such problem in a market system because without the interventions the incentives are very different and create negative feedbacks before things can get out of hand. I am actually glad that brought up the post WWII period. Most of the Keynesians were predicting another depression as government spending collapsed and demand for war supplies dried up. But they were wrong. The reduction of spending and the regime change that made it attractive to invest once again caused an investment boom that brought prosperity. Once again, a reduction of government spending and debt was good for the general economy. Marshall: <b>A similar point can be made for the 1921 deflation episode, which Austrian School adherents often cite as an example of a successful deflation, short and sharp. WWI changed the debt structure, so the mix of liabilities was tipped more toward government default free debt than private debt, and the private sector had cash net savings from rationing plus persistent government deficit spending. They tend to leave this part of the story out, but it is a crucial element in financial stability.</b> This is a very nice narrative but it does not change the argument. There was a severe contraction during the 1920s as bad investments were liquidated and debt was cleansed from the system. There is absolutely no reason why we cannot go through the same process sooner rather than later. If debt cannot be repaid then stop accumulating more of it and face reality as Harding did. From what I see, if the Minsky narrative is the best you could do, you do not have much of an argument. Yours is a logically bankrupt argument that fails the smell test and is contradicted by history. Unless you have something better you need to go back to the drawing board and rethink your bias. Marshall:

Cut the budget deficit, get government out of the way, it all sounds so easy.

I did not say that it is ‘easy.’ I merely point out that it is necessary if a true recovery is to be allowed to happen with the least amount of damage. I can’t see how it is better to tax productive individuals so that we can subsidize inefficient businesses to prevent them from going under. Why do we use tax revenues to pay off the losses of reckless bankers who refused to evaluate risk properly? How do they ever learn if we keep bailing them out time after time?

Marshall:

So if the political preference is for the government to deficit spend less, what other sector is ready and willing to reduce its net saving position?

Who are you to decide that someone should reduce his/her net savings position? And why exactly is borrowing and printing money preferable to the market solution?

Marshall:

The reduction in fiscal deficits cannot occur without an offsetting reduction in domestic private or foreign net saving (the latter being the inverse of the trade deficit). If the answer is no other sector is willing or able to reduce its net saving, then income growth in the economy will have to adjust downward. This is the type of coherent analysis that a tautology, an accounting identity, can reveal.

Deficits can be eliminated by defaulting. If there is no money to pay back the debts the solution is to stop spending, not to pretend that there is no problem and to keep doing what created the problem in the first place.

Marshall:

Minsky had a similar analysis regarding the post-war period. Private balance sheets were simplified and deleveraged in the course of WWII, and private net saving was built up. Minsky concluded that is why you got a unusual period of financial tranquility into the late ’60s, citing in particular the large share of bank assets made up of default free paper – Treasury debt – at the end of WWII. The problem was a) economists took this period of financial tranquility as the new normal, propagating the efficient market hypothesis and other rationale’s for financial deregulation, and b) the private sector, including the financial sector releveraged, and liquidity mismatches became more prevalent in the latter as they came to rely on short term liabilities for positioning assets. The reality is that from Reagan on, serial asset bubbles were used (or at least tolerated by policy makers) in order to prevent the private sector (especially the household sector) multiplier from decaying as it otherwise would. Alongside this was the tendency of the nonfinancial sector to either reinvest profits abroad, or engage in financial engineering, all of which reduced the competitiveness of US productive capacity and hollowed the goods producing side of the labor market out.

I have never been much of a fan of Minsky. His, Financial Instability Hypothesis, is somewhat of a joke because he blames capitalism for underestimating risk during periods of prosperity without looking at the role of the central bank interventions that mispresented the time preference of savers.

The way I see it people like Minsky miss the obvious; as a group, the bankers did not make very many errors even though they engaged in activities that had to end badly for the institutions for which they worked. They simply responded to the incentive structure and did what they must to get as big of a piece of the pie for themselves as they could. While they may have ruined the institutions that they worked for most of them earned much more than they would have had they seen reality as it was and acted prudently. As long as the incentives are put in place by the manipulators the smart people who work in Wall Street will take full advantage of them, even if they take the entire system down. There is no such problem in a market system because without the interventions the incentives are very different and create negative feedbacks before things can get out of hand.

