US added 288,000 jobs in June...Unemployment down to 6.1% (from 6.3%)

[realibrad]

Additionally, six years after the crash, not only is the UKs debt to GDP ratio not been much improved by austerity, but their economy is still smaller than it was before the crash, six years ago. Compare that to the US's performance.

Much of the UK economy was built around the very thing that crashed in 2008. Much of the economy had to be dismantled and rebuilt around things that were more productive. The US and Germany had a more robust economy that could transition much faster. There was a very large productivity gap in Europe. Productivity was going down, while standard of living was going up. Once it all came crashing down, there was not a strong foundation to start again. If you look at the countries that have done better post 2008, its the economies that had been increasing productivity before the crash.

The reason most of Europe went with austerity is because they knew the money would not have gone to productive uses. Assuming that stimulus does work, its would have been better targeted when the economy found its footing again in something productive. It would simply have been a waste to pump money into an unproductive economy. We take for granted that economies are diverse and robust, so that when one part fails, the other parts can pick up the slack. The fact of the matter is, most of Europe did not have anything worth investing in that would be productive. Its why austerity was chosen, and why private capital started flowing out of Europe.

 

[fskimospy]

Much of the UK economy was built around the very thing that crashed in 2008. Much of the economy had to be dismantled and rebuilt around things that were more productive. The US and Germany had a more robust economy that could transition much faster. There was a very large productivity gap in Europe. Productivity was going down, while standard of living was going up. Once it all came crashing down, there was not a strong foundation to start again. If you look at the countries that have done better post 2008, its the economies that had been increasing productivity before the crash.

The US experienced contraction as a percentage of GDP of roughly 1% less than the UK did. The idea that capital was being put to unproductive uses and therefore we needed to 'dismantle' things and build different ones in order to resume growth is an Austrian business cycle style analysis that has been discredited by the evidence. (lack of inflation, low growth despite low interest rates, etc)

The reason most of Europe went with austerity is because they knew the money would not have gone to productive uses. Assuming that stimulus does work, its would have been better targeted when the economy found its footing again in something productive. It would simply have been a waste to pump money into an unproductive economy. We take for granted that economies are diverse and robust, so that when one part fails, the other parts can pick up the slack. The fact of the matter is, most of Europe did not have anything worth investing in that would be productive. Its why austerity was chosen, and why private capital started flowing out of Europe.

I am unaware of any European government, fiscal, or monetary entity saying that stimulus would not be undertaken because it wouldn't go to productive uses. Like, not a single one. They all talked about 'credibility', 'confidence', interest rates, etc. All of those reasons turned out to be wrong, but that's what they said.

Additionally, saying that stimulus would be better used when the economy had 'found its footing' appears to imply that we should stimulate the economy when it is growing well, which is really the opposite of what basically all economics theory I am aware of says. Not only does that go against Keynesian analysis of what is effective, but Ricardian equivalence would kick in at that point anyway.

 

[realibrad]

The US experienced contraction as a percentage of GDP of roughly 1% less than the UK did. The idea that capital was being put to unproductive uses and therefore we needed to 'dismantle' things and build different ones in order to resume growth is an Austrian business cycle style analysis that has been discredited by the evidence. (lack of inflation, low growth despite low interest rates, etc)

So, then what is the reason that after the US pumped in massive amounts of capital into the economy, it still contracted? I think you are arguing about the efficacy of stimulus. If the fluctuation were arbitrary, then the trillions pumped into the US economy would have stopped any recession.

I will grant you that inflation has not hit nearly as hard as my would suggest. Its also true that the influx of printed money has gone to only a select sector, and that money has not gotten into the rest of the market. I believe the effects of the huge influx of money will been seen when people stop covering their losses, and start trying to grow it all again. Kicking it down the road I know, but I dont think that printing money at the levels we have seen is arbitrary either, because historically it has not been.

Also, I dont think you can say that Austrian business cycle has been discredited yet. I think there is a far better case of Keynesian models being wrong historically.

I am unaware of any European government, fiscal, or monetary entity saying that stimulus would not be undertaken because it wouldn't go to productive uses. Like, not a single one. They all talked about 'credibility', 'confidence', interest rates, etc. All of those reasons turned out to be wrong, but that's what they said.

Additionally, saying that stimulus would be better used when the economy had 'found its footing' appears to imply that we should stimulate the economy when it is growing well, which is really the opposite of what basically all economics theory I am aware of says. Not only does that go against Keynesian analysis of what is effective, but Ricardian equivalence would kick in at that point anyway.

The economy had been built around high risk mortgages. When that popped, much of the wealth generation was lost, and nothing was in place to pick up the slack. The other sectors of the economy were getting the net benefit from the wealth that was being produced from the finance sector. Once that boost was taken away, there was an adjustment, and those other sectors contracted in response, as they should have. The wealth created by the finance sector was built upon something that could not be supported by the investments being put into the system.

