Will QE3 Be Cloaked in Repos? The upcoming expansion of US bank credit.

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Will QE3 Be Cloaked in Repos? The upcoming expansion of US bank credit.

http://www.itulip.com/forums/showthread.php/20181-Will-QE3-be-cloaked-in...

 

Since the FOMC meeting, there has been a noticeable silence over the Fed’s monetary policy following QE2. But there is some evidence that the funding of government debt at low interest rates will shift to the repo market, rather than a new round of quantitative easing.

...To the Keynesian mind the obvious alternative must be to expand bank credit, particularly when there is an accumulation of non-borrowed reserves sitting on the Fed’s balance sheet. The NBRs represent the excess capital owned by the commercial banks, which have not been drawn down for use as the capital base for the expansion of bank credit. They currently stand at about $1.76 trillion while in normal circumstances NBRs would be no more than a few tens of billions. High levels of NBRs reflect the reluctance of banks to lend and bankable borrowers to borrow: they are symptomatic of an economy that refuses to expand.

...It is against this background that Ben Bernanke announced at the recent post-FOMC meeting press conference that interest rates would be held at current levels (close to zero) for the next two years. This could be the basis for shifting the funding of government debt from printing raw money to expanding bank credit. The public do not understand the inflationary implications of expanding bank credit as easily as they do that of printing money: switching to bank credit as a funding route for government debt allows the Fed to fool all of us a while longer.

The logical way to do this is by developing the repo market, where the buyer of government securities conducts a reverse repurchase agreement, or a reverse repo. In a reverse repo an investor buys securities with an agreement to sell them back to the seller at a fixed price at a future date. For the seller of the securities, the deal is defined as a simple repurchase agreement and is the mirror-image of the reverse repo. If the cost of financing a reverse repo is profitable then the transaction can be highly geared to give a substantial return on the underlying capital. By encouraging this market for short-term government debt, the Fed can exercise tight control over short-maturity government bond yields with benefits extending to medium maturities, irrespective of the quantity issued. The key to it is to get the banks to lend to the institutions on the Fed’s Reverse Repo Counterparty List, and the key to that is reducing the interest rate paid on non-borrowed reserves to slightly below the targeted government bond yield rate.

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This is esoteric.. but interesting.

More on this same subject today from ZH.. I have to say, I am having some trouble comprehending all the implications of these reverse repo's... but I am trying .   

http://www.zerohedge.com/news/guest-post-bernanke-box?page=1

"Bernanke and QE is in a box – conditions currently in the wholesale money markets, especially the repo market, will not suffer more QE.  As the unsecured Fed funds and eurodollar markets have effectively frozen for banks outside the primary dealer network, wholesale funding has been left to repos.  However, there is already a shortage of treasury bills, the prime, vital collateral of nearly all post-2008 repo funding arrangements. 

QE is nothing more than an extraction of those bills (and notes), creating that shortage in the first place.  So while the primary dealers are loaded up with Fed-created bank reserves, they are not forwarding them to the wider marketplace out of well-founded fears of PIIGS exposures and currency mismatches between assets and liabilities.  Despite an ocean of liquidity at the center, the wider system is now a desert.  The Fed is held hostage by the operational realities of the design of the Federal Reserve system.

Should the Fed embark on a new QE program today, it would simply extract more of that vital collateral, exacerbating the shortage to the point of significant voluntary capital destruction – banks would be forced to take on t-bills at greater and greater negative rates.  This kind of situation is purely deflationary, and nothing scares Bernanke more than that dreaded d-word.

As long as the unsecured markets remain in limbo, and they will as long as the global banking system is hiding its problems, the Fed CANNOT launch another round of QE, no matter how much Bernanke might want to.  In the calculus of monetary primacy, the banking system will win every time, even at the potential expense of stocks and rational expectations.

So the Chairman is forced to jawbone stock investors into believing QE is not yet appropriate (they are constantly monitoring the economic situation), but is still imminent.  Meanwhile, the Fed is actively engaged in expanding the reverse repo program to help alleviate the bill shortage.  While no one was looking, it has taken its aggregate of reverse repo transactions to nearly $100 billion, from only $65 billion at the beginning of August. 

Reverse repos are an exit strategy, not monetary accommodation.  But, in the context of the wider wholesale market freeze, reverse repos expand the amount of treasuries, especially bills, available to be used as collateral by financial institutions outside the primary dealer network.  As much as the Fed adheres to flawed ideology and oft-times inconsistent theoretical constructions, it is not likely to engage in monetary programs that are directly contradictory.  Reverse repos and QE would cancel each other out.

The cue for more QE, then, is t-bill rates.  If the shortage resolves itself at some point in the coming weeks, then the green light is on.  There is no doubt that given that green light, Bernanke will take it – he has to if for no other reason than monetizing the debt (which may not be a problem right now, but it will be at some point)."

 

This comment on the above article also seemed insightful.. but I am still not completely getting it;

http://www.zerohedge.com/news/guest-post-bernanke-box#comment-1606863

"This article is correct. The primary problem we have is highly concentrated liquidity in the hands of the biggest risk takers in the market, and the same hands that no longer really need it. The junkie went into withdrawal, so instead of dishing out the tough love or demanding a stint in rehab, central banks simply dished out more heroin.

The Fed was very, very fast to swap crap at par in exchange for cash (liquidity providing), but there is no way to reverse this. The cure for QE-induced problems are repos, but nobody in their right mind is going to do the reverse trade at the original price because everybody knows how crap that stuff is. At the best, the Fed can swap back some high quality stuff (TYSs), but it's stuck with a lot of the toxic ABS. If a repurchase is going to happen, then the counterparty will only be prepared to pay real market value, meaning the Fed has to take a huge write-down which is exactly the same as turning existing, supposedly sterilizable injection into non-sterilized inflation.