I am actually glad that brought up the post WWII period. Most of the Keynesians were predicting another depression as government spending collapsed and demand for war supplies dried up. But they were wrong. The reduction of spending and the regime change that made it attractive to invest once again caused an investment boom that brought prosperity. Once again, a reduction of government spending and debt was good for the general economy.

Marshall: A similar point can be made for the 1921 deflation episode, which Austrian School adherents often cite as an example of a successful deflation, short and sharp. WWI changed the debt structure, so the mix of liabilities was tipped more toward government default free debt than private debt, and the private sector had cash net savings from rationing plus persistent government deficit spending. They tend to leave this part of the story out, but it is a crucial element in financial stability.

This is a very nice narrative but it does not change the argument. There was a severe contraction during the 1920s as bad investments were liquidated and debt was cleansed from the system. There is absolutely no reason why we cannot go through the same process sooner rather than later. If debt cannot be repaid then stop accumulating more of it and face reality as Harding did.

From what I see, if the Minsky narrative is the best you could do, you do not have much of an argument. Yours is a logically bankrupt argument that fails the smell test and is contradicted by history. Unless you have something better you need to go back to the drawing board and rethink your bias.

]]> By: Kirk Kinder http://www.creditwritedowns.com/2010/02/chandler-policy-makers-are-repeating-the-mistakes-of-the-1930s.html#comment-58400 Kirk Kinder Sun, 07 Feb 2010 02:59:00 +0000 http://www.creditwritedowns.com/2010/02/chandler-policy-makers-are-repeating-the-mistakes-of-the-1930s.html#comment-58400 In 1921, the US government had no deficit spending so how could savings in government debt be the store of the savings. The reason 1921 was quicker is the debts were liquidated - one of the methods mentioned by Edward. Edward mentions a slow depression as the third option for debt deflationary environments. This is another way of saying repaying the current debt is the third option. This is where much of the net savings went in Japan, which is why the consumer debt to GDP (or income) in Japan has dropped drastically since 1990. This could happen in the US as well. So we don't necessarily need government debt to absorb savings. The reason we are in this mess is too much debt, which leads to malinvestment. Japan's borrowing binge hasn't helped their situation at all. In fact, they face severe problems as their aging population goes from net savers to spenders. Without the government spending, they may have faced more debt deflation and write-downs, but they would have a healthier balance sheet today. In 1921, the US government had no deficit spending so how could savings in government debt be the store of the savings. The reason 1921 was quicker is the debts were liquidated – one of the methods mentioned by Edward.

Edward mentions a slow depression as the third option for debt deflationary environments. This is another way of saying repaying the current debt is the third option. This is where much of the net savings went in Japan, which is why the consumer debt to GDP (or income) in Japan has dropped drastically since 1990. This could happen in the US as well. So we don’t necessarily need government debt to absorb savings. The reason we are in this mess is too much debt, which leads to malinvestment. Japan’s borrowing binge hasn’t helped their situation at all. In fact, they face severe problems as their aging population goes from net savers to spenders. Without the government spending, they may have faced more debt deflation and write-downs, but they would have a healthier balance sheet today.

