The Future of the United States of America
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Given that the interest rate on brokers' loans (the loans which fueled speculative margin purchases) by 1929 was around 12 percent, on top of a reserve interest rate in the neighborhood of five percent, the errors in regulation weren't chiefly monetary in nature. A lack of oversight and regulation contributed far more to the bubble and subsequent crash than did any aspect of monetary policy. This was, after all, the era from which we get the phrase "Ponzi scheme."Dele said:
Did I understand you correctly? Fed inflating the money supply by 60%, hiking the interest rates in 1928-29 (Essentially the same as their policies in the 21th century), raising the interest rates again in 1931 and letting the money supply contradict by 35% by 1933 made the markets less volatile and along with interventionistic policies of Hoover and Roosevelt were not the main cause of turning the crisis into The Great Depression but instead lack of regulation was the major cause?Horticulture said:
Horticulture: Thank for the article outlining the infamous "Paradox of saving", where massed saving will invariably cause an overall drop in living standards due to the interruption of the money flow.* And thank you for arguig against Dele. I have exhausted myself trying to batter him into submission with my arguments, but now I'm ready to take up the fight. Again.
*Do not try to bullshit on how saving actually does something. It does in the long run, but at this point the long run can hang itself. Taking large quanitities of cash out of the economy- cash as in physical dollars as well as E-dollars- will naturally dampen demand further, resulting in further loss of income for suppliers**
**Thus rendering the long-term effect of saving negligible, as the usage of that capital as loans will not come into play as no supplier is going to expand his production when demand is falling.
*Do not try to bullshit on how saving actually does something. It does in the long run, but at this point the long run can hang itself. Taking large quanitities of cash out of the economy- cash as in physical dollars as well as E-dollars- will naturally dampen demand further, resulting in further loss of income for suppliers**
**Thus rendering the long-term effect of saving negligible, as the usage of that capital as loans will not come into play as no supplier is going to expand his production when demand is falling.
I would say you are clutching at straws, frankly. Money supply is, and more so at that time, was a supply-side long-term factor- it tended to pay more for expansions to supply than demand. In essence, by constricting the money supply, the Fed did harm demand slightly, but given the near-total saturation of the available market due to the sheer inequalities in wealth present within America at the time and the restrictive trade practices, means that money supply was less important in stimulating demand. And Depressions are, always, a demand crisis. Supply crises are those like the 70s oil crisis, or rationing- they result in inflation but will not result in absurd levels of unemployment.Dele said:
There is no "bullshit" on "saving". Explaining to a Keynesian what capital accumulation is I have now deemed impossible. If "saving" (which is not hoarding, although again, Keynesians cannot or will not learn the difference) is destroying the economy, how do you propose people buy new businesses, or automobiles, or their houses? If saving money leads to economic downturns, than people must be buying these things in one paycheck so as not to "take money out of circulation" as you claim. Let me know when you can purchase a house in one paycheck.Fondant said:
No, the difference is capital accumulation (saving) is the SPENDING on production, not consumption. Again, if saving was so bad, only consumption goods would be bought, and if I am to follow that logic, does magic create goods for all of this consumption spending? Again, if I am to follow that logic and try to defend your point using Keynesian logic, the only way you could possibly even describe people that invest in production is basically "people with a different whim" than those who decide to buy consumable goods.
(and lastly, if you are trying to batter someone into submission in a debate, that really does not show the strength of your position, but rather that you hope persistence and heavy-handed tactics will, not the merits of your viewpoint).
Ah, metaphors. So used, so often ignored, or taken too literally, or simply dismissed....
Now, I have just read, you seem to have dismissed my argument by.....I'm not entirely sure. Permit me to read some more.....ah! I get it! Your saying that saving does something! So did I! I simply said that at this moment it is of little value! Please read my posts! I simply argued that at this time there is no demand by suppliers for credit to expand their production, as their is no demand for the products they supply. The housing market has plummeted, the automobile market has plummeted and I don't see many people expanding their businesses, either.
Keynes never argued that saved capital was useless, he simply argued that it's value during a recession is negligible as their is no demand for supply to be expanded, and if people are saving they are unlikely to be taking out loans.
Saving does not lead to downturns, it merely exacerbates them. Horribly.
Now, I have just read, you seem to have dismissed my argument by.....I'm not entirely sure. Permit me to read some more.....ah! I get it! Your saying that saving does something! So did I! I simply said that at this moment it is of little value! Please read my posts! I simply argued that at this time there is no demand by suppliers for credit to expand their production, as their is no demand for the products they supply. The housing market has plummeted, the automobile market has plummeted and I don't see many people expanding their businesses, either.
