Subprimes and such

[y66]

This may be obvious to everyone else but me, but what exactly is stopping the whole thing from going pop? It seems as though everything that had people planning for an economic doomsday - like the level of governmental debt - hasn't gone away but now people are happy and marching forward with a smile on their face and a song in their hearts, so to speak. What did I miss?

 

It looks like you missed Jan Hatzius' latest U.S. budget deficit estimates for 2013 - 2023 which pretty much ended the government debt = doomsday hysteria when his estimates were reported in April. The real doomsday machine is the ever growing global network of banks that are "still too big to fail, too big to manage, and too big to trust ... There are now more too-big-to-fail institutions than there were prior to the 2008 crisis -- Gretchen Morgenson May 24, 2013".

[blackshoe]

The Chairman of the Federal Reserve Board is required to appear before Congress twice a year to report what the Federal Reserve System is doing and what it plans to do in the future. I don't see anything in the law that gives Congress the authority to tell the Board "No. Don't do that." I suppose they could pass a law abolishing the institution, but somehow I don't see that happening. So while there is "oversight", there's certainly no control. Congress gave up that control when they established — at the behest of bankers — the system. Also, while the GAO is tasked to audit the system, its authority in what to audit is severely limited. So it doesn't seem to me the government has much to say about the day to day operations or long term policies of the Fed.

 

The Federal Reserve System is in practice an independent entity with control over the monetary policy of the United States. While it was "established by law", I'm not at all convinced that Congress has, or ever did have, the power Constitutional authority to pass those laws. I must correct myself — Congress passed the laws, so they certainly had the power to do so.

 

The top level members of the FRB are paid by the Federal government. The rest of its employees are paid from the system's own revenues, which if I read it right amounted to about $5 billion in 2010.

[mike777]

The Chairman of the Federal Reserve Board is required to appear before Congress twice a year to report what the Federal Reserve System is doing and what it plans to do in the future. I don't see anything in the law that gives Congress the authority to tell the Board "No. Don't do that." I suppose they could pass a law abolishing the institution, but somehow I don't see that happening. So while there is "oversight", there's certainly no control. Congress gave up that control when they established — at the behest of bankers — the system. Also, while the GAO is tasked to audit the system, its authority in what to audit is severely limited. So it doesn't seem to me the government has much to say about the day to day operations or long term policies of the Fed.

 

The Federal Reserve System is in practice an independent entity with control over the monetary policy of the United States. While it was "established by law", I'm not at all convinced that Congress has, or ever did have, the power Constitutional authority to pass those laws. I must correct myself — Congress passed the laws, so they certainly had the power to do so.

 

The top level members of the FRB are paid by the Federal government. The rest of its employees are paid from the system's own revenues, which if I read it right amounted to about $5 billion in 2010.

 

 

If we agree(for the sake of this discussion) all of the above is fact and agree that the fed leadership including the current chairman is as much to blame for the crises(credit bubble) in 2008 then what?

 

fwiw my take is domain dependence make the issue difficult to understand but you =may have other issues?

 

 

"For an initial-value problem for a partial differential equation, a portion of the range such that the initial values on this portion determine the solution over the entire range"

[kenberg]

It looks like you missed Jan Hatzius' latest U.S. budget deficit estimates for 2013 - 2023 which pretty much ended the government debt = doomsday hysteria when his estimates were reported in April. The real doomsday machine is the ever growing global network of banks that are "still too big to fail, too big to manage, and too big to trust ... There are now more too-big-to-fail institutions than there were prior to the 2008 crisis -- Gretchen Morgenson May 24, 2013".

 

I don't think that concern about debt should be discarded as doomsday hysteria. I favor addressing the problem, and I do think that it is a problem, realistically. I am not hysterical.

 

But this quibble aside, I do worry (although I still resist hysteria) about international financial entities that seem to be a law onto themselves. It seems to me that progress is often fueled by some mix of self interest and idealism. I am not so sure idealism has any office space in these large enterprises.

 

I had never heard of Jan Hatzius but the Wik tells me "he is a two-time winner of the Lawrence R. Klein Award for the most accurate US economic forecast over the prior four years.". I would say that entitles him to some of my listening time.

[y66]

I don't think that concern about debt should be discarded as doomsday hysteria. I favor addressing the problem, and I do think that it is a problem, realistically. I am not hysterical.