]]> By: Marshall Auerback http://www.creditwritedowns.com/2010/02/chandler-policy-makers-are-repeating-the-mistakes-of-the-1930s.html#comment-58396 Marshall Auerback Sat, 06 Feb 2010 15:39:00 +0000 http://www.creditwritedowns.com/2010/02/chandler-policy-makers-are-repeating-the-mistakes-of-the-1930s.html#comment-58396 Cut the budget deficit, get government out of the way, it all sounds so easy. So if the political preference is for the government to deficit spend less, what other sector is ready and willing to reduce its net saving position? The reduction in fiscal deficits cannot occur without an offsetting reduction in domestic private or foreign net saving (the latter being the inverse of the trade deficit). If the answer is no other sector is willing or able to reduce its net saving, then income growth in the economy will have to adjust downward. This is the type of coherent analysis that a tautology, an accounting identity, can reveal. Minsky had a similar analysis regarding the post-war period. Private balance sheets were simplified and deleveraged in the course of WWII, and private net saving was built up. Minsky concluded that is why you got a unusual period of financial tranquility into the late '60s, citing in particular the large share of bank assets made up of default free paper - Treasury debt - at the end of WWII. The problem was a) economists took this period of financial tranquility as the new normal, propagating the efficient market hypothesis and other rationale's for financial deregulation, and b) the private sector, including the financial sector releveraged, and liquidity mismatches became more prevalent in the latter as they came to rely on short term liabilities for positioning assets. The reality is that from Reagan on, serial asset bubbles were used (or at least tolerated by policy makers) in order to prevent the private sector (especially the household sector) multiplier from decaying as it otherwise would. Alongside this was the tendency of the nonfinancial sector to either reinvest profits abroad, or engage in financial engineering, all of which reduced the competitiveness of US productive capacity and hollowed the goods producing side of the labor market out. A similar point can be made for the 1921 deflation episode, which Austrian School adherents often cite as an example of a successful deflation, short and sharp. WWI changed the debt structure, so the mix of liabilities was tipped more toward government default free debt than private debt, and the private sector had cash net savings from rationing plus persistent government deficit spending. They tend to leave this part of the story out, but it is a crucial element in financial stability. Cut the budget deficit, get government out of the way, it all sounds so
easy. So if the political preference is for the government to deficit spend
less, what other sector is ready and willing to reduce its net saving
position? The reduction in fiscal deficits cannot occur without an offsetting
reduction in domestic private or foreign net saving (the latter being the
inverse of the trade deficit). If the answer is no other sector is willing or
able to reduce its net saving, then income growth in the economy will have to
adjust downward. This is the type of coherent analysis that a tautology,
an accounting identity, can reveal.

Minsky had a similar analysis regarding the post-war period. Private
balance sheets were simplified and deleveraged in the course of WWII, and
private net saving was built up. Minsky concluded that is why you got a unusual
period of financial tranquility into the late ’60s, citing in particular the
large share of bank assets made up of default free paper – Treasury debt –
at the end of WWII. The problem was a) economists took this period of
financial tranquility as the new normal, propagating the efficient market
hypothesis and other rationale’s for financial deregulation, and b) the private
sector, including the financial sector releveraged, and liquidity mismatches
became more prevalent in the latter as they came to rely on short term
liabilities for positioning assets. The reality is that from Reagan on, serial
asset bubbles were used (or at least tolerated by policy makers) in order
to prevent the private sector (especially the household sector) multiplier
from decaying as it otherwise would. Alongside this was the tendency of the
nonfinancial sector to either reinvest profits abroad, or engage in
financial engineering, all of which reduced the competitiveness of US productive
capacity and hollowed the goods producing side of the labor market out.

A similar point can be made for the 1921 deflation episode, which Austrian
School adherents often cite as an example of a successful deflation, short
and sharp. WWI changed the debt structure, so the mix of liabilities was
tipped more toward government default free debt than private debt, and the
private sector had cash net savings from rationing plus persistent
government deficit spending. They tend to leave this part of the story out, but it
is a crucial element in financial stability.

]]> By: Vangel http://www.creditwritedowns.com/2010/02/chandler-policy-makers-are-repeating-the-mistakes-of-the-1930s.html#comment-58393 Vangel Sat, 06 Feb 2010 13:58:00 +0000 http://www.creditwritedowns.com/2010/02/chandler-policy-makers-are-repeating-the-mistakes-of-the-1930s.html#comment-58393 I do not see how one would expect a bankrupt banking system to keep lending money to people who will not be able to pay the loans back. What we need is a massive contraction of unproductive economic activity and a transfer of resources from the managers and owners of failed businesses to those that are better able to deploy them. As I keep pointing out over and over again, the proper approach was not taken by Hoover/FDR but by Harding. It was because Harding shrunk the size of the federal government, cut taxes, and stepped aside as the market liquidated malivestments that nobody has ever heard of the Great Depression of the 1920s. By letting the system cleanse itself Harding and Mellon set the stage for a strong recovery. I do not see how one would expect a bankrupt banking system to keep lending money to people who will not be able to pay the loans back. What we need is a massive contraction of unproductive economic activity and a transfer of resources from the managers and owners of failed businesses to those that are better able to deploy them.