Keynes never argued that saved capital was useless, he simply argued that it's value during a recession is negligible as their is no demand for supply to be expanded, and if people are saving they are unlikely to be taking out loans.
Saving does not lead to downturns, it merely exacerbates them. Horribly.
Ah, I've to meet someone for lunch or I'd love to respond fully, perhaps when I return if Dele or someone else has not made a post similar to what I would have said.
So, to try and argue my point in as brief as possible I will quote Jude Wanniski (albeit paraphrasing, and probably horribly).
"The only reason for production is because those producers want (demand) things".
The only reason we get up everyday for work is because we want things. Food, water, internet, TV's, whatever it is. Therefore let's give those producers (who are of course also consumers) an easier time of producing. The only real way at this time is deflation, not massive amounts of spending. We need to give the reduced amount of capital the same purchasing power as it was previously, not artificially inflate it with capital out of thin air (and that the market is not calling for).
So, to try and argue my point in as brief as possible I will quote Jude Wanniski (albeit paraphrasing, and probably horribly).
"The only reason for production is because those producers want (demand) things".
The only reason we get up everyday for work is because we want things. Food, water, internet, TV's, whatever it is. Therefore let's give those producers (who are of course also consumers) an easier time of producing. The only real way at this time is deflation, not massive amounts of spending. We need to give the reduced amount of capital the same purchasing power as it was previously, not artificially inflate it with capital out of thin air (and that the market is not calling for).
Let's be honest, if we just pretend this isn't happening we'll all be fine. I've been worrying since I was 11 that britain would be in the shit because it doesn't actually produce anything. But anyway, I'm looking forward to the global communist take over. It should spice things up a bit.
Notice those bolded parts. Maybe I can explain this through a simple example. When I put 100 Euros to my bank account (a prime example of average joe saving instead of consuming) you claim it's off from circulation thus hurting the economy etc etc. This is where you fail. When I save 100 Euros instead of buying a new cellphone I:Fondant said:
a) Reinforce the treasury of bank with 100 euros helping the bank to survive against losses.
b) If the bank has enough reserves it will loan my savings to consumers wanting to buy expensive goods such as houses, cars etc.
Now due to fractional-reserve banking, the bank can actually loan more than I have deposited thus creating additional 1000-7000 euros to circulation (depending on regulation).
I hope you can explain to me how consuming goods worth 100 euros instead of helping the banks loan more than tenfold that amount is a better way to 'stimulate the markets'
Sane Man, it seems you were right. 1-2-3-4-5 works.
Edit:
Did you just say that people suddenly dont want to consume anymore? I find it hard to think that nobody would want to consume anymoreFondant said:
if they had financial stability and money to do so. They need to produce more and consume less for a while to receive this. Production is creation of wealth, consumption is destruction of wealth.
A) Point.
B) One cannot loan money out if people do not want loans. And if people are losing jobs, having their houses repossessed, they aren't going to demand loans. I beleive I have already covered this with you Dele. You cannot sell what people do not want, and when the economy goes South, "The People" as a whole- the businessmen, the homeowners, the lawyers, the working classes- do not want loans. At all. In normal times, you are quite right- 100 Euros in the bank means 1,000 can be loaned out (assuming that is the set liquidity ratio- it could be as low as 5, or high as 20.)
Secondly, in times of recession, banks will tend to keep a much higher credit ratio than the minimum set by the reserves. Instead of lending to their maximum, they will keep far more of their cash as cash, in case of a further loss of consumer confidence and a 'run' on the bank.
Explain? Sure: You, as a unit, are unimportant. I am not talking about you saving or you spending, Dele, I am talking about hundreds, if not thousands of people.
Now, look at it this way. If we assume that 10% of people do what you suggest, then we see a 10% drop in the demand for cellphones. That's a significant loss of profit for the makers and sellers of cellphones. If this drop in demand continues, then they will begin to downsize their operations- in short, they will fire people and sell capital. The people fired are now no longer earning money. They will now not spend that money, as they do not have any, thus causing a further drop in demand. That means more money lost. That means more downsizing, more capital sold (at decreasing prices, as their is already a lot of capital being sold) and more unemployment.
And behold! What happens when the system goes 'boink'.
It's simple- save in the good times, spend in the bad. Prices are cheaper then.
B) One cannot loan money out if people do not want loans. And if people are losing jobs, having their houses repossessed, they aren't going to demand loans. I beleive I have already covered this with you Dele. You cannot sell what people do not want, and when the economy goes South, "The People" as a whole- the businessmen, the homeowners, the lawyers, the working classes- do not want loans. At all. In normal times, you are quite right- 100 Euros in the bank means 1,000 can be loaned out (assuming that is the set liquidity ratio- it could be as low as 5, or high as 20.)
