[TheSophist]

We need to sort out the financial system and the government pronto, otherwise we are just prolonging the pain.

The problem is political which means every man and woman needs to get organised and sort this thing out

http://vimeo.com/45687897

[Martyn*]

It will never be done.

[FDR]

Sigh.

Free markets are not to be blamed for the Great Recession. On the contrary, its origins rest upon the deep government and central bank intervention in the economy.

Yet another wacko who believes that it's all stems from the government, and that central banks are evil, despite countless evidence that proves the contrary. Oh well, I guess people will believe whatever they want regardless of the reality if it fits their agenda.

[TheSophist]

(Original post by FDR)
Sigh.



Yet another wacko who believes that it's all stems from the government, and that central banks are evil, despite countless evidence that proves the contrary. Oh well, I guess people will believe whatever they want regardless of the reality if it fits their agenda.

What evidence?

simply alluding to evidence is just as bad as having none at all tbh.

Reality is indeed dependent upon what you take to be the data of reality. what you also take to be theory based on such data. The study of such understanding (of data and theory) is itself a theoretical pursuit, so it is no good you simply saying free market theory is dogma. You have to engage intellectually in discussion please. Why do you think it is dogma?

[ish90an]

(Original post by FDR)
Sigh.



Yet another wacko who believes that it's all stems from the government, and that central banks are evil, despite countless evidence that proves the contrary. Oh well, I guess people will believe whatever they want regardless of the reality if it fits their agenda.

Yes, if you dare to believe in sound money and accountability from politicians and central planners you are a "wacko".

[FDR]

(Original post by TheSophist)
What evidence?

simply alluding to evidence is just as bad as having none at all tbh.

Reality is indeed dependent upon what you take to be the data of reality. what you also take to be theory based on such data. The study of such understanding (of data and theory) is itself a theoretical pursuit, so it is no good you simply saying free market theory is dogma. You have to engage intellectually in discussion please. Why do you think it is dogma?

What is nonsense is exactly what I quoted that 'free markets are not to be blamed for the great recession' and that the crisis actually stems from 'central bank and government intervention within the economy'.

The first point, that 'free markets are not to blame' is wrong because most aspects of the financial system failed in the run up to the crises; the lenders made risky ('subprime') loans in the knowledge that they could sell these on at a profit, the Investment Banks bought these loans and sliced them up into CDOs and sold them on, the ratings agencies Moody's and S&Ps failed to asses the risk of these mortgages, giving them triple A ratings, which exacerbated the problem, and the insurance firms, famously AIG, insured these risky loans for nothing. These are all, private firms that were deeply involved.

Private firms like Bear Stearns and Lehman Brothers, not to mention many others failed not because of too much government, but because they were poorly regulated. Therefore, I cannot see how free markets can be viewed as blameless in anyway, as they played the key role in this crisis. I presume you will point to the CRA, an act passed in the 70s, and say that this forced banks to lend to the poor, and therefore resulted in the subprime crisis, but it didn't because banks weren't required to take on any more risk than they needed to, they didn't need to make bad loans abroad (which they did) and most importantly, around 80%, a massive majority of subprime loans, were made either by institutions not supervised by the act, or were loans that the act didn't cover, and therein lies the problem. Let's not forget the ratings agencies here (private firms remember) - they had no obligation to give toxic loans the best rating, but they did anyway. The financial market failed. Big time.

As for the mistaken belief that the crisis stems from 'central bank and government intervention within the economy, well we know that there is no relationship between the role of government within the economy and how much it has suffered; in the EU, countries with high social expenditure such as Germany, France and Finland have fared far better than the PIIGS.



Also the fact that there was stimulus in the UK and US prevented a much deeper recession (as this Fitch/Oxford Economics research shows: http://economistsview.typepad.com/ec...-stimulus.html )


As for central bank intervention, well over the past decade, in the US, UK and EU, central banks have fulfilled their mandate of low inflation well, wouldn't you agree? In the UK, the BoE has acted admirably, cutting rates to 0.5% and injecting nearly £400bn into the economy, acts which prevented a much deeper recession, boosting GDP by around 2%. Likewise, the Federal Reserve has done a lot. The problem has been in the EU, where the central Bank has been reluctant to do anything; if it bought government debt the crisis would be much smaller.