If the argument is that stimulus would have helped the sectors that were hurt due to the crash of the financial, then what would happen when another sector did not replace the wealth generated by the collapsed financial market? For stimulus to work, it has to go to something productive, unless you believe that stimulus is something other than what I learned it to be.

Also, Ricardian equivalence does not hold up. It did not under Regan and other times in history, so I dont think its a thing to debate about.

You cant stimulate an economy by simply giving money away, because if you do, it will simply collapse again because of the issues that collapsed it in the first place.

 

[rudder]

Surprise - another posting of fake numbers that don't add up. And which will probably be corrected in a month's time due to some report that didn't get filed on time or whatever excuse they choose out of a hat again.

The report just discounts how many people who used to work full-time are now working part-time. There will also be no mention by the ozombies of the Full-Time Equivalent jobs number dropping by 151,000.

 

[fskimospy]

So, then what is the reason that after the US pumped in massive amounts of capital into the economy, it still contracted? I think you are arguing about the efficacy of stimulus. If the fluctuation were arbitrary, then the trillions pumped into the US economy would have stopped any recession.

What kind of stimulus are you talking about, monetary or fiscal? The sum total of US government fiscal policy has actually been one of austerity, not stimulus. We had one modest round of stimulus in 2009, which accounted for a fairly small percentage of GDP, 40% or so of which was less effective tax cuts, spread out over several years. The effect of this was counteracted by large contractions by state and local governments.

In terms of monetary policy the big problem is that the Fed has largely reached the limits of what it can do and it's had to resort to unorthodox methods that aren't that effective.

I will grant you that inflation has not hit nearly as hard as my would suggest. Its also true that the influx of printed money has gone to only a select sector, and that money has not gotten into the rest of the market. I believe the effects of the huge influx of money will been seen when people stop covering their losses, and start trying to grow it all again. Kicking it down the road I know, but I dont think that printing money at the levels we have seen is arbitrary either, because historically it has not been.

I would say that Austrian economists have been predicting skyrocketing inflation for approximately seven years straight now. Everything that Austrian economics is based on very clearly states what should have happened. It didn't. At what point do you accept that the model that these predictions were based on is wrong?

Also, I dont think you can say that Austrian business cycle has been discredited yet. I think there is a far better case of Keynesian models being wrong historically.

I think in its current form it's not possible to effectively defend the theory anymore. Maybe people are interested in making revisions to it in order to bring it into line with the evidence, but outside of that there's not much that can be done. As it currently stands it has been proven false. (or as proven false as anything gets in economics)

As for Keynesian models, which ones? I would say that Keynesian models have pretty much nailed this recession.

The economy had been built around high risk mortgages. When that popped, much of the wealth generation was lost, and nothing was in place to pick up the slack. The other sectors of the economy were getting the net benefit from the wealth that was being produced from the finance sector. Once that boost was taken away, there was an adjustment, and those other sectors contracted in response, as they should have. The wealth created by the finance sector was built upon something that could not be supported by the investments being put into the system.

If the argument is that stimulus would have helped the sectors that were hurt due to the crash of the financial, then what would happen when another sector did not replace the wealth generated by the collapsed financial market? For stimulus to work, it has to go to something productive, unless you believe that stimulus is something other than what I learned it to be.

Again, this is a fundamentally supply side argument that doesn't appear to be supported by the evidence. Lending rates are effectively zero: this means there should have been a massive investment boom as everyone reallocates their new cheap money away from finance into 'productive' things. There wasn't. Why? Businesses told us why: insufficient demand.

Also, Ricardian equivalence does not hold up. It did not under Regan and other times in history, so I dont think its a thing to debate about.

You cant stimulate an economy by simply giving money away, because if you do, it will simply collapse again because of the issues that collapsed it in the first place.

I would say that history pretty conclusively proves that's not so. World War 2 showed a pretty easy way to get out of an economic depression: making things that would blow themselves up.

As shown earlier in this thread, the more governments conducted pro-cyclical fiscal policy, the worse their results are. Not only in a GDP perspective, but also in a debt/GDP one. Austrian policies haven't just been ineffective, they've actually been actively self-defeating.

 

[realibrad]

What kind of stimulus are you talking about, monetary or fiscal? The sum total of US government fiscal policy has actually been one of austerity, not stimulus. We had one modest round of stimulus in 2009, which accounted for a fairly small percentage of GDP, 40% or so of which was less effective tax cuts, spread out over several years. The effect of this was counteracted by large contractions by state and local governments.

In terms of monetary policy the big problem is that the Fed has largely reached the limits of what it can do and it's had to resort to unorthodox methods that aren't that effective.