As I keep pointing out over and over again, the proper approach was not taken by Hoover/FDR but by Harding. It was because Harding shrunk the size of the federal government, cut taxes, and stepped aside as the market liquidated malivestments that nobody has ever heard of the Great Depression of the 1920s. By letting the system cleanse itself Harding and Mellon set the stage for a strong recovery.

]]> By: Edward Harrison http://www.creditwritedowns.com/2010/02/chandler-policy-makers-are-repeating-the-mistakes-of-the-1930s.html#comment-58390 Edward Harrison Sat, 06 Feb 2010 11:57:00 +0000 http://www.creditwritedowns.com/2010/02/chandler-policy-makers-are-repeating-the-mistakes-of-the-1930s.html#comment-58390 michael, there are only two ways out of this where private sector debt is high: 1. inflation 2. default/foregiveness. There is a third i.e. a soft depression (Japan). However, given how many countries are in dire straits I don't see that as a likely outcome as it may depend to a degree on exports. Long story/short, you have to lean toward inflation as a real possibility (hence the gold). michael, there are only two ways out of this where private sector debt is high: 1. inflation 2. default/foregiveness. There is a third i.e. a soft depression (Japan). However, given how many countries are in dire straits I don’t see that as a likely outcome as it may depend to a degree on exports.

Long story/short, you have to lean toward inflation as a real possibility (hence the gold).

]]> By: Michael Jung http://www.creditwritedowns.com/2010/02/chandler-policy-makers-are-repeating-the-mistakes-of-the-1930s.html#comment-58384 Michael Jung Fri, 05 Feb 2010 22:49:00 +0000 http://www.creditwritedowns.com/2010/02/chandler-policy-makers-are-repeating-the-mistakes-of-the-1930s.html#comment-58384 I am 26, I advised my brother and parents to buy (some) real gold and silver and postpone the purchase of a youngtimer they looked for in December. I am a realist and pragmatist. Politicians are too busy with day-to-day politics and checking poll numbers and surveys, having no sense of urgency and real meaningful policy. And I am acusing all across the political spectrum. And then I am acusing the media in the US and EU for populistical headlines for pageviews and no real education. They are the checks and balances, and I am not seeing anything of that. Too soft on near-term problems. Day-to-Day politics and citing statements (2 pro, 2 contra) is the most convenient journalism/reporting. Why should I pay for that? I better read you blog (and others) and click on the ads to give something back. *rant off* I am 26, I advised my brother and parents to buy (some) real gold and silver and postpone the purchase of a youngtimer they looked for in December.

I am a realist and pragmatist. Politicians are too busy with day-to-day politics and checking poll numbers and surveys, having no sense of urgency and real meaningful policy. And I am acusing all across the political spectrum.

And then I am acusing the media in the US and EU for populistical headlines for pageviews and no real education. They are the checks and balances, and I am not seeing anything of that.

Too soft on near-term problems. Day-to-Day politics and citing statements (2 pro, 2 contra) is the most convenient journalism/reporting.

Why should I pay for that? I better read you blog (and others) and click on the ads to give something back.

*rant off*

]]> By: Edward Harrison http://www.creditwritedowns.com/2010/02/chandler-policy-makers-are-repeating-the-mistakes-of-the-1930s.html#comment-58382 Edward Harrison Fri, 05 Feb 2010 21:07:00 +0000 http://www.creditwritedowns.com/2010/02/chandler-policy-makers-are-repeating-the-mistakes-of-the-1930s.html#comment-58382 You would be pessimistic too if you saw the youth unemployment rate. With the education debt burden, the situation is bleak for this generation. You would be pessimistic too if you saw the youth unemployment rate. With the education debt burden, the situation is bleak for this generation.

