The Problem With keynesian economics

[itfitzme]

dear, a little econ 101 for you, calls one day one. Conservatives are against printing enough to inflate the currency.

I really gotta know, what you think that means, "printing enough to inflate the currency"? How do you measure that the currency has been [over] "inflated"?

By the price of commodities on the world market.

Any particular one, or all of them? Do you have a "standard basket of commodities on the world market" index?

 

[Quantum Windbag]

I really gotta know, what you think that means, "printing enough to inflate the currency"? How do you measure that the currency has been [over] "inflated"?

By the price of commodities on the world market.

Any particular one, or all of them? Do you have a "standard basket of commodities on the world market" index?

Doesn't matter which one you use, take a look at the world and the effect of the tight money supply we currently have.

 

[editec]

The Basic Premise of Keynesian economics is that you Spend money when the Economy is Down to Stimulate it, Then Make cuts when the Economy is up.

It's 2 Sides of a Coin. The Problem is the Keynesian are only Keynesian when the Economy is down. When it is Up they forget about the Rules of Keynesian Economics and Continue to Spend more than we have instead of Making cuts.

We never cut

The basic premise?

So your complaint is that nobody is actually applying Keynesian economic policies to our economy?

I quite agree.

History shows us that then the GOP is in power they spend money like drunken sailors.

Quite right.

Glad you recognize this problem.

Good for you!

 

[Polk]

as a liberal you lack the IQ to understand. Sure, they were more successful but they still need the $148 billion bailout they will never return whereas the the private banks did return their bailouts?

Why not read "Reckless Endangerment" to get 400 pages on exactly how Fan Fred controlled 100% of the mortgage market. THey got the
better loans because they were cheaper but they led the downward standards that themore expensive private companies had to follow and still it cost us 148 billion so far!!

who can say with a straight face that Fan/ Fred/ Fed / CRA were not a huge cause of the depression when libturd policy was to get follks into homes the Republican free market said they could not afford.

See why we are positive a liberal will slow and driven by unconscious prejudices?

That's a great argument, except that it's not true. It's really weird to claim Freddie and Fannie were driving the sub-prime market, when they basically weren't players in it.

"When the bubble burst, hundreds of billions of dollars in losses in mortgages and mortgage-related securities shook markets as well as financial institutions that had significant exposures to those mortgages and had borrowed heavily against them. This happened not just in the United States but around the world. The losses were magnified by derivatives such as synthetic securities."

What is even more interesting is how Fanne Mae and Freddie Mac managed to drive housing bubbles and non-prime lending in other countries.

Must be via magick.

 

[Polk]

Yep, everybody was surprised the US didn't plunge back into Depression after WWII. And, not that I want to sound like I agree with Krugman, he did say from the very beginning that the stimulus was nowhere near large enough (if you read his blog he constantly links back to it). And if you read John Taylor's paper you'll see that the "stimulus" didn't actually stimulate anything. It wasn't used for government purchases (as is the Keynesian prescription). It was offset by states balancing their budgets and saving more.

So, to be clear, I am not a Keynesian. I just don't agree with your analysis.

People were shocked when the nation didn't jump back in to a depression after the war because they put too much stock in the structural theories that were in vogue pre-war (and are coming back in to vogue today). That's they were wrong is a pretty positive sign. It means we engage in counter-cyclical spending to smooth demand without the need for an ever-rising debt.

And Taylor is a partisan hack. His own theory suggests interest rates should be negative right now, but he spends his days moaning that current rates are going to set off a wave of hyperinflation.

People were shocked there wasn't a depression after the war?

What the frack do you base that on?

Writings of economists from the time.

 

[Polk]

Oh I'm well aware that Taylor thinks some crazy shit, but this paper is sound. Here's the link if you want to check it out for yourself.

http://www.stanford.edu/~johntayl/Cogan%20Taylor%20multiplicand%20Jan%202011%20rev.pdf

The problem with that paper is that his argument doesn't really show what he thinks it shows. His argument is that it didn't have much impact because it just shifted what state and local governments did. Fair enough, but it misses the point they would have massively cut services in absence of stimulus. That creates a very different multiplier than his assumption that state and local government would have remained the same in the absence of stimulus.

The purpose of a Keynesian stimulus is to create new spending, not to continue old spending. The purpose of the Obama stimulus was to continue old spending until the economy inevitably recovered so he could take credit for it.

Thanks for admitting that, under Keynes theories, the stimulus was a failure. Thanks for also proving that, under Obama's theory, it was more than a failure.

That's only true if you believe Keynes stands for the proposition that maintaining the spending level is worse than reducing the spending level.

 

[Polk]

Except that state and local governments largely don't have the ability to find their budgets via borrowing. Hence why even more liberal states have been slashing budgets all over the place.