Secondly, in times of recession, banks will tend to keep a much higher credit ratio than the minimum set by the reserves. Instead of lending to their maximum, they will keep far more of their cash as cash, in case of a further loss of consumer confidence and a 'run' on the bank.
Explain? Sure: You, as a unit, are unimportant. I am not talking about you saving or you spending, Dele, I am talking about hundreds, if not thousands of people.
Now, look at it this way. If we assume that 10% of people do what you suggest, then we see a 10% drop in the demand for cellphones. That's a significant loss of profit for the makers and sellers of cellphones. If this drop in demand continues, then they will begin to downsize their operations- in short, they will fire people and sell capital. The people fired are now no longer earning money. They will now not spend that money, as they do not have any, thus causing a further drop in demand. That means more money lost. That means more downsizing, more capital sold (at decreasing prices, as their is already a lot of capital being sold) and more unemployment.
And behold! What happens when the system goes 'boink'.
It's simple- save in the good times, spend in the bad. Prices are cheaper then.
Yeah I thought you would say something like that. You are in denial my friend. Think about your answer for a minute.... Now be completely honest with me and answer: Is the current banking crisis dueFondant said:
a) Banks not having enough reserves and thus going bankrupt while businessses and people cant get more loans even if they have guarantees and steady income.
b) Banks sitting on a huge pile of money while desparately trying to loan it to people who just dont wanna take a loan. In fact they are so desperate that they keep calling you and begging you to take more loans and giving you a super-special bonus if you do.
You answered b on your post. Now go to any financial site and see if the banks are failing and governments desperately trying to get the banks to loan more even though banks dont wanna because theyre afraid that they cant handle the possible losses. Yes thats right, it's exactly the opposite of what you said previously. Also Happy Puppy -magazine doesn't count.
Runs on bank are extremely rare on modern society since we have accounts guaranteed and even if such happened banks can always take out loans from government/central bank/stock market so I would not count it as a factor.Fondant said:
So if thousands of people save, it can only be better than only me saving as banks have even larger reserves and can give out even more loans and the bank situation is stabilized. Even if the demand of cellphones drops the money doesn't disappear anywhere. It will be given out as new loans to people who will consume it + new money on somewhere else which fuels consumption somewhere else thus your reasoning doesn't work.
Excuse me.
*Smashes head into keyboard in despair*
There. Let me explain: People. Don't. Want. Loans. Why? Because they are afraid. They're afraid they will lose their jobs, and so do not want more debt hanging on them. If they do not want loans, they will not demand them.
Are you being deliberately obtuse, or are you just having a problem with my English?
The crisis is due to banks investing too much money in the stock market, and losing it. The crisis may be exacerbated by a paradox of saving occuring due to the fact that people, knowing their deposits are guaranteed, will drop their money into the now-stabilised banks and not take out any loans, due to the fact they are worried about the recession.
You seem to not understand the 'demand' concept of 'supply and demand'. May I advise you read Adam Smith's: The Wealth of Nations, for a little brush-up in basic economics.
*Smashes head into keyboard in despair*
There. Let me explain: People. Don't. Want. Loans. Why? Because they are afraid. They're afraid they will lose their jobs, and so do not want more debt hanging on them. If they do not want loans, they will not demand them.
Are you being deliberately obtuse, or are you just having a problem with my English?
The crisis is due to banks investing too much money in the stock market, and losing it. The crisis may be exacerbated by a paradox of saving occuring due to the fact that people, knowing their deposits are guaranteed, will drop their money into the now-stabilised banks and not take out any loans, due to the fact they are worried about the recession.
You seem to not understand the 'demand' concept of 'supply and demand'. May I advise you read Adam Smith's: The Wealth of Nations, for a little brush-up in basic economics.
I suggested going around and looking what happens in the real world. Looks like you did not.Fondant said:
CNN [http://cnnmoneytalkback.blogs.cnnmoney.cnn.com/2009/02/16/why-you-cant-get-a-loan/]
NY Times [http://www.nytimes.com/2008/10/25/business/25nocera.html?fta=y]
Why does the government keep giving money to the banks if they sit on a cash reserve and desperately want to give loans to everyone but nobody seems to want new loans. Oh right maybe they dont have the money to give loans, maybe government is hoping that banks start loaning again, maybe there is a huge demand for loans but nobody seems to be willing to loan at this point and finally maybe putting money to your bank account gives banks money to loan and thus helps businesses to expands and keeps them from going to bankrupt due lack of loans. Saving saves businesses.