Either that, or it pushes the loss off its books onto the Treasury and asks taxes to pay for it, socializing bank losses. In the latter case, the effective inflation is basically the same because the real economy must deflate to cover losses (as taxes are taken in) meaning that the relative state of the real economy and the ponzi finance economy is the same either way: banks get richer, society gets poorer. An example of this happening is the govt recently asking for ideas to deal with the large inventory of defaulted upon homes underpinning toxic MBS. Part of that is the Fed looking for an "out". A way to push shitty assets back to the GSEs / government.

In the subsequent environment, banks use their position of greater relative wealth to purchase firesale assets from the real economy, coming to own more of the real world. The only other option is to go Japanese and sit on that stuff forever in the hope that bubbles eventually regrow and repurchases can be conducted at the original price. It might take 20 years, more likely, it will never happen at real equivalent value (maybe nominal, but then that's actually inflationary if you think about it).

Absolutely none of this is under democratic review by the masses. It's 100% pure, unadulterated oppression, the very opposite of the "freedom" that Americans are lied to about on a daily basis and sadly seem happy to parrot back."

 

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And another thing...

I happend across another article that (in a most circuitous way) ends up talking about the "scarcity" of T-bonds.. and relates this in a very interesting way to the FED's use of interest rate swap derivatives in their efforts to control the markets;

http://news.goldseek.com/GoldSeek/1314194400.php

Morgan Stanley Lays An Egg: the Footprint of the ESF

"When one considers that Morgan Stanley “strapped on” 9 Trillion [according to the OCC in Q1/2011] in notional of products that require 2-WAY–CREDIT-CHECK – we should all now be scratching your head as to “WHO” or perhaps “WHAT” would be an agreeing counterparty to such STAGGERING 9 trillion of two-way-risk trade with Stanley in 3 months?????  Remember folks, a couple of years ago – no institution would consider buying / acquiring Stanley for any amount.

The ONLY answer – is that the EXCHANGE STABILIZATION FUND is acting in the int. rate swap market [through the N.Y. Fed] “RECEIVEING” 5 – 10 year swaps at “FIXED RATES” [meaning Stanley is paying the ESF fixed rate and the ESF is in turn paying them ‘floating’ 3 month libor, but does not exchange bonds with Stanley].  Morgan Stanley “IS” a spread player and the ESF is NOT.  [the custom in int. rate swaps of 3 – 10 year duration is for the “receiver” of fixed to sell the “payer” of fixed a duration weighted amount of government bonds of the tenure of the swap, ie 25 million notional of 5 year swap would entail a physical bond trade of roughly 25 million 5 yr. gov’t bonds.] 

This FORCES Stanley into the bond market to purchase the required amount of bonds to hedge their trades.  [this has the added benefit of being quite profitable if you are the Exchange Stabilization Fund – especially when you KNOW [and no one else does] that short term rates are NEVER going to go up. 

This serves to make US bonds “SCARCE” for settlement purposes [fails to deliver data available open source confirms this] over the past few years – and has served to give the U.S. Treasury / Fed control of the long end of the int. rate curve.  This is why interest rates are so PERVERSELY LOW today.  It really has NOTHING to do with “flight to quality” or “liquidity”.

This has all been perpetrated on humanity by a group of elite, narcissist, globalist Central Bankers to obscure the reality that “their” FIAT MONEY is FAILING – in spades.

Got physical precious metal yet?"

By Rob Kirby

 

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Gubymint too big, spendy too much

It is hard to make sense of it. It kind of reminds me of pre-Wright Brothers attempts at flight, long on tar paper and feathers, short on flight theory. At some point we’re just standing on the roof with ever more complicated means of assembling the tar paper and feathers, and hoping for a different outcome from the previous broken legs and damaged theories.

At it’s very core we have in evidence some linked concepts that (demonstrably) do not mix well with a political economy that is in full spectrum denial.

The linked concepts that are not working are, in descending order of complexity:

-         Monetarist theory which says the Fed (and only the Fed) shall govern using supply side interest rate tools, of which the latest salvo of reverse repos is but a complex derivative.

-         The government is not allowed to (directly) influence matters of monetary relevance.

-         Freidmanesque theories that ramrod the notion of government intervention as the root of all evil, and that free markets should never   be touched.

-         Free markets are inherently stable, and totally efficient for price discovery.

-         Capitalism is inherently in equilibrium, and needs no external controls.

-         Markets in equilibrium need not be concerned with sustained unemployment and extreme price cycling, this cannot occur.

-         Neither consumers nor capitalists will ever hoard money, commodities or labor power, such action is irrational and the markets are inherently rational.

-         There can never be a general glut of labor or commodities, see above for reasons why.

Now, obviously, none of the above concepts are in any way true- and we can observe this, but these factors represent the current “conventional wisdom”  and have propagated, completely, though our political economy.

 

The point I would make is that these concepts are in fact linked, if you dispel one you dispel them all. They are built up, tar and feathers style, and have deep, irreconcilable dependencies. It’s a tower of cards, and it’s looking mighty rickety.

 

To the point of full spectrum denial in our political economy, if we take the above monetarist policies and associated theology as a beginning, we can see these dogmas propagating through our society:

 

If the only tool is supply side adjustments through Fed policy actions, we (negatively) reinforce the alternatives as antithetical:

 

1.)     Any stimulus is to be delivered to the supply side, as the demand side is not the problem (markets inherently stable, structural gluts are not possible). This dovetails nicely with the current dominant political theory that conflates any New Deal style Keynesian approaches, by invoking charges of expanding the “welfare state” and other pejoratives.