Funny thing, they are still slashing budgets even though revenue is up. Under your explanation they should be increasing spending.

That assumes revenue is the only constraint. States can also be driving by ideological factors and concerns about another rainy day.

 

[Polk]

By the price of commodities on the world market.

Any particular one, or all of them? Do you have a "standard basket of commodities on the world market" index?

Doesn't matter which one you use, take a look at the world and the effect of the tight money supply we currently have.

So at least you realize there isn't a danger of runaway inflation. That's positive. I'd also note rising commodity prices aren't necessarily evidence of inflation. It can also be a sign of real shocks in supply and/or demand for the goods in question.

 

[itfitzme]

By the price of commodities on the world market.

Any particular one, or all of them? Do you have a "standard basket of commodities on the world market" index?

Doesn't matter which one you use, take a look at the world and the effect of the tight money supply we currently have.

Of course it matters. Otherwise it's just arbitrarily picking the one that suits ones bias.

So far, the idea just sounds like a load of carp.

Perhaps it might be easer to just look at the exchange rate.

 

[EdwardBaiamonte]

That's a great argument, except that it's not true. It's really weird to claim Freddie and Fannie were driving the sub-prime market, when they basically weren't players in it.

of course as a liberal you're an idiot:

Read "Reckless Endangerment" for 400 pages on their involvement or

For instance, as George Mason University economist Russ Roberts explains in his paper “Gambling with Other People’s Money”:

Fannie and Freddie bought 25.2% of the record $272.81 billion in subprime MBS [mortgage-backed securities] sold in the first half of 2006, according to Inside Mortgage Finance Publications, a Bethesda, MD-based publisher that covers the home loan industry.

In 2005, Fannie and Freddie purchased 35.3% of all subprime MBS, the publication estimated. The year before, the two purchased almost 44% of all subprime MBS sold.

In addition, lawmakers in both parties enacted policies directed at increasing home ownership rates, resulting in lower mortgage underwriting standards for Fannie and Freddie. Roberts notes that from 2000 on, Fannie and Freddie bought loans with low FICO scores, loans with very low down payments, and loans with little or no documentation





Rep. Frank: I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing. . .

Pelican Parts:
Mr. Mozilo and Fannie essentially were business partners in the subprime business. Countrywide found the customers, while Fannie provided the taxpayer-backed capital. And the rest of the industry followed.


Bloomberg 12/21/11 on SEC action:

The truth is that Fannie and Freddie engaged in far greater financial-reporting abuses, which couldn’t have happened without the government’s knowledge and cooperation.
Fannie and Freddie continued to maintain they were adequately capitalized, as did their regulator, until they were placed into conservatorship in September 2008. This farce wouldn’t have been sustainable had the two companies been forthright about their earnings and asset values.

:
WSJ/12/21/11 on SEC action against Fanny Freddie

Fanny degraded its underwriting standards to increase its market share in the sub prime loans... Fanny led private lenders into the sub prime market loans... by the mid 2000's other mortgages lenders developed other similar reduced documentation loans.....Fanny hid the risk of sub prime loans to investors... Fannie said its Alt. A exposure was 11% of its portfolio, when it was closer to 23% - a 341 billion difference...Dallavecchia told investors that Fanny's sub prime exposure was
"immaterial".... we see part of our mission to make mortgages available to people who don't have perfect credit...the Freddie record was similarly incriminating...private lenders could never have done as much harm if Fan and Fred weren't providing tens of billions in tax payer subsidized liquidity to lend on easy terms to borrowers who couldn't[t pay it back...Congress created the 2 mortgage giants as well as their affordable housing mandates.

Sen. Christopher Dodd (D., Conn.): I, just briefly will say, Mr. Chairman, obviously, like most of us here, this [Fanny Freddie] is one of the great success stories of all time. And we don't want to lose sight of that and [what] has been pointed out by all of our witnesses here, obviously, the 70% of Americans who own their own homes today, in no small measure, due because of the work that's been done here. And that shouldn't be lost in this debate and discussion. . . .
Rep. Waters: However, I have sat through nearly a dozen hearings where, frankly, we were trying to fix something that wasn't broke. Housing is the economic engine of our economy, and in no community does this engine need to work more than in mine. With last week's hurricane and the drain on the economy from the war in Iraq, we should do no harm to these GSEs.[Fanny Freddie] We should be enhancing regulation, not making fundamental change.

Mr. Chairman, we do not have a crisis at Freddie Mac, and in particular at Fannie Mae, under the outstanding leadership of Mr. Frank Raines. Everything in the 1992 act has worked just fine. In fact, the GSEs have exceeded their housing goals. . . .

Rep. Frank: Let me ask [George] Gould and [Franklin] Raines on behalf of Freddie Mac and Fannie Mae, do you feel that over the past years you have been substantially under-regulated?

Mr. Raines?