I would say that Austrian economists have been predicting skyrocketing inflation for approximately seven years straight now. Everything that Austrian economics is based on very clearly states what should have happened. It didn't. At what point do you accept that the model that these predictions were based on is wrong?



I think in its current form it's not possible to effectively defend the theory anymore. Maybe people are interested in making revisions to it in order to bring it into line with the evidence, but outside of that there's not much that can be done. As it currently stands it has been proven false. (or as proven false as anything gets in economics)

As for Keynesian models, which ones? I would say that Keynesian models have pretty much nailed this recession.



Again, this is a fundamentally supply side argument that doesn't appear to be supported by the evidence. Lending rates are effectively zero: this means there should have been a massive investment boom as everyone reallocates their new cheap money away from finance into 'productive' things. There wasn't. Why? Businesses told us why: insufficient demand.



I would say that history pretty conclusively proves that's not so. World War 2 showed a pretty easy way to get out of an economic depression: making things that would blow themselves up.

As shown earlier in this thread, the more governments conducted pro-cyclical fiscal policy, the worse their results are. Not only in a GDP perspective, but also in a debt/GDP one. Austrian policies haven't just been ineffective, they've actually been actively self-defeating.

So, first is that WW2 did not bring us out of the Great Depression. The economies effected by the great depression were ones that were on the gold standard. The economies that were on a fiat money system saw very little impact.

http://www.independent.org/pdf/tir/tir_12_02_02_steindl.pdf

What did Keynesian models predict that have come true? We pumped trillions into the economy, with very little growth. What did the US not do that should have been done? Japan is a great example where they have spent a lot of money relative to their gdp, with flat growth. I am missing the success of Keynesian economics.

Other than inflation not being seen currently, what have austrians been wrong about?

The private sector in Europe moved their money into other global markets. They took their money out of Europe because there was little demand for capital, but there was for other sectors around the world.

 

[fskimospy]

So, first is that WW2 did not bring us out of the Great Depression. The economies effected by the great depression were ones that were on the gold standard. The economies that were on a fiat money system saw very little impact.

http://www.independent.org/pdf/tir/tir_12_02_02_steindl.pdf

What did Keynesian models predict that have come true? We pumped trillions into the economy, with very little growth. What did the US not do that should have been done? Japan is a great example where they have spent a lot of money relative to their gdp, with flat growth. I am missing the success of Keynesian economics.

Other than inflation not being seen currently, what have austrians been wrong about?

The private sector in Europe moved their money into other global markets. They took their money out of Europe because there was little demand for capital, but there was for other sectors around the world.

That world war 2 did not end the depression is a minority view among economists and historians. Japan is in a liquidity trap, which is not only explicitly predicted by Keynesian economics, but it explains their experience perfectly well.

Also, you can't just argue that "other than the central claim of my economic model, what else about it is wrong?"

 

[realibrad]

That world war 2 did not end the depression is a minority view among economists and historians. Japan is in a liquidity trap, which is not only explicitly predicted by Keynesian economics, but it explains their experience perfectly well.

Also, you can't just argue that "other than the central claim of my economic model, what else about it is wrong?"

The reason inflation has not gone up faster, is because of how the fed is giving the banks money. Pre 2008 bank reserves did not make interest, so the banks had a huge incentive to loan out the money. What is the point of holding capital and it not doing anything when you could loan it out to make money. That all changed in 2008 when the Fed started paying interest on reserves. The banks realized there was very little to invest in, and the investments that were around were very risky. Instead, the banks kept the money and got interest on reserves they were holding. This meant that the nominal amount of money increased, but not the real amount. The banks not loaning it out, meant the consumers of the economy did not get the increase and did not purchase more. That is the reason inflation has been so low. Once the banks start loaning out more money, you will see inflation rise. At that time, the Fed will start pulling back on stimulus and try to hold back inflation by decreasing the money supply.

The Austrian view is not wrong in this context, because the real money supply has not increased.

 

[glenn1]

That world war 2 did not end the depression is a minority view among economists and historians. Japan is in a liquidity trap, which is not only explicitly predicted by Keynesian economics, but it explains their experience perfectly well.

Also, you can't just argue that "other than the central claim of my economic model, what else about it is wrong?"

And Krugman's "solution" to the theorized liquidity trap is that governments and central banks “credibly promise to be irresponsible”. So basically your plan is stimulus now, stimulus later, stimulus forever.

 

[fskimospy]

The reason inflation has not gone up faster, is because of how the fed is giving the banks money. Pre 2008 bank reserves did not make interest, so the banks had a huge incentive to loan out the money. What is the point of holding capital and it not doing anything when you could loan it out to make money. That all changed in 2008 when the Fed started paying interest on reserves. The banks realized there was very little to invest in, and the investments that were around were very risky.