 

But this quibble aside, I do worry (although I still resist hysteria) about international financial entities that seem to be a law onto themselves. It seems to me that progress is often fueled by some mix of self interest and idealism. I am not so sure idealism has any office space in these large enterprises.

 

I had never heard of Jan Hatzius but the Wik tells me "he is a two-time winner of the Lawrence R. Klein Award for the most accurate US economic forecast over the prior four years.". I would say that entitles him to some of my listening time.

Nobody is saying that "concern about the debt" = "doomsday hysteria".

 

If Medicare and Medicaid spending are not addressed between now and 2020, U.S. government debt will become a serious problem. U.S. government debt is not a serious problem now.

 

We can address the long term debt problem by tackling the healthcare spending problem as has been proposed by sensible forum mates on a different thread.

 

Unemployment is a serious problem now and has been a serious problem for almost 5 years.

 

We can address the unemployment problem by getting the economy going again and keeping it going. The best tool for this, according to people who study this problem, is short term government spending aka stimulus spending. Yes, short term government spending increases debt but there are other effects. Getting the economy going again decreases debt by decreasing unemployment costs and by increasing tax revenue. We're already seeing the effects of increasing tax revenues in new debt estimates from Hatzius and CBO.

[Winstonm]

This may be obvious to everyone else but me, but what exactly is stopping the whole thing from going pop? It seems as though everything that had people planning for an economic doomsday - like the level of governmental debt - hasn't gone away but now people are happy and marching forward with a smile on their face and a song in their hearts, so to speak. What did I miss?

 

Mainly, the reason is that those people were wrong, spectacularly so.

[Winstonm]

The Chairman of the Federal Reserve Board is required to appear before Congress twice a year to report what the Federal Reserve System is doing and what it plans to do in the future. I don't see anything in the law that gives Congress the authority to tell the Board "No. Don't do that." I suppose they could pass a law abolishing the institution, but somehow I don't see that happening. So while there is "oversight", there's certainly no control. Congress gave up that control when they established — at the behest of bankers — the system. Also, while the GAO is tasked to audit the system, its authority in what to audit is severely limited. So it doesn't seem to me the government has much to say about the day to day operations or long term policies of the Fed.

 

The Federal Reserve System is in practice an independent entity with control over the monetary policy of the United States. While it was "established by law", I'm not at all convinced that Congress has, or ever did have, the power Constitutional authority to pass those laws. I must correct myself — Congress passed the laws, so they certainly had the power to do so.

 

The top level members of the FRB are paid by the Federal government. The rest of its employees are paid from the system's own revenues, which if I read it right amounted to about $5 billion in 2010.

 

Yes, to manage and pay for the banking system the Fed is allowed to keep 6% of their earnings - they turned over about $80 billion to the US Treasury.

[onoway]

Mainly, the reason is that those people were wrong, spectacularly so.

Well, maybe not. Detroit declaring bankruptcy can't be seen as a good sign. What does that even mean, a city declaring bankruptcy? How does that even work?

[dwar0123]

Well, maybe not. Detroit declaring bankruptcy can't be seen as a good sign. What does that even mean, a city declaring bankruptcy? How does that even work?

The city sells bonds to cover the cost of capital projects. The bonds promise to give so much money after so much time. Investors buy the bonds. Small risk and small profit. The investors are going to get burned, small risk isn't the same thing as no risk.

 

Also, pensions are being threatened but historically they are left mostly intact.

[onoway]

The city sells bonds to cover the cost of capital projects. The bonds promise to give so much money after so much time. Investors buy the bonds. Small risk and small profit. The investors are going to get burned, small risk isn't the same thing as no risk.

 

Also, pensions are being threatened but historically they are left mostly intact.

So a bank or a car company is "too big to fail" but not a city of 900,000 or so.

Economics is a wonderful thing.

 

It would seem, then, that this isn't really going to cost the city much except the ability to sell bonds for a while? That sounds fairly harmless so will other cities follow suit?

[dwar0123]

So a bank or a car company is "too big to fail" but not a city of 900,000 or so.

Economics is a wonderful thing.

 

It would seem, then, that this isn't really going to cost the city much except the ability to sell bonds for a while? That sounds fairly harmless so will other cities follow suit?