 

2.)     “Gubymint too big, spendy too much”. Everywhere you look, every TV channel, virtually every blogger, spouts some version of the chant ‘Gubymint too big, spendy too much”. This reinforces the notion of the Fed taking supply side action, as we have effectively killed off any opportunity to stimulate the demand side of the problem, which might include mortgage relief, wage increases, etc or in other words, actions that might actually work, as we found during the Great depression.

 

And again these concepts, antithetical as they are in today’s political climate, are also linked in the same fashion. This time from bottom to top:

 

-         There most certainly can  be a glut of labor or commodities.

 

-         Both consumers and capitalists may, at times, hoard money, and do so for protracted periods of time.

 

-         This can lead to inexplicable market instabilities including long term, sustained unemployment

 

-         The Efficient Market Hypothesis is dead wrong, in fact, we have a new hypotheses, which says precisely the opposite, that markets are in fact inherently unstable, and price discovery is not singularly influenced by rational dispersal of information, but is in fact substantially influenced by speculation, and therefore is subject to bubbles, and sustained periods of instability.

 

-         If true, who is the monitor to rein in such damaging occurrences that socialize high risks to unsuspecting market participants? If we have learned anything, it is that the market cannot self-regulate, and giving such regulation in the monetarist style to the (supposedly impartial) Fed nets a toolset that stops short of success when the effective interest rate is near or at zero, which is precisely where we are now-with very near zero results.

 

Kensysian style spending stimulus, delivered to the demand side (most certainly not to the bankers) would have a positive affect on recovering our economy in the short term. However, due to the political capture of the aforementioned concepts, there is no chance to consider any meaningful measures that include Keynesian spending, in large measure because the money has already been spent, as in given to the bankers,. These “new” derivatives and reverse repos are simply attempts to correct faulty logic and poor policy decisions by trying to motivate those who will remain unmotivated to do something they have no intention of doing- which is to loan money to people that are not qualified to borrow it and even if they were, have no market for which to sell into.

 

The larger (and longer) view that consolidates the diminishing natural resources with respect to a growth imperative is another matter entirely, and not easily solved, and has no chance of co-existing with the notion of perpetual expansion as required by the capitalist model.

 

But in the meantime we will contrive ever more complicated means of attaching the feathers to the tar paper, and hope for the best.

 

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Why You've Never Heard of the Great Depression of 1920

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Economic Cycles Before the Fed

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More gubymint......

Gregroberts, I watched the first video and I must say I find Woods’ arguments unconvincing. He seems like a guy with a ideology in search of data to support his position- not the other way ‘round. A quick search of Wiki yields the following comments on his assertion that Warding did not promote interventions during the depression of 1920-21:

Interpretations of the end

Austrian School economists and historians argue that the 1921 recession was a necessary market correction, required to engineer the massive realignments required of private business and industry following the end of the War. Libertarian Austrian School historian Thomas Woods argues that President Harding's laissez-faire economic policies during the 1920-21 recession, combined with a coordinated aggressive policy of rapid government downsizing, had a direct influence (mostly through intentional non-influence) on the rapid and widespread private-sector recovery.[12] Woods argued that, as there existed massive distortions in private markets due to government economic influence related to World War I, an equally massive "correction" to the distortions needed to occur as quickly as possible to realign investment and consumption with the new peace-time economic environment.

Daniel Kuehn's recent research calls into question many of the assertions Woods makes about the1920-21 recession.[13] Kuehn argues that the most substantial downsizing of government was attributable to the Wilson administration, and occurred well before the onset of the 1920-21 recession. Kuehn states that the Harding administration raised taxes in 1921 by expanding the tax base considerably at the same time that it lowered rates. Kuehn also argues that Woods underemphasizes the role the monetary stimulus played in reviving the depressed economy and that, since the 1920-21 recession was not characterized by any aggregate demand deficiency, fiscal stimulus was unwarranted

 

It seems that Mr. Woods’ conclusion are not shared regarding his supposed example of history, and I find his selection of this particular time to try and support his thesis to be a very thin argument, and of no consequence to the real issue which of course was the Depression of 1929. Regardless, prior to 1929 it was widely believed that capitalism was capable of correcting itself, at least from a monetary perspective. This self corrective tendency was not carried over into labor and social relations, where it was well understood that capitalism was a disaster needing extensive regulatory oversight through much of the 19th century and well into the industrial revolution.

The events of 1929 shattered this myth, and replaced this mistaken belief with Keynesian theory, which was fought by conservatives until WWII (and still disputed by revisionists).

I may have some comments after I view the second movie, but so far Mr. Woods is just another Austrian trying to convince us what we already know, which is that lassiez faire capitalism does not work, never did work, and never will work. His theory and understanding of rising wage levels is poor, his comment on industrial automation increasing wages for factory labor is so far off the mark as to be comical.

Here are some comments from Krugman on the subject:

Link

 

The birth of economics as a discipline is usually credited to Adam Smith, who published “The Wealth of Nations” in 1776. Over the next 160 years an extensive body of economic theory was developed, whose central message was: Trust the market. Yes, economists admitted that there were cases in which markets might fail, of which the most important was the case of “externalities” — costs that people impose on others without paying the price, like traffic congestion or pollution. But the basic presumption of “neoclassical” economics (named after the late-19th-century theorists who elaborated on the concepts of their “classical” predecessors) was that we should have faith in the market system.

This faith was, however, shattered by the Great Depression. Actually, even in the face of total collapse some economists insisted that whatever happens in a market economy must be right: “Depressions are not simply evils,” declared Joseph Schumpeter in 1934 — 1934! They are, he added, “forms of something which has to be done.” But many, and eventually most, economists turned to the insights of John Maynard Keynes for both an explanation of what had happened and a solution to future depressions.