If the problem was malinvestment in finance as opposed to other sectors then there should be tons of opportunities to invest that cash in other, more productive enterprises. Since Austrian economics disavows aggregate demand, what is the cause for there to be little to invest in? I will express my incredulity that a 0.25% rate of interest was so appealing to huge financial institutions that they gave up on lending.

Instead, the banks kept the money and got interest on reserves they were holding. This meant that the nominal amount of money increased, but not the real amount. The banks not loaning it out, meant the consumers of the economy did not get the increase and did not purchase more. That is the reason inflation has been so low. Once the banks start loaning out more money, you will see inflation rise. At that time, the Fed will start pulling back on stimulus and try to hold back inflation by decreasing the money supply.

This seems to be a fundamental misunderstanding of how bank reserves work.

I would suggest reading this:
http://www.standardandpoors.com/spf/upload/Ratings_US/Repeat_After_Me_8_14_13.pdf

The Austrian view is not wrong in this context, because the real money supply has not increased.

So your argument is that a whole ton of Austrian economists don't understand their own theory? Not only were they predicting major inflation in 2008, they continued to do so year after year despite the Fed having the same policies in place.

There's no hiding the fact that large numbers of those affiliated with Austrian economics made very explicit predictions on what would happen. Those predictions weren't just slightly wrong, they were catastrophically wrong. This seems to happen a lot, perhaps primarily because Austrian economists don't use mathematical models and such. In that kind of circumstance you are never really tied to any explicit description of your economic theory. They seem to exploit this frequently to avoid confronting criticism.

 

[fskimospy]

And Krugman's "solution" to the theorized liquidity trap is that governments and central banks “credibly promise to be irresponsible”. So basically your plan is stimulus now, stimulus later, stimulus forever.

No, that's not the plan. If you would actually read what Krugman wrote you would know that's not his plan either. If you're going to argue against it, at least argue against the actual policy.

 

[glenn1]

No, that's not the plan. If you would actually read what Krugman wrote you would know that's not his plan either. If you're going to argue against it, at least argue against the actual policy.

Okay, here's Krugman's plan:

If investors believe that the central bank will keep the pedal to the metal even as the economy begins to recover, this will imply higher inflation than if it hikes rates at the first hint of good news – and higher expected inflation means a lower real interest rate, and therefore a stronger economy.

So basically he not only advocates current stimulus, but to maintain easy monetary policy (e.g. stimulus) basically indefinitely in order to bump up inflation expecations. So please explain how exactly what I said is "not his policy"?

 

[fskimospy]

Okay, here's Krugman's plan:

So basically he not only advocates current stimulus, but to maintain easy monetary policy (e.g. stimulus) basically indefinitely in order to bump up inflation expecations. So please explain how exactly what I said is "not his policy"?

It's not his policy because he doesn't want to maintain easy monetary policy indefinitely; the part you quoted describes this pretty clearly. You say his policy is indefinite stimulus and his quote says, in effect, 'longer stimulus then would generally be done'. Those are extraordinarily different ideas.

His policy is to keep easy money around longer than it is normally expected to, which shows a tolerance for a higher inflation target than central banks normally have. If you would like to argue against that, I'm open to hear it. Don't bother arguing against a straw man of his position.

 

[First]

Okay, here's Krugman's plan:



So basically he not only advocates current stimulus, but to maintain easy monetary policy (e.g. stimulus) basically indefinitely in order to bump up inflation expecations. So please explain how exactly what I said is "not his policy"?

You don't understand what he's saying; he's saying that higher inflation is the point here, that the Fed can essentially telegraph "irresponsibility" by keeping rates low for longer than expected and that'll lead to higher than 2% inflation, something Krugman wants in part because he's not afraid of its effects given that higher inflation is both good for the debt and lower interest rates good for the economy because it insures some very real level of economic growth. Of course his caveat is that it'll overheat the economy, but that the alternative of the Fed increasing the discount rates at the first sign of good economic news is a poorer alternative than a little inflation and over-heating. I agree with that only partially because I think Krugman has too much faith in monetary policy's ability to control overheating in the first place, among other unforeseen effects it can have.

 

[realibrad]

If the problem was malinvestment in finance as opposed to other sectors then there should be tons of opportunities to invest that cash in other, more productive enterprises. Since Austrian economics disavows aggregate demand, what is the cause for there to be little to invest in? I will express my incredulity that a 0.25% rate of interest was so appealing to huge financial institutions that they gave up on lending.