Not being able to sell bonds is like not being able to breath. Fairly harmless over the short term...

[kenberg]

We can address the unemployment problem by getting the economy going again and keeping it going. The best tool for this, according to people who study this problem, is short term government spending aka stimulus spending. Yes, short term government spending increases debt but there are other effects. Getting the economy going again decreases debt by decreasing unemployment costs and by increasing tax revenue. We're already seeing the effects of increasing tax revenues in new debt estimates from Hatzius and CBO.

 

You may be pleased to hear that I am doing my part. I've been paying a kid forty bucks a pop to mow my grass. I am pretty sure that this cash goes directly into the economy.

 

Men everywhere may want to do this. They can explain to their wives that it is simply a sacrifice that they feel they must make for their country.

[Winstonm]

Well, maybe not. Detroit declaring bankruptcy can't be seen as a good sign. What does that even mean, a city declaring bankruptcy? How does that even work?

 

The discussion was about the Federal debt. Municipal debt, private debt, and individual debt cannot be used as proxies for federal debt - they are not the same creatures.

[Phil]

 

What I tell people is that the market will suck for at least another 12 months (we are in our 25th month of a decline currently). Check with me in early 2009. I think many things could happen that may brighten the outlook, like a change in the White House, situation in Iraq, etc..

 

 

Only missed this one by about four years....

[mike777]

So a bank or a car company is "too big to fail" but not a city of 900,000 or so.

Economics is a wonderful thing.

 

It would seem, then, that this isn't really going to cost the city much except the ability to sell bonds for a while? That sounds fairly harmless so will other cities follow suit?

 

 

You ask a great question.

 

 

Detroit owes about 18B but only 500M are bonds. Pensions and other benefits are the huge part.

 

Most of the retired don't live in Detroit. The city went from 2M to about 700K, many of them not rich.

 

The hope is that this a new beginning and the citizens will seize the chance for a new life and also attract new blood. A purging of the system will hurt many and we should be aware of that fact.

 

btw better to substitute the word politics for economics in your usage.

Detroit has been an excellent example of "rent seeking".

 

In public choice theory, rent-seeking is an attempt to obtain economic rent by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth. One

[mike777]

Only missed this one by about four years....

 

 

defining what the market is difficult if not impossible but there have been excellent markets including 2008-2013.

 

Richard Roll discusses the issue of markets.

[mike777]

Nobody is saying that "concern about the debt" = "doomsday hysteria".

 

If Medicare and Medicaid spending are not addressed between now and 2020, U.S. government debt will become a serious problem. U.S. government debt is not a serious problem now.

 

We can address the long term debt problem by tackling the healthcare spending problem as has been proposed by sensible forum mates on a different thread.

 

Unemployment is a serious problem now and has been a serious problem for almost 5 years.

 

We can address the unemployment problem by getting the economy going again and keeping it going. The best tool for this, according to people who study this problem, is short term government spending aka stimulus spending. Yes, short term government spending increases debt but there are other effects. Getting the economy going again decreases debt by decreasing unemployment costs and by increasing tax revenue. We're already seeing the effects of increasing tax revenues in new debt estimates from Hatzius and CBO.

 

 

yes huge SHORT TERM spending is indeed the argument.

 

I ARGUED for a big Nat. holiday to celebrate and honor entrepreneurs and got pounded on.

[hrothgar]

Richard Roll discusses the issue of markets.

 

Let's examine that Roll paper that you keep citing, because I don't find it particularly convincing:

 

First and foremost, lets start with his explanation why a bubble isn't the correct explanation for the collapse in the housing market.

Ultimately, his argument collapses down to the following:

 

Of course, one can never completely rule out the possibility of an irrational bubble in hindsight.

A simple explanation for the 2007–08 debacle is that global real estate values were simply too high and

that a crash was inevitable. Why there was a bubble in the first place and why it burst when it did might

forever remain unanswerable questions, which is the problem with any bubble story; it can always be concocted to “explain” everything.

 

This is a fancy way of saying "I don't like bubbles, so let me come up with another explanation"

 

Here's what Rolls offers instead:

 

Consider an alternative rational explanation: a 2007 reduction in the value of human capital, the overwhelmingly dominant component of collective total real wealth. Human capital is also the

most important determinant of real estate values. People will pay what they can afford for housing. There are plausible reasons to conjecture that a negative human capital valuation shock actually

occurred in 2007, although hard evidence is lacking because human capital prices are not directly observable.