]]> By: Michael Jung http://www.creditwritedowns.com/2010/02/chandler-policy-makers-are-repeating-the-mistakes-of-the-1930s.html#comment-58381 Michael Jung Fri, 05 Feb 2010 19:16:00 +0000 http://www.creditwritedowns.com/2010/02/chandler-policy-makers-are-repeating-the-mistakes-of-the-1930s.html#comment-58381 I always thought that the M3 contration is bad when I read it. All gov bailouts and extra credit facilities from the ECB. "By the end of the year it was contracting at a 0.2% pace. It was contracting in both November and December." Shows what the average timespan of Wall Street and Main Street is. Plus all the talk about the Recession. There was a psycology article in the NYTs about that we have a recession in our mind too, and no stimulus and Obama Town Hall meeting can change that. Thats now fact. Americans are saving now and paydown its debt. www.nytimes.com/2010/01/31/business/economy/31view.html Und dann hab ich noch aus meiner delicious liste das hier; www.spiegel.de/panorama/gesellschaft/0,1518,671590,00.html Unicef-Kinderstudie: Generation der Pessimisten - SPIEGEL ONLINE - Nachrichten - Panorama And from www.ritholtz.com/blog/2009/12/why-arent-banks-lending-they-are-being-rational/ Why Aren’t Banks Lending? They Are Being Rational | The Big Picture 'The Battle for the World Economy' is still under way. What would Keynes NOW do? I always thought that the M3 contration is bad when I read it. All gov bailouts and extra credit facilities from the ECB.

“By the end of the year it was contracting at a 0.2% pace. It was contracting in both November and December.”

Shows what the average timespan of Wall Street and Main Street is. Plus all the talk about the Recession. There was a psycology article in the NYTs about that we have a recession in our mind too, and no stimulus and Obama Town Hall meeting can change that. Thats now fact. Americans are saving now and paydown its debt.

http://www.nytimes.com/2010/01/31/business/economy/31view.html

Und dann hab ich noch aus meiner delicious liste das hier;
http://www.spiegel.de/panorama/gesellschaft/0,1518,671590,00.html
Unicef-Kinderstudie: Generation der Pessimisten – SPIEGEL ONLINE – Nachrichten – Panorama

And from http://www.ritholtz.com/blog/2009/12/why-arent-banks-lending-they-are-being-rational/ Why Aren’t Banks Lending? They Are Being Rational | The Big Picture

‘The Battle for the World Economy’ is still under way. What would Keynes NOW do?

]]> By: Anonymous http://www.creditwritedowns.com/2010/02/chandler-policy-makers-are-repeating-the-mistakes-of-the-1930s.html#comment-58377 Anonymous Fri, 05 Feb 2010 16:10:00 +0000 http://www.creditwritedowns.com/2010/02/chandler-policy-makers-are-repeating-the-mistakes-of-the-1930s.html#comment-58377 Very well written article. I think he's right. What he doesn't acknowledge is that the bond market perceives that risk is rising. It is. It is rising because nothing (very little) has been done to remove the unprecedented levels of bad debt from the system. New, good money is not being allowed to replace bad, miss-allocated money. Think of debt like you do technology. Technology companies continuously replace slower technology with faster and smarter technology. If they don’t they will go bankrupt. Bad debt (money) is no different. It must be replaced with good money in order to be productive. The banks, investment houses and our Government are not allowing the markets to replace the bad debt (money). It is the replacement process itself that generates growth, which generates jobs. Out with the Old and In with the New! Opportunity for one is often the result of another’s bad decision Very well written article. I think he’s right. What he doesn’t acknowledge is that the bond market perceives that risk is rising. It is. It is rising because nothing (very little) has been done to remove the unprecedented levels of bad debt from the system. New, good money is not being allowed to replace bad, miss-allocated money. Think of debt like you do technology. Technology companies continuously replace slower technology with faster and smarter technology. If they don’t they will go bankrupt. Bad debt (money) is no different. It must be replaced with good money in order to be productive. The banks, investment houses and our Government are not allowing the markets to replace the bad debt (money). It is the replacement process itself that generates growth, which generates jobs. Out with the Old and In with the New! Opportunity for one is often the result of another’s bad decision

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