global financial crash yay!

[vimothy]

Gagnon FTW!

EDIT: BTW, what the fuck is Bernanke smoking nowadays--inflation at 1.7% and he wants to do nothing about unemployment (near 10% for involuntary unemployment), and on top of that, he's advising against more fiscal stimulus and for reducing the US budget deficit by cutting social security benefits....

 

[vimothy]

Ryan Avent gets it:

Second, consider the trade-off Mr Wessel presents here. Tighten too early and you get a relapse into recession. Tighten too late and you get "an outbreak of inflation greater than [Ben Bernanke] thinks is prudent". Scary stuff! The costs are not symmetrically distributed, in other words. And yet, the FOMC appears to be much more worried about the threat of inflation than of relapse into recession. This makes no sense at all, and yet very smart people, like Mr Wessel, cast this choice as if it were the most difficult thing in the world to have to decide.

 

[vimothy]

Woo-hoo: new Donald MacKenzie paper!

The Credit Crisis as a Problem in the Sociology of Knowledge

This article examines the role in the current credit crisis of “evaluation cultures” (shared beliefs, practices, ways of calculating, and technical systems that are employed when market participants evaluate financial instruments) and “metadevices” (relatively durable configurations of social relations and technical systems, such as the “canonical mechanism,” largely identified by Carruthers and Stinchcombe, and the credit ratings system). Employing documentary sources and a set of 55 predominantly oral-history interviews, the article presents a historical sociology of the two categories of financial instrument crucial to the crisis (ABSs, asset-backed securities, and CDOs, collateralized debt obligations), and in particular discusses the evaluation of and the role played by a fateful concatenation of the two, ABS CDOs.

 

[vimothy]

Er, so apparently Bernanke gets it too:

What I have in mind is that the Bank of Japan would announce its intention to restore the price level (as measured by some standard index of prices, such as the consumer price index excluding fresh food) to the value it would have reached if, instead of the deflation of the past five years, a moderate inflation of, say, 1 percent per year had occurred. (I choose 1 percent to allow for the measurement bias issue noted above, and because a slightly positive average rate of inflation reduces the risk of future episodes of sustained deflation.) Note that the proposed price-level target is a moving target, equal in the year 2003 to a value approximately 5 percent above the actual price level in 1998 and rising 1 percent per year thereafter. Because deflation implies falling prices while the target price-level rises, the failure to end deflation in a given year has the effect of increasing what I have called the price-level gap (Bernanke, 2000). The price-level gap is the difference between the actual price level and the price level that would have obtained if deflation had been avoided and the price stability objective achieved in the first place.

(...)

A concern that one might have about price-level targeting, as opposed to more conventional inflation targeting, is that it requires a short-term inflation rate that is higher than the long-term inflation objective. Is there not some danger of inflation overshooting, so that a deflation problem is replaced with an inflation problem? No doubt this concern has some basis, and ultimately one has to make a judgment. However, on the other side of the scale, I would put the following points: first, the benefits to the real economy of a more rapid restoration of the pre-deflation price level and second, the fact that the publicly announced price-level targets would help the Bank of Japan manage public expectations and to draw the distinction between a one-time price-level correction and the BOJ’s longer-run inflation objective. If this distinction can be made, the effect of the reflation program on inflation expectations and long-term nominal interest rates should be smaller than if all reflation is interpreted as a permanent increase in inflation.

Get on it then, Ben!

 

[vimothy]

Er:

City accountants said there was a strong likelihood of a legal challenge against a punitive tax aimed at one sector of the workforce. Bill Dodwell, head of taxation at accountants Deloitte said: "We have had calls from bankers asking about what action they might take under the Human Rights Act. There's never been a precedent."

The Human Rights Act!?!

 

[vimothy]

Household leverage: US vs. UK

 

[Gavin]

Drug money propping up banks

Any other good articles about massive amounts of drug funds laundered through major financial institutions? Obviously way too much money is made in the drug trade for it not to get through somehow.

Read an article yesterday about Mexican drug cartels getting into stealing oil, selling it to U.S. oil companies.

 

[vimothy]

Interesting stuff, but good data are hard to find:

How much money does the international drugs trade make, and how much of that money helped out the global banking system when liquidity dried up last year? According to the UN, the answer to both questions is “a lot”:

Antonio Maria Costa, head of the UN Office on Drugs and Crime, said he has seen evidence that the proceeds of organised crime were “the only liquid investment capital” available to some banks on the brink of collapse last year. He said that a majority of the $352bn (£216bn) of drugs profits was absorbed into the economic system as a result.​

I’ve spent a chunk of this morning rooting around the UNODC’s website to see if I could find a source for that suspiciously-precise $352 billion number, but I couldn’t: if someone can point me to the report which generated it, I’d be much obliged. I did however find a press release in which Costa said that corruption was “the cause and consequence” of the financial crisis, which does make me suspect that he’s prone to talking his own book here. (The financial crisis had many causes, but corruption wasn’t even in the top ten.)