Maybe the problem is not the stock markets, but banks giving too many loans due huge demand caused by too low interest rates and now many will default, hitting the banks hard.
Maybe.... If you open your eyes.
(Edit: Ironically it seems that you have consumed too many of your arguments, maybe you should try producing some new ones so that we can keep on discussing)
Errors in monetary policy were the last step in a long line of causes leading to the depression. Tight monetary policy (I think the Fed actually decreased the money supply, i.e. sold bonds, by a small margin in late '29) certainly exacerbated the situation throughout the Hoover era, but that's like blaming the death of cancer patient on his failure to eat a sufficient amount of fiber.Dele said:
Fed policy did exacerbate the situation, but the depression stemmed from the insane state of the stock and securities market and the associated rapidly expanding income inequality (facilitating the endurance of the stock/securities market bubble beyond the time at which the rest of the economy had begun to waver). Fed policy leading up to the Hoover administration, and even throughout its early months, was far too passive, giving over the reins to a market increasingly recognized to be unsustainable.
Even so, this case has little bearing on today's Fed and crisis, as we're operating under a different set of macroeconomic theories which have utterly transformed, for the better, our understanding of what constitutes effective monetary policy. U.S. monetary policy was so widely effective in the post-war era that by the early 1990s some (optimistic) business commentators began to herald an 'end to the business cycle.' This is obviously not the case, but it serves to illustrate the success of the Fed in moderating the volatility of the market.
A secondary point: the Fed is not pursuing a tight monetary policy. Federal interest rates are rock bottom, and have declined rapidly since 2008, and reserve banks are poised to purchase long-term bonds.
Wait, your "reputable" sources of information and news are CNN and the Times? Really!? I'm not refuting your point. In fact I'd stand by it Dele, but I really have to insist you go elsewhere for your information. As reliable, unbiased sources of news, CNN and the Times do NOT qualify.Dele said:
Now, let me think this through. Banks have given out too much of their capital to bad lenders, resulting in the crash as more and more lenders default. This in turn has caused house prices to plummet as their owners or the banks try to sell them to cover their debts/losses, leading to an oversaturated market. Since the banks have lost incredible amounts of money, they are naturally cautious about lending money, even with the government backing their loans, mainly because it was irrational lending that caused them to lose so much money in the first place. Ergo, they will not give loans. Now, due to the fact that there is an ongoing recession, most people and businesses do not want loans, as demand for their product is falling. And even if they did, the banks will not give it to them due to the fact that due to the recession, there is a good chance they will default on that loan simply due to the fact of losing their jobs due to business failures or downsizing!
Dele, you seem to misunderstand the interest rate. It is the base- the lowest level at which banks may lend. By setting it lower, the Fed did not compell the bankers to lend out to unreliable debtors/at low rates, it simply permitted them to do so. Unwise, yes, but the fact is that simply because the state permits you to drive at 90 miles per hour does not force you to, and if you crash it is not the state's fault.
http://www.imf.org/external/np/speeches/2003/040803.htm
http://www.economist.com/finance/displaystory.cfm?story_id=13104022
Dele, you seem to misunderstand the interest rate. It is the base- the lowest level at which banks may lend. By setting it lower, the Fed did not compell the bankers to lend out to unreliable debtors/at low rates, it simply permitted them to do so. Unwise, yes, but the fact is that simply because the state permits you to drive at 90 miles per hour does not force you to, and if you crash it is not the state's fault.
http://www.imf.org/external/np/speeches/2003/040803.htm
http://www.economist.com/finance/displaystory.cfm?story_id=13104022
I more like picked the first two links out of google than tried to find "the most reputable sources".Vigormortis said:
So what you are essentially saying is that Fed made the markets more volatile and more unstable in the past through their mistakes but they have come up with new theories that somehow makes it impossible for them to do mistakes and hurt the economy. This is also known as This time it's different [http://www.incademy.com/courses/Fifteen-favourite-fallacies/%22Investing-is-just-gambling-anyway,-so-why-not-take-a-few-chances%22/15/1041/10002] -fallacy. Easy example of Fed still doing mistakes can be found by looking at them inflating the money supply with interest rate cuts on 21th century when there was absolutely no need for such cuts and then raising them too late which is followed by worldwide recession/depression. Doesn't that sound awfully familiar to you?Horticulture said:
Youre right that they are not playing it tight now, but they will have to raise the rates very high to deal with the inflation as soon as some light can be seen at the end of the tunnel.