Mr. Raines: No, sir.

Mr. Frank: Mr. Gould?

Mr. Gould: No, sir. . . .

Mr. Frank: OK. Then I am not entirely sure why we are here. . . .

Rep. Frank: I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists.

* * *
Senate Banking Committee, Oct. 16, 2003:

Sen. Charles Schumer (D., N.Y.): And my worry is that we're using the recent safety and soundness concerns, particularly with Freddie, and with a poor regulator, as a straw man to curtail Fannie and Freddie's mission. And I don't think there is any doubt that there are some in the administration who don't believe in Fannie and Freddie altogether, say let the private sector do it. That would be sort of an ideological position.

The Washington Post reported Frank, who is openly gay, had a relationship with Herb Moses, an executive for the now-government controlled Fannie Mae. The column revealed the two had split up at the time but also said Frank was referring to Moses as his “spouse.” Another Washington Post report said Frank called Moses his “lover” and that the two were “still friends” after the breakup.

Frank was and remains a stalwart defender of Fannie Mae, which is now under FBI investigation along with its sister organization Freddie Mac, American International Group Inc. (NYSE:AIG) and Lehman Brothers (NYSE:LEH) – all recently participants in government bailouts. But Frank has derailed efforts to regulate the institution, as well as denying it posed any financial risk. Frank’s office has been unresponsive to efforts by the Business & Media Institute to comment on these potential conflicts of interest.



While the relationship reportedly ended 10 years ago, Frank was serving on the House Banking Committee the entire 10 years they were together. The committee is the primary House body which along with the Office of Federal Housing Enterprise Oversight (OFHEO) has jurisdiction over the government-sponsored enterprises.



Just a month before, Frank had aggressively thwarted reform efforts by the Bush administration. He told The New York Times on Sept. 11, 2003, Fannie Mae and Freddie Mac’s problems were “exaggerated,” a gross miscalculation some five years later with costs estimated to be in the hundreds of billions.


“These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis,” Frank said to the Times. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

. J. Bridges says:

Beginning in 1992, Congress pushed Fannie Mae and Freddie Mac to increase their purchases of mortgages going to low and moderate income borrowers. For 1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target -- 42% of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50% in 2000 and 52% in 2005.

For 1996, HUD required that 12% of all mortgage purchases by Fannie and Freddie be "special affordable" loans, typically to borrowers with income less than 60% of their area's median income. That number was increased to 20% in 2000 and 22% in 2005. The 2008 goal was to be 28%. Between 2000 and 2005, Fannie and Freddie met those goals every year, funding hundreds of billions of dollars worth of loans, many of them subprime and adjustable-rate loans, and made to borrowers who bought houses with less than 10% down.
Warren Buffett: "There are significant limits to what regulation can accomplish. As a dramatic illustration, take two of the biggest accounting disasters in the past ten years: Freddie Mac and Fannie Mae. We're talking billions and billions of dollars of misstatements at both places".

Now, these are two incredibly important institutions. I mean, they accounted for over 40% of the mortgage flow a few years back. Right now I think they're up to 70%. They're quasi-governmental in nature. So the government set up an organization called OFHEO. I'm not sure what all the letters stand for. [Note to Warren: They stand for Office of Federal Housing Enterprise Oversight.] But if you go to OFHEO's website, you'll find that its purpose was to just watch over these two companies. OFHEO had 200 employees. Their job was simply to look at two companies and say, "Are these guys behaving like they're supposed to?" And of course what happened were two of the greatest accounting misstatements in history while these 200 people had their jobs. It's incredible. I mean, two for two!

Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES NYTIMES
Published: September 30, 1999
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In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

 

[Polk]

But your claim is that these are artificial markets that wouldn't exist in the absence of Freddie and Fannie. Your own data shows that you can attribute a third of the market to them at best.

 

[EdwardBaiamonte]

But your claim is that these are artificial markets that wouldn't exist in the absence of Freddie and Fannie. Your own data shows that you can attribute a third of the market to them at best.

IF you read "Reckless Endangerment" you'll see that it was 100%. THey defined subprime and Alt -a, and always downward to always expand . They always got the cream because they had lower government rates, but that forced all the others down still further.
Its a huge mistake to excuse them that can only happen with 100% ignorance of the way the market worked.

 

[ilia25]

But your claim is that these are artificial markets that wouldn't exist in the absence of Freddie and Fannie. Your own data shows that you can attribute a third of the market to them at best.

IF you read "Reckless Endangerment" you'll see that it was 100%. THey defined subprime and Alt -a, and always downward to always expand .

Except those "subprime" loans that Freddie and Fannie were allegedly giving away were not actually subprime:

Here is more:
Wallison: Still Wrong About Genesis of Housing Crisis | The Big Picture

 

[EdwardBaiamonte]

But your claim is that these are artificial markets that wouldn't exist in the absence of Freddie and Fannie. Your own data shows that you can attribute a third of the market to them at best.