Machinery, equipment, and intangible values can be observed daily, at least in part, through equity market values. Real estate values are partially observable, although less frequently—at

best monthly. Human capital value is not observable until long afterward, when labor income is ultimately reported.

Given the impossibility of observing human capital values directly, the diagnostician must resort to supposition. The following is a

plausible chronology of recent events, based on rationality and well-functioning markets. First, human capital values declined precipitously

from mid-2007 through 2008 because anticipated growth rates in labor income declined. This value reduction was not observed

(and could not have been). If the anticipated growth rate in labor income is relatively close to the discount rate, even a small decrease

in anticipated growth can have a large impact on the present value of human capital.

 

Note that his explanation is subject to the precise same critique as the one for the "real estate bubble:.

Roll directly states that human capital is unobservable and offers no explanation why expectations about growth rates for labor income suddenly changed in 2007.

 

Unlike the bubble explanation, Rolls alternative requires that there was a sudden and significant change in growth rate expectations that suddenly impacted the world economy in a very short period of time.

What was the driver for this event? Why did it happen all at once, rather than a slow, gradual change in beliefs?

 

Next, lets look at some of the assumptions that Roll requires for his preferred explanation. In particular, consider the following quote:

 

Suppose Warren Buffett gave Bill Gates $20 billion. What is the net change in aggregated (total)

wealth? Would markets crash as a result? Would total human capital be worth less? Would real

estate values fall or rise (except in Omaha, Nebraska, relative to Seattle)? Would there be any

direct impact on existing stocks of productive machinery, goodwill, or any other real asset? No,

there would be little, if any, change in total wealth, output, or any other indicator of real economic

activity as a result of a simple wealth transfer. This fact has important implications for the role of debt

in economic crises.

 

Note that Roll concedes that this wealth transfer would impact real estate prices in individual sectors of the economy.

(In this case Omaha and Seattle). The consider what happens when housing market collapsed:

There was a significant net transfer of wealth from consumers and individuals who held the wrong end of CDOs to a small group of speculators who were holding the "Right" end of the CDOs

 

Historically, the primary vehicle for savings for American consumer was their homes.

So, rather than thinking about 20 billion transferred from Buffet to Gates, think about a whole lot more transferred out of the consumer economy.

[Phil]

defining what the market is difficult if not impossible but there have been excellent markets including 2008-2013.

 

Richard Roll discusses the issue of markets.

 

Hard to call a 40 - 60% (nearly) universal slide in values an excellent market under any measurement.

 

If you want to call North Dakota in 2010 - 2012 an excellent market, I will concede this point.

[hrothgar]

Hard to call a 40 - 60% (nearly) universal slide in values an excellent market under any measurement.

 

If you want to call North Dakota in 2010 - 2012 an excellent market, I will concede this point.

 

Its often difficult to understand what Mike is talking about, however, I suspect that you are discussing the market for real estate and Mike is discussing stocks...

[Phil]

Its often difficult to understand what Mike is talking about, however, I suspect that you are discussing the market for real estate and Mike is discussing stocks...

 

You are correct, but thats all I've ever discussed over the duration of this thread.

 

I don't have the patience to determine subjects Mike777 has taken on here, only that he is responding to me.

[jonottawa]

Let's examine that Roll paper that you keep citing, because I don't find it particularly convincing:

 

Here's an excellent lecture by

on the topic. He actually makes a great deal of sense.

[jonottawa]

Did I not get anyone? Yes, Rickrolling is pretty lame/dated, but under the circumstances I couldn't resist.

[hrothgar]

Did I not get anyone? Yes, Rickrolling is pretty lame/dated, but under the circumstances I couldn't resist.

 

I most certainly know the reference, hence my unwillingness to click on the link...

[kenberg]

Yes, you got me. Easy to do!!

I figured it was just another one of these damned ads that I had to sit through until we got to the real thing.

I caught on. Eventually.

 

 

i wiked the economist guy. He has enough going for him that I will not just dismiss him, but the quotes that Richard put up certainly get my skepticism working. "Human capital" seems to be sort of like a quark, at least in his telling. You can't really observe it, just sort of make inferences about it. And it explains everything. Sort of like God, actually.