I know more about the US economy, so ill use it as the example. A bunch of risky mortgages were sold to very risky people. In the short run, huge profits were made. Industries then invested in supporting the expansion of selling homes. Places like home depot expanded to meet the desires of all the new home owners. People also used their houses as credit to purchase other things. All the things that were being purchases because of the short term wealth generation all stopped when it collapsed. Then, the industries that were built around that short term boom also collapsed, taking more down with them. The economy had to shift its focus from the unproductive risky loans business, to other more productive things. More homes were being built than could be sold, so it would eventually stop. All the industries built around it would then have to shrink to cope with the lack of demand. Boosting agg demand wont do much to help, if the money goes back into the flawed system. This is part of the reason banks did not loan out the money they were getting. Why risk a loan, when you can keep the money from the Fed, and get paid for holding their money, while the Fed gets to keep the risky assets.

This seems to be a fundamental misunderstanding of how bank reserves work.

I would suggest reading this:
http://www.standardandpoors.com/spf/...Me_8_14_13.pdf

There are 2 types of reserves. There are mandated reserves by the Fed, and excess reserves. Excess reserves did not used to collect interest pre 2008, so banks loaned out the excess reserves because they wanted to make money off of their money.

http://realfreeradical.com/2014/01/04/banks-can-lend-out-excess-reserves/

So yes, the banks can convert excess reserves into capital to loan out

So your argument is that a whole ton of Austrian economists don't understand their own theory? Not only were they predicting major inflation in 2008, they continued to do so year after year despite the Fed having the same policies in place.

There's no hiding the fact that large numbers of those affiliated with Austrian economics made very explicit predictions on what would happen. Those predictions weren't just slightly wrong, they were catastrophically wrong. This seems to happen a lot, perhaps primarily because Austrian economists don't use mathematical models and such. In that kind of circumstance you are never really tied to any explicit description of your economic theory. They seem to exploit this frequently to avoid confronting criticism.

So first, Austrian's use mathematical models, they just to go as far as others do. Many believe they can quantify risk, and still do post 2008. Austrian's tend to look at models being mainly apart of the micro, and very little part of the macro.

2nd. Paying on reserves was explicitly intended to stop rampant inflation. They stated as much. Paying on reserves causes banks not to lend out the money as much, so the real money supply did not increase. Its a very important factor. As I stated before, banks are covering their losses with the interest right now. Eventually, they will start lending out their reserves instead of holding them, because the interest earned from a loan will be greater.

 

[First]

I know more about the US economy, so ill use it as the example. A bunch of risky mortgages were sold to very risky people. In the short run, huge profits were made. Industries then invested in supporting the expansion of selling homes. Places like home depot expanded to meet the desires of all the new home owners. People also used their houses as credit to purchase other things. All the things that were being purchases because of the short term wealth generation all stopped when it collapsed. Then, the industries that were built around that short term boom also collapsed, taking more down with them. The economy had to shift its focus from the unproductive risky loans business, to other more productive things. More homes were being built than could be sold, so it would eventually stop. All the industries built around it would then have to shrink to cope with the lack of demand. Boosting agg demand wont do much to help, if the money goes back into the flawed system. This is part of the reason banks did not loan out the money they were getting. Why risk a loan, when you can keep the money from the Fed, and get paid for holding their money, while the Fed gets to keep the risky assets.

I'd say this is anywhere from an oversimplification to just pretty much inaccurate. For one, there's nothing "unproductive" about high-risk loans. I'm not sure what this really refers to; the sub-prime mortgage market is alive and (somewhat) well, and those are certainly higher risk mortgages. Bubbles are inherently incoherent, hysterical and a little bit insane frankly, but that has nothing to do with Keynesian or Austrian given that both schools of thought would agree that industries that have no long-term viability shouldn't be created. There's no evidence the government created it, though. Of course, sub-prime itself was a by-stander as a primary cause for the 2008 crisis in comparison to the 1) conventional lenders abandoning federal underwriting standards between 2004-2007, essentially leading to an inability to properly assess risk levels in various tranches of collateralized securities (CMO/CDO's, etc.) and 2) the banks/institutions' insane belief that housing prices would continue to rise, and literally having little or no way to handle a scenario where prices collapse other than with CDS' that, unbeknownst to everyone else, everyone was using to hedge their bets.

There are 2 types of reserves. There are mandated reserves by the Fed, and excess reserves. Excess reserves did not used to collect interest pre 2008, so banks loaned out the excess reserves because they wanted to make money off of their money.

http://realfreeradical.com/2014/01/04/banks-can-lend-out-excess-reserves/

So yes, the banks can convert excess reserves into capital to loan out

Banks did and still do not have incentive to earn interest on reserves through the Fed discount windows, the interest rates were and are pretty much absolutely rock bottom (though with a marked rise in the last couple weeks). Frankly I'm not sure what you're referring to, as I believe that article doesn't say what you think it does. The reason for banks holding onto their TARP funds and/or other funds borrowed from the Fed through the discount window is pretty simple; regulatory uncertainty (Dodd-Frank) and economic uncertainty (recession starting in 08) about risk and investment opportunities, with not enough potential yield to risk those reserves. The reserve requirements are also, of course, higher, as they certainly should be if we care about systemic stability (we all do whether we know it or not).