IF you read "Reckless Endangerment" you'll see that it was 100%. THey defined subprime and Alt -a, and always downward to always expand .

Except those "subprime" loans that Freddie and Fannie were allegedly giving away were not actually subprime:

dear, if I said they were I'll pay you $10,000. Bet or run away with your liberal strawman between your legs once again.

 

[Widdekind]

The problem with Keynes is that it all goes against common sense. To borrow money and spend it during a depression goes against all that is holy...

perhaps that is a false premise?

The Public is like a giant apartment building. And, a depression is like half the residents go broke. So, they borrow from their roommates, in the short-term, promising to repay, in the long-term. Now, the invocation of 'Government' means, that the 'apartment manager' stepped in, and ordered that everybody who could lend, had to lend. But people who go broke often beg or otherwise borrow from their friends. In the GD, most everybody was borrowing from their "country-mates"... who only agreed to lend to them, if they did Public works, in the short-term ("i'll give you the money, but you have to vacuum the apartment"), and promised to repay, in the long-term. And so a million miles of road & rail, and a hundred thousand buildings & dams, got built, on borrowed-from-country-mate money.

 

[EdwardBaiamonte]

And so a million miles of road & rail, and a hundred thousand buildings & dams, got built, on borrowed-from-country-mate money.

thats called a bubble that causes a depression. Remember the housing bubble stimulation.

Only the free market can cause sustainable economic development through real job creation. A liberal bubble will merely burst and cause another depression,

 

[Rshermr]

And so a million miles of road & rail, and a hundred thousand buildings & dams, got built, on borrowed-from-country-mate money.

thats called a bubble that causes a depression. Remember the housing bubble stimulation.

Only the free market can cause sustainable economic development through real job creation. A liberal bubble will merely burst and cause another depression,

Wow, that is some profound analysis, ed. Looks to me that you do not know what a bubble is.

Bubbles don't necessarily start with any specific politics behind them, ed. For instance, the .com bubble started because the internet became common place, and the economy was very good. Every new company had .com or .net in its name, and investors bid prices up. You know, ed, those all knowing capitalists. Prices went well beyond value, and the bubble burst. Though not a really terrible downturn, still it went downward.

The housing bubble was supported by politicians and financiers. Remember Greenspan. The fact that housing prices were going nuts did not indicate a problem to him, as he believed that the open market would regulate it. He has since admitted he was wrong. I am sure you missed that, ed.

I know you feel the need to blame dems for all bubbles. Just your nature. But you need to understand, first, what a bubble is and then you may actually understand, bubbles happen under demo and repub administrations with no concern for politics. It is a greed thing. And a inability to understand when the end is near.

 

[Widdekind]

And so a million miles of road & rail, and a hundred thousand buildings & dams, got built, on borrowed-from-country-mate money.

thats called a bubble that causes a depression. Remember the housing bubble stimulation.

Only the free market can cause sustainable economic development through real job creation. A liberal bubble will merely burst and cause another depression,

i don't understand.

In the 1930s, poor people (in effect) borrowed from their country-men, who made them build infrastructure, in the US. Then, in the 1940s, they built war material (to destroy infrastructure, in Europe). Economically, spending on domestic infrastructure & military (re-)employed millions of Americans, perhaps on Publicly-funded contracts, to private firms.

An asset price bubble derives from more & more money, buying & re-buying the same old existing assets, over & over, thereby driving up prices. But (Public) investment in infrastructure & military employs people to build new assets (roads, ships). There are some "Public goods" that can only be produced if "everybody chips in", funding Government expenditures, through taxes & loans.

That does not mean that taxes have to be heavy, or complex. A 10% flat-rate sales tax, on all goods (primary & secondary / after markets) would generate $2T/year, about enough to cover the Federal budget. (If Government spending were reduced, old debts could be paid down.)

 

[EdwardBaiamonte]

Bubbles don't necessarily start with any specific politics behind them, ed. For instance, the .com bubble

dear, that was a bubble in one industry, not a liberal federal bubble that depresses the whole economy!!!

The housing bubble was supported by politicians and financiers.

yes now thats a liberal bubble as most of the federal government was organized to subvert the free market by getting folks in houses the free market said they could not afford.

 

[Widdekind]

The housing bubble was supported by politicians and financiers.

yes now thats a liberal bubble as most of the federal government was organized to subvert the free market by getting folks in houses the free market said they could not afford.

Public Government spending is not per se the problem. But mis-spending, e.g. bad loans, whether Public or private, is always per se a problem.

Keynesian Fiscal stimulus could occur, without any mis-spending, and be beneficial (in certain circumstances, when the Government would not "crowd out" the private sector).