Keynes did not, despite what you may have heard, want the government to run the economy. He described his analysis in his 1936 masterwork, “The General Theory of Employment, Interest and Money,” as “moderately conservative in its implications.” He wanted to fix capitalism, not replace it. But he did challenge the notion that free-market economies can function without a minder, expressing particular contempt for financial markets, which he viewed as being dominated by short-term speculation with little regard for fundamentals. And he called for active government intervention — printing more money and, if necessary, spending heavily on public works — to fight unemployment during slumps.

Eventually, however, the anti-Keynesian counterrevolution went far beyond Friedman’s position, which came to seem relatively moderate compared with what his successors were saying. Among financial economists, Keynes’s disparaging vision of financial markets as a “casino” was replaced by “efficient market” theory, which asserted that financial markets always get asset prices right given the available information. Meanwhile, many macroeconomists completely rejected Keynes’s framework for understanding economic slumps. Some returned to the view of Schumpeter and other apologists for the Great Depression, viewing recessions as a good thing, part of the economy’s adjustment to change. And even those not willing to go that far argued that any attempt to fight an economic slump would do more harm than good.

In the 1930s, financial markets, for obvious reasons, didn’t get much respect. Keynes compared them to “those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those that he thinks likeliest to catch the fancy of the other competitors.”

And Keynes considered it a very bad idea to let such markets, in which speculators spent their time chasing one another’s tails, dictate important business decisions: “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”

 

So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.

Many economists will find these changes deeply disturbing. It will be a long time, if ever, before the new, more realistic approaches to finance and macroeconomics offer the same kind of clarity, completeness and sheer beauty that characterizes the full neoclassical approach. To some economists that will be a reason to cling to neoclassicism, despite its utter failure to make sense of the greatest economic crisis in three generations. This seems, however, like a good time to recall the words of H. L. Mencken: “There is always an easy solution to every human problem — neat, plausible and wrong.”

 And that last line says about all that needs to be said.

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Gregroberts

OK, I finished the 2nd Mises video, now up to almost 2 hrs in watching Mises material. Before I comment, I had put forth a post here earlier containing a reasonably complete chronology of 19th century American bank panics and recessions. I’d suggest you look it over if you’ve not seen it.

Although I have to give credit to Woods for his historical accounting, I find his interjection of causality to be unsound but not unexpected for a Mises fellow. He tries to make the claim that the entire series of 19th century bank panics and recessions were due to government intervention and centralized banking policies. As seductive as this conclusion is to the Austrians- it’s just plain wrong. Woods apparently is not aware of a little side show going on in America at the time, mainly the industrial revolution. An era filled with capital expansion of previously unseen veracity. And this capital expansion was not at the bequest of the government, and its various and sundry central banks, it was at the bequest of the capitalists. Building transcontinental railroads takes money, and lots of it. Participating at scale in the massive gold and silver rushes of the day takes money, and lots of it. Building new metropolitan cities (such as San Francisco) takes money and lots of it.

But nary a mention in nearly two hours of speeches from Mr. Woods do we hear acknowledgment of such events. Also, although we hear a rich tale of history, nary a comment of reference from any economists of the 19th century, nothing from John Baptiste Say, nothing from Malthus, nothing from Mills, and nothing from Ricardo, and certainly, nothing from Marx, all who commented (sometimes at great disagreement) on the exact nature and causality of these events.

At the risk of being classed as a reductionist, I would like to simply highlight Woods at just past the halfway point in the second film. Here, he makes a statement that is echoed throughout Austrian economic theory, throughout Libertarian theory, and throughout Neo-liberal and even general conservative theory. And that comment is simply this “…….. we need to get the State out of the banks….”

Now I would focus on this simple comment for just a minute to add my own commentary. I think Woods and the aforementioned ideologies have it just about 180 degrees opposite. I would simply change the sequence of two words in his remark to look like this “………..we need to get the banks out of the State…..”

So which is it? Is Woods right and everthing can be traced to the State interfering in banking? Or is it that capitalists require endless supplies of money to expand, ceaselessly, their ventures, and prod the banks to provide this supply, and then the State is descended upon by locusts throwing cash for special favors and complicity in providing said capital? Because how you land on this (rather simple) quandary in large measure determines whether you consider Woods and his Austrian compatriots a complete waste of time-or underrated genius.

To each his own. But to support my conclusion, I’ll cite the Panic of 1907, which occurred just shortly before the formation of the Federal Reserve Bank in 1913. This was a nasty financial crisis caused by a lack of liquidity, and the stock market dropped 50%. Notably, the entire US economy was bailed out by JP Morgan, using his own money to do so. Now I ask you, who do you think is calling the shots when a private citizen is bailing out the entire country virtually from his own checking account?

These comments aside, now that I have “invested” nearly two hours in watching Mises videos, I have one for you Gregroberts. Requiring little more than half of the time I put in to Mises.org, I think you will find the video below an interesting and multi-dimensional discussion between some very big thinkers. I believe you will find some common ground in what one speaker in general says- I’ll let you guess who. But also, try and notice not only the content of what is said, but how it is said. The delivery of these ideas is at least as interesting as the subject.

I'd be most interested in your comments.

 

 

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What insight was supposed to be gained from this discussion?
darbikrash wrote:

I'd be most interested in your comments. 

I am not Greg but here are my observations.