So first, Austrian's use mathematical models, they just to go as far as others do. Many believe they can quantify risk, and still do post 2008. Austrian's tend to look at models being mainly apart of the micro, and very little part of the macro.

2nd. Paying on reserves was explicitly intended to stop rampant inflation. They stated as much. Paying on reserves causes banks not to lend out the money as much, so the real money supply did not increase. Its a very important factor. As I stated before, banks are covering their losses with the interest right now. Eventually, they will start lending out their reserves instead of holding them, because the interest earned from a loan will be greater.

None of this is true; there is no evidence of 1) banks actively looking at the rates their earns on Fed-borrowed loans and deciding that's better than the higher yield they would achieve elsewhere in the real world (be it 30-year loans at 4%, take-out loans, bridge and warehouse loans, etc.). There is literally no evidence of these institutions sitting on cash because of Fed yield on their loans. The fact they may earn some yield is just the way it is, nothing more. Doesn't change the calculus at all.

Also, Austrians have almost certainly gotten everything wrong, cause it's hard to argue with 6 years of data that would literally have to do a 180 in the next 6 years for them to be anywhere near correct with regards to inflation, commodities and U.S. equities. I can pull up all sorts of false predictions by the Austrian's patron saint, Peter Schiff, since 2008.

 

[fskimospy]

I know more about the US economy, so ill use it as the example. A bunch of risky mortgages were sold to very risky people. In the short run, huge profits were made. Industries then invested in supporting the expansion of selling homes. Places like home depot expanded to meet the desires of all the new home owners. People also used their houses as credit to purchase other things. All the things that were being purchases because of the short term wealth generation all stopped when it collapsed. Then, the industries that were built around that short term boom also collapsed, taking more down with them. The economy had to shift its focus from the unproductive risky loans business, to other more productive things. More homes were being built than could be sold, so it would eventually stop. All the industries built around it would then have to shrink to cope with the lack of demand. Boosting agg demand wont do much to help, if the money goes back into the flawed system. This is part of the reason banks did not loan out the money they were getting. Why risk a loan, when you can keep the money from the Fed, and get paid for holding their money, while the Fed gets to keep the risky assets.

You still aren't answering why we didn't see a major investment expansion in the other "productive" sectors after the crash. In fact what we saw was a broad based decline in every sector. Your explanation simply isn't consistent with what actually happened.

There are 2 types of reserves. There are mandated reserves by the Fed, and excess reserves. Excess reserves did not used to collect interest pre 2008, so banks loaned out the excess reserves because they wanted to make money off of their money.

http://realfreeradical.com/2014/01/04/banks-can-lend-out-excess-reserves/

So yes, the banks can convert excess reserves into capital to loan out

The author of the original paper was talking about the banking system in the aggregate, which is of course the important thing here.

So first, Austrian's use mathematical models, they just to go as far as others do. Many believe they can quantify risk, and still do post 2008. Austrian's tend to look at models being mainly apart of the micro, and very little part of the macro.

2nd. Paying on reserves was explicitly intended to stop rampant inflation. They stated as much. Paying on reserves causes banks not to lend out the money as much, so the real money supply did not increase. Its a very important factor. As I stated before, banks are covering their losses with the interest right now. Eventually, they will start lending out their reserves instead of holding them, because the interest earned from a loan will be greater.

None of this addresses my point which was if what you're claiming is true then Austrians don't understand their own models as their predictions simply didn't reflect what you're trying to argue now. In my opinion this is due to the fundamental malleability of ideology that's possible when you don't quantify your predictions.

 

[glenn1]

You don't understand what he's saying; he's saying that higher inflation is the point here, that the Fed can essentially telegraph "irresponsibility" by keeping rates low for longer than expected and that'll lead to higher than 2% inflation, something Krugman wants in part because he's not afraid of its effects given that higher inflation is both good for the debt and lower interest rates good for the economy because it insures some very real level of economic growth. Of course his caveat is that it'll overheat the economy, but that the alternative of the Fed increasing the discount rates at the first sign of good economic news is a poorer alternative than a little inflation and over-heating. I agree with that only partially because I think Krugman has too much faith in monetary policy's ability to control overheating in the first place, among other unforeseen effects it can have.

If your entire reason for seeking inflation is that it devalues debt obligations, why don't you just repudiate the debt to begin with? I presume you think that high inflation/low interest rates will somehow create demand-pull inflation, but of what? Do you really think we live in an economy whose key drivers are beer, cigarettes, and processed food?

 

[First]

If your entire reason for seeking inflation is that it devalues debt obligations, why don't you just repudiate the debt to begin with?