[TheSophist]

(Original post by FDR)
What is nonsense is exactly what I quoted that 'free markets are not to be blamed for the great recession' and that the crisis actually stems from 'central bank and government intervention within the economy'.

The first point, that 'free markets are not to blame' is wrong because most aspects of the financial system failed in the run up to the crises; the lenders made risky ('subprime') loans in the knowledge that they could sell these on at a profit, the Investment Banks bought these loans and sliced them up into CDOs and sold them on, the ratings agencies Moody's and S&Ps failed to asses the risk of these mortgages, giving them triple A ratings, which exacerbated the problem, and the insurance firms, famously AIG, insured these risky loans for nothing. These are all, private firms that were deeply involved.

Private firms like Bear Stearns and Lehman Brothers, not to mention many others failed not because of too much government, but because they were poorly regulated. Therefore, I cannot see how free markets can be viewed as blameless in anyway, as they played the key role in this crisis. I presume you will point to the CRA, an act passed in the 70s, and say that this forced banks to lend to the poor, and therefore resulted in the subprime crisis, but it didn't because banks weren't required to take on any more risk than they needed to, they didn't need to make bad loans abroad (which they did) and most importantly, around 80%, a massive majority of subprime loans, were made either by institutions not supervised by the act, or were loans that the act didn't cover, and therein lies the problem. Let's not forget the ratings agencies here (private firms remember) - they had no obligation to give toxic loans the best rating, but they did anyway. The financial market failed. Big time.

As for the mistaken belief that the crisis stems from 'central bank and government intervention within the economy, well we know that there is no relationship between the role of government within the economy and how much it has suffered; in the EU, countries with high social expenditure such as Germany, France and Finland have fared far better than the PIIGS.



Also the fact that there was stimulus in the UK and US prevented a much deeper recession (as this Fitch/Oxford Economics research shows: http://economistsview.typepad.com/ec...-stimulus.html )


As for central bank intervention, well over the past decade, in the US, UK and EU, central banks have fulfilled their mandate of low inflation well, wouldn't you agree? In the UK, the BoE has acted admirably, cutting rates to 0.5% and injecting nearly £400bn into the economy, acts which prevented a much deeper recession, boosting GDP by around 2%. Likewise, the Federal Reserve has done a lot. The problem has been in the EU, where the central Bank has been reluctant to do anything; if it bought government debt the crisis would be much smaller.

The fact is, a central bank is not needed at all. Money is a commodity (like bread, ,milk, TV sets). We do not need government institutions to say what money is or how much of it there should be. The market will decide what to trade for what, eventually choosing a good which is generally tradeable and therefore becomes money. For all we know we could be buying general goods with seashells. Inflation is 2%. If we did not have the central bank we would see deflation. I.e. we do not know specifically the untold loss of wealth of the people through the LACK of deflation. In other words the opportunity cost of having a central bank gives us hypothetically 10%, 20% ? inflation. The purchasing power which has been stolen from the poor.

I have no idea where that graph in the link of where we would be if we did not do the stimulus comes from. Are they time travellers or something? They go back in time and do a test where they shoot the prime minister or something and there was no stimulus and write a report about what happens. It is utterly ridiculous to for them to claim with any degree of certainty that they can predict SPECIFICALLY what would have happend.

When you say the free market has responsibility in the economic crisis (bear sterns etc). I think you are confusing what free market means. Free market is indicative of free exchange between individuals without intervention in their interests. If you'd have watched the video in the link you would know that banks are given free reign to create money out of nothing, which is basically legal theft. Do ordinary citizens have the right to produce their own money: pound notes? This is already a rigged market enforced by the duplicitous government. The market is corrupted by the government and is therefore not free. Capitalism/free markets is mass production for the masses (quote of Mises). if you understood what this meant, you would know that the free market is not responsible for this mess.

As it stands this is a klepocratic situation (which you would agree with) I.e. there are bad rich people. But they are not bad because they are rich. Wealthy entrpeneurs are rich because of their mass production for the masses. The bad rich people are bad because they are simply stealing money/wealth/power/influence without without working in the interest of society.