  1. De Soto does not come off very well.  I have heard him before and enjoyed what he had to say but this time he just comes off as a broken record about property rights.  He may be right but I wish his point was a little more clear and interesting.
  2. Klein is ok.  I just don't think she has anything but typical left insights that could have been made by any number of standard left thinkers.  At 34 minutes she talks about how the (OTC) derivatives market is what a true free market looks like. She might have a point if it would have been allowed to fail but because this "free market" was bailed out, the only lession learned by the players is head I win, tails you loose.  If there was no bailout, and most of Wall St was allowed to crash and burn, there would have been pain felt everywhere (including main street), but those games would now be over, the financial sector would be far smaller and less powerful, and the few prudent firms that survived could have picked up the pieces.  Instead by bailing out the bad players, the government has institutionalized corruption and left us with something that is even worse than a "free market".  There is no such thing as a "free market" without failure.
  3. Stiglitz seems to come off best.  I don't agree with some of what he says and he still makes some typical left comments, but at least he is interesting and has some insights.  When he started talking about ownership vs control at 35:20 into the video was probably the most interesting.  I wish De Soto would not have sidetracked that conversion with more of his "property rights" rhetoric.
  4. I would have liked to hear more from your man Harvey.  He did not talk much but I do agree with him that it would have made far more sense for the $700 billion to be spent helping people instead of bailing out the banks.  Bailing out the rich and powerful was the unforgivable sin of whatever you want to call our current economic system.

DK,

What insight was supposed to be gained from this discussion?  I am not saying it was not interesting, but if there was an overall point I was supposed to take away, I must have missed it.

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No point.......

I’m not sure there are any overarching points, it is as billed  “…an interesting and multi-dimensional conversation” and that’s what it is. But it is offered in the context of Wood's videos.

That said, in some ways it loosely extends the topic covered by Woods in the Mises videos into modern times, but perhaps most importantly, its panelists are not interested in looking to history except as means to be informed, they are looking forward. Woods is entirely interested in looking backward, re-interpreting history to suit his ideology, and then suggesting that we recreate a future to include a hypothetical outcome advanced by his conclusions of the way history might have turned out if only we had listened to him.

He is only interested in returning to something that already happened (and not to his liking), a simpler, kinder time. I guess no one told him “once you leave, you can never go home again”.

Although this represents the underpinnings of Austrian theory, as well as many other ideologies, it is not a productive argument.

I made reference to the manner in which the content was addressed, as I found this interesting. Harvey was the moderator, and as such kept himself well out of the way by not interjecting his belief system or opinions into the dialogue, rather letting the participants air their views in their own words. And even this was quite subdued, almost disappointingly so. Suffice to say, Harvey has very different views on property rights than does De Soto. Stiglitz seems almost bemused to be there, he laid out some heavy remarks, but did not feel the need to pound his philosophy into the ground (as de Soto did) he just laid it out there and if you wanted to listen then great, if not, he seemed nonplussed.

He stated quite clearly that “....Neoliberalism is a doctrine and free market fundamentalism is dead…..” and almost casually describes the passing of lassiez fair capitalism without fanfare (to those three people left in the world who still did not know). So this is a discussion about power, economic power and Neoliberalism. Which is ironic really, because directly linked to the Mises video as the end game of Austrian economics is Neoliberalism. Which Naomi Klein famously showed in her seminal work “Shock Doctrine” was the hard wiring between Hayek, first disciple Milton Friedman, the University of Chicago economists, and the modern day embodiment of what Woods was trying to articulate in his revisionist history lesson. Which is that if free markets where given free rein, that if the government could be eliminated from the picture, then, and only then, could the wonders of Austrian economics bear fruit. And as Klein meticulously documents in “Shock Doctrine” this is precisely what the “Chicago Boys” headed by none other than Milton Friedman himself set out to do in Chile in the ‘70s. This was a massive failure, but nevertheless, set into motion the destructive machinery of global Neoliberalism.

To the point about the $600 trillion derivatives market that Klein mentions, she uses this as an example of what happens when you have unregulated free markets. Again, like the others, she is not interested in hammering the point or bludgeoning the audience, you either get it or you don’t. But to expand this point, I believe she is right, this is yet another example of exactly what does happen when free markets are allowed to self regulate. You cannot argue derivatives are a function of Federal Reserve policy, they are not related to monetary policy at all, they are bets, gambling chips, or insurance policies, take your pick, and occurred because market participants were scheming ways to enrich themselves while passing off risks to unaware alternate participants. They are proof positive that if you allow people to act in their best interests without regard to social impact you will get an unmitigated disaster in short order. Which we did, and which we have. To the point of bailing out the derivatives market? There is no bailout of the derivatives market- they cannot be bailed out. How do you bail out $600 trillion in liabilities? That is her point, you cannot bail it out- it is simply too large. So we have to conclude, unbeknownst to the market at large, that small numbers of individuals created financial mechanisms with the power to destroy the world economy so that they themselves could benefit. Free market capitalism indeed.

And they did so out of reach of government influence, they did so out of view of the scrutiny of society, and they did so by specifically denying regulatory oversight so that they may advance their machinations out of view-until it was too late.

And yet we hear the call to “double down” on free market principles? If only we could get the government out of the way, dust off the three corner hats and roll up the knee high Yankee stockings, it will all be OK?  To steal a phrase from Woods’ quoted historians, “…..it’s a little like jumping in the water to get out of the rain”

Another remark I would make-this time in reference to De Soto’s comments, to which in general I thought he made some good points. However, he insists (as do most Neoliberals) that the ultimate metric of economic proficiency is GDP per capita, and he cites the US figures as proof positive that our economic principles are the gold standard. I would strongly disagree with this thesis.