Repudiate how? Specifically what are you asking.

I presume you think that high inflation/low interest rates will somehow create demand-pull inflation, but of what? Do you really think we live in an economy whose key drivers are beer, cigarettes, and processed food?

Sure, you could say it's demand-pull inflation, and of all sorts of products and services; healthcare, energy, equity investments, etc. I'm not sure what your beer/cigs/processed food reference is about. Just simple macro trends that are undeniable; e.g. banks and the private sector at large have a spread they use to price their loans, usually about 3% above the depositor interest they're paying which itself is of course based on the fed funds rates (lots of other factors too, and it depends on the rate used, such as LIBOR, COFI, etc. and 3% is not a hard and fast rule anymore AFAIK). As a result, the Fed has immense control over the economy if they choose to use it. Now sometimes the Fed doesn't, as real interest rates in the actual private economy will rise without Fed intervention during booms (like the last one). But the theory is still sound because the Fed can indeed act as an accelerator of growth and as a result push up prices/inflation, which has undeniable effect of reducing the burden of debt held by the public.

 

[realibrad]

I'd say this is anywhere from an oversimplification to just pretty much inaccurate. For one, there's nothing "unproductive" about high-risk loans. I'm not sure what this really refers to; the sub-prime mortgage market is alive and (somewhat) well, and those are certainly higher risk mortgages. Bubbles are inherently incoherent, hysterical and a little bit insane frankly, but that has nothing to do with Keynesian or Austrian given that both schools of thought would agree that industries that have no long-term viability shouldn't be created. There's no evidence the government created it, though. Of course, sub-prime itself was a by-stander as a primary cause for the 2008 crisis in comparison to the 1) conventional lenders abandoning federal underwriting standards between 2004-2007, essentially leading to an inability to properly assess risk levels in various tranches of collateralized securities (CMO/CDO's, etc.) and 2) the banks/institutions' insane belief that housing prices would continue to rise, and literally having little or no way to handle a scenario where prices collapse other than with CDS' that, unbeknownst to everyone else, everyone was using to hedge their bets.

The argument I was making is that the high risk loans were a much higher risk than what was believed to be understood. The interest rates should have been higher, and that would have pushed out the buyers of the loans. This would mean fewer loans overall, and a net decrease in the profitability of that activity. That loss in profitability would mean the other sectors that had been dependent on that income would go away. I don't mean to say that high risk loans cant be profitable, so sorry if it came off that way. What I'm saying is that the way the industry was making money off of them was not productive, because in the long run, more money was lost then created from it. Once the prices collapsed, the whole thing collapsed.

Banks did and still do not have incentive to earn interest on reserves through the Fed discount windows, the interest rates were and are pretty much absolutely rock bottom (though with a marked rise in the last couple weeks). Frankly I'm not sure what you're referring to, as I believe that article doesn't say what you think it does. The reason for banks holding onto their TARP funds and/or other funds borrowed from the Fed through the discount window is pretty simple; regulatory uncertainty (Dodd-Frank) and economic uncertainty (recession starting in 08) about risk and investment opportunities, with not enough potential yield to risk those reserves. The reserve requirements are also, of course, higher, as they certainly should be if we care about systemic stability (we all do whether we know it or not).

The reason the banks are holding onto their reserves at the levels they are, is because its not worth it for them to lead it out. If it turns out they must keep more liquid capital on hand, it could be a larger expense to get that capital. But, what I was saying is that its not cost effective, because of poor investment opportunities and unknown future. His argument was that you cannot lead excess reserves, and you most definitely can.

None of this is true; there is no evidence of 1) banks actively looking at the rates their earns on Fed-borrowed loans and deciding that's better than the higher yield they would achieve elsewhere in the real world (be it 30-year loans at 4%, take-out loans, bridge and warehouse loans, etc.). There is literally no evidence of these institutions sitting on cash because of Fed yield on their loans. The fact they may earn some yield is just the way it is, nothing more. Doesn't change the calculus at all.

Also, Austrians have almost certainly gotten everything wrong, cause it's hard to argue with 6 years of data that would literally have to do a 180 in the next 6 years for them to be anywhere near correct with regards to inflation, commodities and U.S. equities. I can pull up all sorts of false predictions by the Austrian's patron saint, Peter Schiff, since 2008.

The point of paying interest on the reserves is to stop inflation.

"In principle, the interest rate the Fed pays on bank reserves should set a floor on the overnight interest rate, as banks should be unwilling to lend reserves at a rate lower than they can receive from the Fed."

That is from Ben Bernanke.

http://www.newyorkfed.org/research/current_issues/ci15-8.pdf

That link also explains how inflation is held down by incentivising the banks to keep the money. The reason it keeps down inflation is because it does not increase the real money supply. If interest on the reserves did not mean anything, they why did the Fed do it with the explicit intent to stop the banks from lending it.