In conclusion: The government and the financial sector are in bed together. Even though generally speaking it takes two to tango, its the responsibility of the government to withdraw the ENFORCED rights of central bankers and banks to create money out of thin air, distorting market processes.

[jesusandtequila]

(Original post by FDR)
Sigh.



Yet another wacko who believes that it's all stems from the government, and that central banks are evil, despite countless evidence that proves the contrary. Oh well, I guess people will believe whatever they want regardless of the reality if it fits their agenda.

This is a quite incredible straw man. I don't think they are evil, they are probably entirely well-meaning. It's just there's no way for a committee of 9 to try to determine the price of time with any degree of accuracy whatsoever; and that a competitive market process would lead to a much better signal of the preferences being expressed through action.

[FDR]

(Original post by TheSophist)
The fact is, a central bank is not needed at all. Money is a commodity (like bread, ,milk, TV sets). We do not need government institutions to say what money is or how much of it there should be. The market will decide what to trade for what, eventually choosing a good which is generally tradeable and therefore becomes money. For all we know we could be buying general goods with seashells. Inflation is 2%. If we did not have the central bank we would see deflation. I.e. we do not know specifically the untold loss of wealth of the people through the LACK of deflation. In other words the opportunity cost of having a central bank gives us hypothetically 10%, 20% ? inflation. The purchasing power which has been stolen from the poor.

I have no idea where that graph in the link of where we would be if we did not do the stimulus comes from. Are they time travellers or something? They go back in time and do a test where they shoot the prime minister or something and there was no stimulus and write a report about what happens. It is utterly ridiculous to for them to claim with any degree of certainty that they can predict SPECIFICALLY what would have happend.

When you say the free market has responsibility in the economic crisis (bear sterns etc). I think you are confusing what free market means. Free market is indicative of free exchange between individuals without intervention in their interests. If you'd have watched the video in the link you would know that banks are given free reign to create money out of nothing, which is basically legal theft. Do ordinary citizens have the right to produce their own money: pound notes? This is already a rigged market enforced by the duplicitous government. The market is corrupted by the government and is therefore not free. Capitalism/free markets is mass production for the masses (quote of Mises). if you understood what this meant, you would know that the free market is not responsible for this mess.

As it stands this is a klepocratic situation (which you would agree with) I.e. there are bad rich people. But they are not bad because they are rich. Wealthy entrpeneurs are rich because of their mass production for the masses. The bad rich people are bad because they are simply stealing money/wealth/power/influence without without working in the interest of society.

In conclusion: The government and the financial sector are in bed together. Even though generally speaking it takes two to tango, its the responsibility of the government to withdraw the ENFORCED rights of central bankers and banks to create money out of thin air, distorting market processes.

Having a central bank, particularly an independent one that isn't politically influenced, means that we have generally stable prices through management of the interest rate and consequently stable growth and therefore near full employment. The market isn't perfect; sometimes prices may fall as debtors decide to cut down spending to pay off debt, and if a central bank doesn't react, then the value of that debt increases in real terms, and the economy continues in a deflationary spiral - having a central bank that can cut rates and increase the money supply reduces all this unecessary suffering. The poor will lose out more in a case of severe deflation because wages and jobs will be cut, and the value of debt will rise.

The graph came from Fitch and Oxford Economics, and whilst such a study will never be completely accurate, others studies have come up with similar results, plus the sources are pretty reliable.

OK, on this you're clearly far more knowledgable than I am, but surely if Banks are allowed to create money out of thin air, then RBS etc could have just created money to pay off their bad loans? Surely the money must come from somewhere?

I agree the market is corrupt, but I strongly disagree that it's the governments fault - like we saw during the crises, the government didn't intervene to cause the crises or any of the financial problems, they are all a result of a lack of government, and that's why I think it's mistaken to blame the government because this is one area which the government didn't intervene much at all.

[FDR]

(Original post by jesusandtequila)
This is a quite incredible straw man. I don't think they are evil, they are probably entirely well-meaning. It's just there's no way for a committee of 9 to try to determine the price of time with any degree of accuracy whatsoever; and that a competitive market process would lead to a much better signal of the preferences being expressed through action.