To illustrate my point, if you take the top 1% out of many OCED countries, or even fully developing  countries like France, and look at GDP per capita you see a very different picture. In fact, the US is well below France (and many other countries) if you normalize the data by removing the top 1% of income earners from both datasets under comparison. The results are quite shocking, and do not support the notion that our system is outperforming other countries.

Mean vs. Median Income Growth

Comparing income growth per capita to median income growth is telling:

What Does ‘Economic Growth’ Mean for Americans?, by Uwe E. Reinhardt, Economix: ...The third chart, below, exhibits the growth path of real G.D.P. per capita in the United States over the period 1975-2009 and the corresponding path of real median household income. The data show that over the 34-year period, real G.D.P. per capita rose by an annual compound rate of 1.9 percent. ... [H]owever, median household income in the United States rose by less than 0.5 percent a year..., that 1.9 percent average economic growth does not mean much for the experience of the median household in the United States.


Sources: Economic Report of the President (GDP); Census Bureau (income)
Sources: Economic Report of the President (GDP); Census Bureau (income)

In this regard, I found even more interesting this comment...:

Average real income per family in the United States grew by 32.2 percent from 1975 to 2006, while they grew only by 27.1 percent in France during the same period, showing that the macroeconomic performance in the United States was better than the French one during this period. Excluding the top percentile, average United States real incomes grew by only 17.9 percent during the period while average French real incomes — excluding the top percentile — still grew at much the same rate (26.4 percent) as for the whole French population. Therefore, the better macroeconomic performance of the United States and France is reversed when excluding the top 1 percent.

In other words, if one took away the top 1 percent highest-income recipients and their share of income and focused on what was left for the bottom 99 percent, the median representative of that cohort should not be all that impressed by economic performance in the United States relative to their peers in other countries.

It can help explain why the so-called median American voter ... seems so angry at this time... It also can help explain why the high-income groups in the United States have accounted for a growing share of total federal taxes paid in the United States.

I wonder how many people know that our superiority over France during this time period is only because of the top 1%?

 

To make matters worse, the amount of avg hours worked per year in France is significantly lower than in the US (1778 hrs/yr vs. 1554hrs/yr) which skews the data even more against this erroneous conclusion.

 

goes211's picture
goes211
Status: Diamond Member (Offline)
Joined: Aug 18 2008
Posts: 1114
Re: No point.......
darbikrash wrote:

I’m not sure there are any overarching points, it is as billed  “…an interesting and multi-dimensional conversation” and that’s what it is. But it is offered in the context of Wood's videos.

That said, in some ways it loosely extends the topic covered by Woods in the Mises videos into modern times, but perhaps most importantly, its panelists are not interested in looking to history except as means to be informed, they are looking forward. Woods is entirely interested in looking backward, re-interpreting history to suit his ideology, and then suggesting that we recreate a future to include a hypothetical outcome advanced by his conclusions of the way history might have turned out if only we had listened to him.

He is only interested in returning to something that already happened (and not to his liking), a simpler, kinder time. I guess no one told him “once you leave, you can never go home again”.

Although this represents the underpinnings of Austrian theory, as well as many other ideologies, it is not a productive argument.

Ironically I have not watched either of the Woods videos.  I am a big Woods fan ( have read Meltdown, Nullification, and was planning on reading Rollback soon) and assumed I had probably seen them in the past.  Looking at them briefly today, I see that I have not seen either of them.  I will try and watch them so I can contrast the discussions.

darbikrash wrote:

I made reference to the manner in which the content was addressed, as I found this interesting. Harvey was the moderator, and as such kept himself well out of the way by not interjecting his belief system or opinions into the dialogue, rather letting the participants air their views in their own words. And even this was quite subdued, almost disappointingly so. Suffice to say, Harvey has very different views on property rights than does De Soto. Stiglitz seems almost bemused to be there, he laid out some heavy remarks, but did not feel the need to pound his philosophy into the ground (as de Soto did) he just laid it out there and if you wanted to listen then great, if not, he seemed nonplussed.

He stated quite clearly that “....Neoliberalism is a doctrine and free market fundamentalism is dead…..” and almost casually describes the passing of lassiez fair capitalism without fanfare (to those three people left in the world who still did not know). So this is a discussion about power, economic power and Neoliberalism. Which is ironic really, because directly linked to the Mises video as the end game of Austrian economics is Neoliberalism. Which Naomi Klein famously showed in her seminal work “Shock Doctrine” was the hard wiring between Hayek, first disciple Milton Friedman, the University of Chicago economists, and the modern day embodiment of what Woods was trying to articulate in his revisionist history lesson. Which is that if free markets where given free rein, that if the government could be eliminated from the picture, then, and only then, could the wonders of Austrian economics bear fruit. And as Klein meticulously documents in “Shock Doctrine” this is precisely what the “Chicago Boys” headed by none other than Milton Friedman himself set out to do in Chile in the ‘70s. This was a massive failure, but nevertheless, set into motion the destructive machinery of global Neoliberalism.

To the point about the $600 trillion derivatives market that Klein mentions, she uses this as an example of what happens when you have unregulated free markets. Again, like the others, she is not interested in hammering the point or bludgeoning the audience, you either get it or you don’t. But to expand this point, I believe she is right, this is yet another example of exactly what does happen when free markets are allowed to self regulate. You cannot argue derivatives are a function of Federal Reserve policy, they are not related to monetary policy at all, they are bets, gambling chips, or insurance policies, take your pick, and occurred because market participants were scheming ways to enrich themselves while passing off risks to unaware alternate participants. They are proof positive that if you allow people to act in their best interests without regard to social impact you will get an unmitigated disaster in short order. Which we did, and which we have. To the point of bailing out the derivatives market? There is no bailout of the derivatives market- they cannot be bailed out. How do you bail out $600 trillion in liabilities? That is her point, you cannot bail it out- it is simply too large. So we have to conclude, unbeknownst to the market at large, that small numbers of individuals created financial mechanisms with the power to destroy the world economy so that they themselves could benefit. Free market capitalism indeed.