So I’m filing this one under “empirically-dubious publicity-seeking” for the time being, if only because Costa is prone to statements like this:

Mr. Costa said: “Nicolas Cage’s characters have exposed us to some of the darkest aspects of human nature. Now he is championing one of the most noble – the quest for justice. The Lord of War has become a messenger for peace, the Bad Lieutenant has turned into a good cop, and the inmate from Con Air has become a champion of prison reform. His star status and strong conviction on these issues will help us achieve security and justice for all.”​

Or, to put it another way, the forces of evil and corruption were responsible for causing the financial crisis. But don’t worry, we’ve got Nicolas Cage on our side, so the good guys are bound to win.

http://blogs.reuters.com/felix-salmon/2009/12/13/drug-money-and-the-financial-crisis/

I have an exact figure for total dollar currency outside the US--it's huge. I'll see if I can locate it. I'm not sure how much of it is recycled back into the US. Of course, this arrangement makes Treasury happy and State sad, but such is a bureaucrats life...

 

[DJ PIMP]

ron paul reiterating this stuff for like the millionth time...

http://www.forbes.com/forbes/2009/1116/opinions-great-depression-economy-on-my-mind.html

people go on about the great depression and it does seem overblown or like yet more scare-mongering... but then i see those graphs of US gdp vs debt or the drop in global trade, and its like, holy goats.

 

[synapticat]

My philosophy and science studies blog for those who are interested.

www.synapticat.blogspot.com

 

[vimothy]

I'd take everything Ron Paul says with a very large pinch of salt. His critique of the stimulus is, IMO, moronic, 180 degrees from reality. He's a man out of time, really. One hundred years ago, perhaps he might have had a point. Stuff like this:

Government intervention cannot lead to economic growth. Where does the money come from for Tarp (Treasury's program to buy bad bank paper), the stimulus handouts and the cash for clunkers? It can come only from taxpayers, from sales of Treasury debt or through the printing of new money. Paying for these programs out of tax revenues is pure redistribution; it takes money out of one person's pocket and gives it to someone else without creating any new wealth. Besides, tax revenues have fallen drastically as unemployment has risen, yet government spending continues to increase

Is just plain ignorant. Ron Paul doesn't get it. If the private sector wants to increase its savings, the government must deficit spend in order for this to happen. Otherwise, demand falls, income falls and ultimately savings fall as well.

Anyway, I thought Obama's speech was pretty damn good. Looks like Volcker has prevailed. Regulated banks will no longer be allowed to engage in propietary trading, will no longer be allowed to run hedge funds or private equity firms as principal. Some kind of tax related to size is also alluded to.

 

[polystyle]

Agreed Vim.
With so many things going on , how complex it all really is and then you have this Congress ...
Glad people / pundits /media did note Judge Alito's mouthed reaction to Obama calling out the Supreme Court last night.
jeez they looked decrepit.

 

[rumble]

If the private sector wants to increase its savings, the government must deficit spend in order for this to happen. Otherwise, demand falls, income falls and ultimately savings fall as well.

very good grasshopper. Inflation hawks & deficit hawks = scoundrels & idiots. I noticed that you've been kicking around the MMT blogosphere. That's a good start. The next step is taking what you know about MMT and applying it to an open economy, with (pegged & floating) exchange rates, private capital & trade flows, CB intervention & sterilization, PPP disparities etc. etc. etc. Heavy deficit spending isn't the only solution, but right now it is the best short term solution that we have. But we aren't even going to get that now are we? Why not? cui bono? think vim think

Anyway, I thought Obama's speech was pretty damn good. Looks like Volcker has prevailed. Regulated banks will no longer be allowed to engage in propietary trading, will no longer be allowed to run hedge funds or private equity firms as principal. Some kind of tax related to size is also alluded to.

I wouldn't put too much hope in Obama. You must have missed the deficit hawk bit in his speech. Also Simon Johnson has already shat all over the shamtastic banking reform package, while everyone on Wall Street already sees it as an easily circumvented joke. the big O is all talk

Volcker, like Ron Paul, is a man of another time. They are both actually very very similar in a lot of respects. They mean well, but are misguided, and too old to learn. There are already plenty of austere grandpas at the fed & treasury, we need more prodigal sons

 

[vimothy]

Actually, I think heavy deficit spending really is the only sustainable solution, by definition. A balanced budget is political grandstanding. Point scoring for Obama but impossible at this stage anyway. All talk, as you say--Obama can suppress aggregate demand if he wants, but the operative fact about automatic stabilisers is that they're automatic.

I wouldn't be so quick to dismiss talk of reform. I think it's probably a necessary (if hardly sufficient) condition for actual reform. It's part of the process. I didn't think that Johnson shat all over Obama's speech. His post amounted to saying "I don't think they mean it", which is fine--everyone has an opinion--but it remains to be seen whether this is correct. And at some point, mandem need to be re-elected. So something has to give or it's tea tomorrow and the next day for four years (Palin-Beck 2012?).

