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Pascal Bedard
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8 months ago
in Restoring Functioning Markets in a Broken World on Information Arbitrage
I agree entirely with prof Mankiw. I would like, however, for someone to admit that there is a SEVERE need for coherence! Throwing all the money they ask for at mismanaged firms, letting the Fed become an anything goes institution is NOT the way to fix structurally important economic problems!
8 months ago
in The Fed’s Ballooning Credit Extensions on The Washington Independent
I could not agree MORE. This entire mess has thrown public authorities out of control... if only it was an "out of control" that was relatively costless to the taxpayer, but such is not the case. This "anything goes" approach WILL have consequences. The very fundamental rule of economics, even more basic than supply and demand is that there is no free lunch!
Can we stop spending thousands of billions of taxpayer dollars (and next-generation real disposable incomes) on trying to fix an unfixable mess (while millions if not billions "fall through the cracks" and end up in private pockets of well-connected Wall Street people) and concentrate on padding people and businesses against the consequences of the necessary but painful global deleveraging that is taking place? The Warren Buffets of the world are positioning themselves in preparation for the Bailout Mania windfall but not much else is happening on the positive side.
We need to accept the very basic truth here: the West has been living beyond its means for 2 decades now and this shows up in aggregate private market credit as a % of GDP which has reached historical proportions now and has been on a tear for 2 decades. Although there may be some “structural break” in the world economy that could explain PART of the phenomenal increase in the credit market debt-to-GDP ratio, but I strongly doubt this “structural break” could entirely explain the observed changes of the last decade in the 1920-2007 series (see graphs).
This “living beyond our means” has been made possible by borrowing (in fiscal and environmental terms) from future generations and from Asia. We are now literally throwing free money at the very people who should get as little as possible, thus structurally integrating moral hazard to the long term mess as well, but that is so “old school”, right? The slogan currently should be “if you want money, you have to be bankrupt or close to it”, and all the large mismanaged corporations have certainly caught on to this. Now everything goes and more dumping on the taxpayer will soon come – auto loans, credit card debt, almost free transfers to large automakers, etc.
Of course "punishment" is not a responsible economic policy - I agree and I totally understand the issue of "clogged" credit markets. But pragmatism IS essential to good economic policy. And using thousands of billions of taxpayer dollars (still not enough relative to the size of the problem) in what seems like ad-hoc "tests" and “approximate” policies with very unsure results that benefit few at the expense of many seems quite un-pragmatic and irresponsible to me.
The reality is that there are 2 types of recessions: one is due to the Central Bank slowing the economy to decrease inflation (Romer and Romer), change inflationary expectations and “anchor” expectations and policy credibility, and to keep the economy "close to potential." The other type of recession is due to massive misallocation of resources, dislocations in interest rates and prices, and poor risk assessment – all are essentially the same thing. The recession just starting now is a "type 2" recession and standard policy will not work. We (especially the USA and Europe) will spend astronomical amounts of taxpayer dollars and, Central Bank “printing of free money”, and policy credibility erosion while discovering this and running into a liquidity trap. We will then wake up in a few years with very serious fiscal issues which will limit the intervention ability of the public sector when it will be really required and useful.
Pascal Bédard, Montreal
Can we stop spending thousands of billions of taxpayer dollars (and next-generation real disposable incomes) on trying to fix an unfixable mess (while millions if not billions "fall through the cracks" and end up in private pockets of well-connected Wall Street people) and concentrate on padding people and businesses against the consequences of the necessary but painful global deleveraging that is taking place? The Warren Buffets of the world are positioning themselves in preparation for the Bailout Mania windfall but not much else is happening on the positive side.
We need to accept the very basic truth here: the West has been living beyond its means for 2 decades now and this shows up in aggregate private market credit as a % of GDP which has reached historical proportions now and has been on a tear for 2 decades. Although there may be some “structural break” in the world economy that could explain PART of the phenomenal increase in the credit market debt-to-GDP ratio, but I strongly doubt this “structural break” could entirely explain the observed changes of the last decade in the 1920-2007 series (see graphs).
This “living beyond our means” has been made possible by borrowing (in fiscal and environmental terms) from future generations and from Asia. We are now literally throwing free money at the very people who should get as little as possible, thus structurally integrating moral hazard to the long term mess as well, but that is so “old school”, right? The slogan currently should be “if you want money, you have to be bankrupt or close to it”, and all the large mismanaged corporations have certainly caught on to this. Now everything goes and more dumping on the taxpayer will soon come – auto loans, credit card debt, almost free transfers to large automakers, etc.
Of course "punishment" is not a responsible economic policy - I agree and I totally understand the issue of "clogged" credit markets. But pragmatism IS essential to good economic policy. And using thousands of billions of taxpayer dollars (still not enough relative to the size of the problem) in what seems like ad-hoc "tests" and “approximate” policies with very unsure results that benefit few at the expense of many seems quite un-pragmatic and irresponsible to me.
The reality is that there are 2 types of recessions: one is due to the Central Bank slowing the economy to decrease inflation (Romer and Romer), change inflationary expectations and “anchor” expectations and policy credibility, and to keep the economy "close to potential." The other type of recession is due to massive misallocation of resources, dislocations in interest rates and prices, and poor risk assessment – all are essentially the same thing. The recession just starting now is a "type 2" recession and standard policy will not work. We (especially the USA and Europe) will spend astronomical amounts of taxpayer dollars and, Central Bank “printing of free money”, and policy credibility erosion while discovering this and running into a liquidity trap. We will then wake up in a few years with very serious fiscal issues which will limit the intervention ability of the public sector when it will be really required and useful.
Pascal Bédard, Montreal
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