And they did so out of reach of government influence, they did so out of view of the scrutiny of society, and they did so by specifically denying regulatory oversight so that they may advance their machinations out of view-until it was too late.

And yet we hear the call to “double down” on free market principles? If only we could get the government out of the way, dust off the three corner hats and roll up the knee high Yankee stockings, it will all be OK?  To steal a phrase from Woods’ quoted historians, “…..it’s a little like jumping in the water to get out of the rain”

Another remark I would make-this time in reference to De Soto’s comments, to which in general I thought he made some good points. However, he insists (as do most Neoliberals) that the ultimate metric of economic proficiency is GDP per capita, and he cites the US figures as proof positive that our economic principles are the gold standard. I would strongly disagree with this thesis.

I have not read "Shock Doctrine" yet ( hopefully soon ) but I am guessing that I will find that I agree with much of it.  Where I assume I will probably disagree is the whole left vs right take.  She seems to see evil as a right thing and is blind to the same issues that originate from the left.  For example she seems to look to Obama as some sort of answer to the problems of Bush, whereas I look at them both and see differences in rhetoric but only superfical differences in policy.  Now I am guessing that instead of admitting that Obama and the left have failed in the exact same way that the right has, she will somehow claim that Obama is some sort of right wing failure.

As for the point about the "free market" in derivatives, it may be true.  However there can be no claim of a "free market" without failure.  We don't know how a "free market" truly would work because when that derivatives mess looked as though it was going to hurt TPTB, it was bailed out and this is the critical point.  Most economic systems can work well in good times.  Capitalism, socialism, communism,... may all function when there is massive growth in energy and natural resources.  The validity of the system is not know until it hits hard times.  I submit that the "free market" in derivatives was not allowed to be a "free market" because it was not allowed to fail.  If this failure took down all the Wall St banks, need it really destroy the world economy?  If so then Wall St must be critcal to the functioning of the world economy.

I fully believe that if the bailout did not happen, a major world wide depression would probably have occured.  I also believe that it would have revealed that the financial system was not the real source of our wealth.  Our wealth is people, resources, energy, not paper tokens and that after a 3-5 year economic reallignment, the world would be a far better place for this discovery.

Your comment "the end game of Austrian economics is Neoliberalism", is an example of the strawman arguments I have accused you of using in the past.  By making such a comment you are claiming that ownership of everything we all dislike about the current system is really owned by supporters of X ideology.  If you truly believe this will do you also except the opposite claim that collectivism/socialism/communism ends in massive death and destruction because the Soviet and Chinese examples. 

If not can you explain how yours is a valid argument but the other opposite claim is not?

darbikrash's picture
darbikrash
Status: Platinum Member (Offline)
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Posts: 573
shock doctrine

I think you’ll find “Shock Doctrine” a good read should you decide to take it on. In it you’ll not find much to support your supposition about Obama- it was written before his presidency. And I do not think you can really make a case that this is “left vs. right”, what is documented in this text transcends this simple paradigm by a large measure, top vs bottom is a better metric. She makes an illuminating point however in the video above, when she explains that ideology as used by the elites is a matter of temporal convenience- it is used heavily in the build up to the cash out, and discarded very quickly when the bubble bursts. I think we can readily observe this in our political economy and indicates the fallacy of using such metaphors.

Once again to the point of derivatives, we disagree as to whether or not the $600 trillion mess was bailed out. It cannot be bailed out. It still hangs over us. However, this deflects the point, which is that a mechanism was allowed by free market ideology which endangers all citizens, whether market participants or not, and was done for the express profit of a few. Not much more needs to be said then that, as the issue of failure is secondary to this reality. You’ll really need to set aside the mantra of necessary failure to see that simpy constructing an edifice that puts the majority at risk for the profit of a few is an abomination- and wholly unacceptable- attribute of free market behavior.

 I would also add that I agree with De Soto when he said that the paper representations of our wealth has become disconnected from the real property and real wealth of our economy, a point you make as well.

The comment on Austrian economics ending up in Neoliberalism is not a straw man-it is what has happened, and again, “Shock Doctrine” will add significant detail to the how’s and why’s. Will it always turn out this way? Very likely yes. Using only rudimentary predictive skills, you can see that any ideology that relies on unregulated free markets driven by profit motive to modulate an entire political society will have problems with consolidation, centralization, overreach and resource depletion. Compensating for these realities opens up the door for global Neoliberalism as the population grows larger and the growth imperative becomes exponential.

To the subject of the inverse argument concerning collectivism/socialism/communism, I feel no obligation to defend these ideologies, for the simple reason that I am not advocating for them. Where is it written that anyone who challenges the notion that free market economics does not work, or that Austrian theory is largely bogus must summarily defend the alternatives? Talk about a straw man argument.

This is a disturbing (and I do not necessarily direct this at you) trend that I see, which is that anyone who posits that there is something seriously wrong with the system of free market capitalism must be a communist, and must immediately stop what they are doing and defend all manner of global atrocities. This is usually followed by pithy remarks such as “well, it’s worst system there is except for the rest” which is nothing more that license to keep making the same mistakes and defending the very practices that got us into this system in the first place.  The first step to corrective action is recognizing that the system we have is intrinsically flawed and must be either fundamentally changed (if possible) or abandoned altogether.

We are a long way from this in this country.