I'm increasingly impressed with MMT's focus on the accounting and operational side of the financial system (some amazing comment threads at Nick Rowe's blog). They're good at macro. And I like Godley's SFC models, which they seem to draw on heavily. That said, I'm hoping to go back into the belly of the beast in a few months to do a post grad (your buddy Joe has an office here, btw), so this may be a mere blip before I'm reintegrated back into the new consensus hive mind...

The next step is taking what you know about MMT and applying it to an open economy...

Sadly, I have very little time to spare doing anything, especially thinking. It's all linear algebra for me at the moment. Great way to spend your thirtieth birthday, eh?

 

[rumble]

Actually, I think heavy deficit spending really is the only sustainable solution, by definition.

In a closed (or semi-closed) economy that is probably right. Example: Andrew Jackson's adventures in fiscal austerity:

"In 1835, Jackson managed to reduce the federal debt to only $33,733.05, the lowest it had been since the first fiscal year of 1791.[21] President Jackson is the only president in United States history to have paid off the national debt. However, this accomplishment was short lived. A severe depression from 1837 to 1844 caused a tenfold increase in national debt within its first year."

whoops.

But now for the open economy counter-example: Canada's surplus years 1997-2007. Why didn't Canada crash? the answer lies in open economy macro. This is where the MMT guys come up short

here you can see billy struggling to adapt to the open economy model, aka .... the modern world:
http://bilbo.economicoutlook.net/blog/?p=5402

I wouldn't be so quick to dismiss talk of reform. I think it's probably a necessary (if hardly sufficient) condition for actual reform. It's part of the process. I didn't think that Johnson shat all over Obama's speech. His post amounted to saying "I don't think they mean it", which is fine--everyone has an opinion--but it remains to be seen whether this is correct. And at some point, mandem need to be re-elected. So something has to give or it's tea tomorrow and the next day for four years (Palin-Beck 2012?).

You might be right. Some of my friends make the same argument, and I probably would have agreed about a year ago. Since then, however, the Obama administration has proven itself so shockingly inept that I'm starting to doubt that it is even capable of self-preservation

That said, I'm hoping to go back into the belly of the beast in a few months to do a post grad (your buddy Joe has an office here, btw), so this may be a mere blip before I'm reintegrated back into the new consensus hive mind... ... Sadly, I have very little time to spare doing anything, especially thinking. It's all linear algebra for me at the moment. Great way to spend your thirtieth birthday, eh?

Time well spent. The New Keynesian hive mind consensus isn't all bad. There's a lot of good stuff in there, just look out for a few turds in the pool, courtesy of our friends in Chicago:
-rational expectations
-efficient market hypothesis
-the biggest stinker of them all, the NAIRU

basically, just take most of the "New" out of "New Keynesian" and you should be good.

Nobel laureate Bill Vickrey is a good guide in these treacherous waters:
http://www.columbia.edu/dlc/wp/econ/vickrey.html

 

[vimothy]

Canada's surplus years 1997-2007. Why didn't Canada crash?

Are you talking about the current account? You'll have to be more explicit, I'm afraid. I meant what I said about not having time to think!

 

[rumble]

fiscal surplus

 

[vimothy]

i got that i mean the answer

 

[rumble]

I probably should have written "answers" plural because it is fairly complicated, but I think you've got the basic idea that it comes down to the current account, and beyond that, the balance of payments

On a simplistic model, you could say that Canadian aggregate demand was supported through Canada's trade surplus, which, despite negative net factor income, contributed to a current account surplus. The other important part is that the positive savings rate in Canada was satisfied by the capital account surplus, although this was less than the current account surplus. So taken together, Canada's balance of payments surplus ((current account - capital account) > 0) allowed it to maintain high government savings that would be deflationary under a closed system, without suffering from deflation. The current Chinese policy is like this, but on steroids.

That's a pretty simple sketch (obviously there was a lot more going on over this period with exchange rates, interest rates, price levels, terms of trade, productivity etc. etc.) but I think it captures the basic story.

edit: ok, I think that's better... this stuff makes my head spin

 

[rumble]

to expand on that a bit, and tie it into the MMT stuff:

The MMT guys are right that deficit spending is required to support AD. The key is that in a global open economy system, individual governments can take on different roles (surplus or deficit), so long as there is a net deficit on the global aggregate level that is able to make up for the gap between private savings rates and the ability of the private sector to recycle those savings into demand. that is to say that if you sum all the deficits and surpluses of the various governments, you should come out with a net deficit equal to global excess savings, thus ensuring that demand does not fall short of supply.

The fundamental reason for the global crisis is that the Chinese tried to save at a level far beyond what the rest of the world (mainly the US) could support, tipping global aggregate government budgets into a surplus and destroying global aggregate demand. aka "the savings glut". Chinese policies (along with complimentary policies in much of east asia) have basically opened an economic black hole