Also, Peter is wrong about a lot of things. Having said that, inflation not running rampant is explained by the actions of the Fed.

 

[realibrad]

You still aren't answering why we didn't see a major investment expansion in the other "productive" sectors after the crash. In fact what we saw was a broad based decline in every sector. Your explanation simply isn't consistent with what actually happened.



The author of the original paper was talking about the banking system in the aggregate, which is of course the important thing here.



None of this addresses my point which was if what you're claiming is true then Austrians don't understand their own models as their predictions simply didn't reflect what you're trying to argue now. In my opinion this is due to the fundamental malleability of ideology that's possible when you don't quantify your predictions.

We didnt see investment in other areas, because nobody knew what was safe to invest in anymore. When the US got its credit downgrading, something funny happened. The rest of the world figured that if the US got a credit downgrade, then the rest of the world was far worse than thought, so investment flooded into the US. There is a lot of investment money out there, but nothing to do with it, because nobody knows what will come next.

http://www.clevelandfed.org/research/trends/2011/0511/01finmar.cfm

While banks cannot control the overall level of excess reserves, there are a several ways they can reduce the level of excess reserves on their own individual balance sheets. They can lend excess reserves to other banks in the federal funds market, they can lend them to consumers or businesses, or they can purchase securities. Each of these outlets has been constrained for various reasons since the recession.

Lending in the federal funds market has been constrained two factors. In October of 2008, the Federal Reserve began paying interest of 25 basis points on excess reserves. Before that time, banks sought to minimize their holdings of excess reserves by making interbank loans in the federal funds market. This new policy, coupled with the effective federal funds rate declining to under 25 basis points in November 2008, created a disincentive for banks to lend in the overnight market.

Show me where an Austrian model says inflation will rise when nominal money supply increases, and not real money supply.

Inflation is created when the real money supply increases. Buy taking away the incentive to get the money out to the market, they are in effect not increasing the real money supply.

 

[fskimospy]

We didnt see investment in other areas, because nobody knew what was safe to invest in anymore. When the US got its credit downgrading, something funny happened. The rest of the world figured that if the US got a credit downgrade, then the rest of the world was far worse than thought, so investment flooded into the US. There is a lot of investment money out there, but nothing to do with it, because nobody knows what will come next.

http://www.clevelandfed.org/research/trends/2011/0511/01finmar.cfm

This is just repeating what I said. Individual banks can, aggregate banks cannot.

Show me where an Austrian model says inflation will rise when nominal money supply increases, and not real money supply.

Inflation is created when the real money supply increases. Buy taking away the incentive to get the money out to the market, they are in effect not increasing the real money supply.

Again, you're simply arguing that the Austrians can't understand their own models then. Show me a single prediction from an Austrian economist in 2008 that said inflation was going to be low and stay there.

A single. Solitary. One.

 

[realibrad]

This is just repeating what I said. Individual banks can, aggregate banks cannot.



Again, you're simply arguing that the Austrians can't understand their own models then. Show me a single prediction from an Austrian economist in 2008 that said inflation was going to be low and stay there.

A single. Solitary. One.

So, why do you believe that banks are keeping reserves greater than what is mandated?

The Austrian model says that if velocity is held constant, but the money supply is increased, you will get inflation. The money supply was not actually increased, thus no inflation. Peter S. was using conjecture to predict inflation, not Austrian economic models.

 

[fskimospy]

So, why do you believe that banks are keeping reserves greater than what is mandated?

Insufficient aggregate demand, low inflation expectations, etc. This is in fact the definition of the Keynesian liquidity trap, which has sadly been precisely what Keynesians predicted.

The Austrian model says that if velocity is held constant, but the money supply is increased, you will get inflation. The money supply was not actually increased, thus no inflation. Peter S. was using conjecture to predict inflation, not Austrian economic models.

Well first I would say "what Austrian model?" Be specific.

Secondly I would say that many Austrian economists dismiss the velocity of money.

Third, I would say, forget Peter Schiff. Everyone knows he was a hack. Give me someone who claims to be of the Austrian school who issued a prediction in 2008 that large increases in the money supply, large federal deficits, etc, would still end up as low inflation, bordering on deflation.

Seriously, ANYONE.

 

[Doc Savage Fan]

So, why do you believe that banks are keeping reserves greater than what is mandated?

The Austrian model says that if velocity is held constant, but the money supply is increased, you will get inflation. The money supply was not actually increased, thus no inflation. Peter S. was using conjecture to predict inflation, not Austrian economic models.

Relevant to your point.

And money velocity is at a 50+ year low!

Here's an excellent article for those interested in this subject.

http://raynoreport.com/13/07/shocking-collapse-in-money-velocity-might-be-scaring-fed/