As to what type of change that constitutes correction action, or what type of alternative system might be proposed, the first question is 1.) Are there intrinsic failure modes “baked” in to the underlying theory, that virtually guarantee a bad outcome-no matter how the deck chairs are organized? To this first question it is my contention that with respect to the subject of unregulated free market capitalism the answer is yes, there are. My contentions notwithstanding, the subject must also be expanded to address historical records and to note that if failure occurs, are they intrinsic to the ideology (e.g. must they occur regardless of circumstance) or were the failures induced by some externalized artifact that may be addressed in future variants and net a functioning system. This is what Woods, and by extension the Austrians and even the classical liberal theorists are doing, and this repetitive  (and rather tedious) argument is the crux of the disagreement. The rest of the world has moved on, you won’t find many credible economists arguing for lassiez faire capitalism- it is truly dead.

Any alternative ideology must undergo the same scrutiny, as you suggest. However, the basic means for consideration must be the same question, are there intrinsic, unavoidable failure modes in alternate solutions, or have avoidable artifacts influenced the outcomes? This is not a question we will answer in this thread, and to answer it correctly would take some substantial scholarly experience in subjects such as Leninism and Stalinism, but why bother, Stiglitz himself said it in the video- communism is also dead.

But the collectivist farmers at the turn of the 20th century American landscape would argue that not too many died sharing farm tractors and participating in the ubiquitous farm collectives of the day, nor would the modern day sustainable farming participants that frequent this site and preach collectivism at the community level have much to offer in the way of bad stories and intrinsic failure modes.

And the myriad of countries (such as France, Sweden, et. al.) that have active socialist parties (the Socialist party in France is widely expected to sweep the next presidential election) will not be able to add much to your foreboding tale of errant societies that killed off citizens in their denial of capitalism. Take from those anctedotes what you will.

If you do decide to read “Shock Doctrine” let us know your comments.

 

goes211's picture
goes211
Status: Diamond Member (Offline)
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Posts: 1114
Charles Hugh Smith seems to agree with you.

I am a big fan of CHS.  His post for today seems to be spot on this subject.

http://www.oftwominds.com/blogsept11/global-capitalist-crisis9-11.html

To understand the role of paper money, credit and gold in trade, we need to understand the role of trade in advanced global Capitalism. If we don't understand this, then we cannot possibly understand the current interlocking crises.

As I described in the entry noted above, Marx foresaw that mechanization/automation and the dominance of finance capital would lead to labor's share of the national income shrinking while industrial capital's factories produced ever greater quantities of goods at prices pushed down by labor-saving machinery and software (i.e. invested capital). (Marx also laid out the inevitable progression of capital to monopoly and cartel Capitalism, but that's another entry.)

This "crisis of overproduction" has several consequences. As less labor is needed for production, then the "army of surplus labor" (the unemployed) grows while wages stagnate or decline for everyone below the professional/technical Caste. As the labor component of goods and services declines, workers no longer have enough income to buy the rising output. At that point the economy collapses as demand declines to the point that nobody can make money even as production keeps ramping ever higher.

 

The solution is trade: dump the surplus production (the production beyond what the domestic market of workers can buy) overseas. The ideal setup is of course Global Empire, where the home economy strips away productive capacity in its colonies and essentially forces its colonial populations to buy its surplus manufactured goods in exchange for raw materials.

This "solution" to advanced Capitalism's ongoing "crisis of overproduction" is brilliantly described in the book Sweetness and Power: The Place of Sugar in Modern History.

The second very important thing to understand is what Mish has tirelessly explained on his blog Mish's Global Economic Analysis: everybody can't have a trade surplus, as that is a mathematical impossibility. Somebody has to run a trade deficit, i.e. import others' surplus production. 

 

Alas, you can't have it both ways, and that is a key dynamic in the Crisis of Advanced Capitalism: if you want to dump your surplus production on America, then you have to accept its paper money in exchange. If you decline that deal, and cease producing a surplus, your domestic economy will implode and your political stability will unravel.

Given the choice, the rest of the world accepts the dollars while complaining that it had a better deal in the good old days. Meanwhile, the U.S. consumer, hollowed out by intolerable debt loads, a declining asset base (the family home) and a domestic economy based on ever-expanding credit, is unable to continue the decades-long buying spree without massive transfers from the Central State, which must borrow $1.6 trillion every year to keep the whole creaky structure from collapsing.

China jumped on the export-model as its engine of growth and political stability, and it guaranteed that stability by pegging its currency to the U.S. dollar, making the renminbi a proxy of the dollar.

In the oil-exporting world, OPEC has lost its cartel powers as non-OPEC exporters gained market share and the cartel divided into those who benefit from investing in the West and those who benefit solely from higher oil prices.

If we put all these pieces together, we have a clearer understanding of the long-term historical forces at work: the global consumer society funded by credit is in its end-game, and is the "Central State as guarantor of private consumption" model in which governments borrow/print vast sums of fiat currency to distribute to their citizenry to prop up consumption.

Once exports go away, then domestic economies the world over implode. Ironically, perhaps, the one nation which doesn't depend on exporting its surplus production for its stability is the U.S.

 

I am still not conviced and waitng to hear the alternative.  At least he makes an interesting case.

Check out the comments on Zero Hedge for the repost.  Seems socialist/communist name calling is not an isolated occurance.

http://www.zerohedge.com/news/guest-post-currency-wars-trade-and-consumi...

Wendy S. Delmater's picture
Wendy S. Delmater
Status: Diamond Member (Offline)
Joined: Dec 13 2009
Posts: 1988
yes.

I submit that the "free market" in derivatives was not allowed to be a "free market" because it was not allowed to fail.

 

+1

BTW, this  is one of the reasons I am so against any form of corporate <strike>bailouts</strike> welfare.

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