I'm not sure what you mean by the price of time, but the MPC have been extremely successful in maintaining a stable price level.

The problem with leaving things entirely to the market is that it can cause a lot of uneccesary suffering, particularly if as a result of large amounts of private debt, there is a deflation - by lowering the cost of borrowing and telling banks they can lower their capital ratios, a central bank is still acting through the market mechanism. If high inflation occurs and prices rise rapidly, rather than letting the economy suffer a loss of competitiveness, loss of living standards etc, just raise rates and restrict the flow of money. Again, monetary policy doesn't transcend the market mechanism, it uses it to influence demand and saves us a load of trouble.

[Llamageddon]

guys guys guys... can we stop talking about banks as though they were sentient beings capable of emotion or malice?

[ish90an]

(Original post by FDR)
What is nonsense is exactly what I quoted that 'free markets are not to be blamed for the great recession' and that the crisis actually stems from 'central bank and government intervention within the economy'.

The first point, that 'free markets are not to blame' is wrong because most aspects of the financial system failed in the run up to the crises; the lenders made risky ('subprime') loans in the knowledge that they could sell these on at a profit, the Investment Banks bought these loans and sliced them up into CDOs and sold them on, the ratings agencies Moody's and S&Ps failed to asses the risk of these mortgages, giving them triple A ratings, which exacerbated the problem, and the insurance firms, famously AIG, insured these risky loans for nothing. These are all, private firms that were deeply involved.

Private firms like Bear Stearns and Lehman Brothers, not to mention many others failed not because of too much government, but because they were poorly regulated. Therefore, I cannot see how free markets can be viewed as blameless in anyway, as they played the key role in this crisis. I presume you will point to the CRA, an act passed in the 70s, and say that this forced banks to lend to the poor, and therefore resulted in the subprime crisis, but it didn't because banks weren't required to take on any more risk than they needed to, they didn't need to make bad loans abroad (which they did) and most importantly, around 80%, a massive majority of subprime loans, were made either by institutions not supervised by the act, or were loans that the act didn't cover, and therein lies the problem. Let's not forget the ratings agencies here (private firms remember) - they had no obligation to give toxic loans the best rating, but they did anyway. The financial market failed. Big time.

As for the mistaken belief that the crisis stems from 'central bank and government intervention within the economy, well we know that there is no relationship between the role of government within the economy and how much it has suffered; in the EU, countries with high social expenditure such as Germany, France and Finland have fared far better than the PIIGS.



Also the fact that there was stimulus in the UK and US prevented a much deeper recession (as this Fitch/Oxford Economics research shows: http://economistsview.typepad.com/ec...-stimulus.html )


As for central bank intervention, well over the past decade, in the US, UK and EU, central banks have fulfilled their mandate of low inflation well, wouldn't you agree? In the UK, the BoE has acted admirably, cutting rates to 0.5% and injecting nearly £400bn into the economy, acts which prevented a much deeper recession, boosting GDP by around 2%. Likewise, the Federal Reserve has done a lot. The problem has been in the EU, where the central Bank has been reluctant to do anything; if it bought government debt the crisis would be much smaller.

Have they? All the BLS in the US has done is repeatedly change the methodology used to measure inflation. Use the models used before 1980 and the real inflation rate in the US isn't 3.1%, it is 11%. Use the methodology before 1990, it is 6.5%
All that QE money has done nothing for savers and the working population, it disappeared straight into bank balance sheets as lending still hasn't improved and now the government(i.e. the taxpayer) has taken on the toxic debt of banks. This is not a free market, a free market does not reward failure.
What you have written is an incredibly short sighted and naive version of the housing bubble. The lenders sold on risky knowledge because of government implicitly backing them up, the biggest underwriters of toxic debt was a centrally planned Fannie Mae, that is why the banks could package "AAA" rated CDOs(not to forget that most of the major IBs in the US sit on the same Federal Reserve that controls the money supply in the first place). The US has now done so well thanks to the almighty Fed that California is slowly declaring bankruptcy, the bailed out General Motors is at new post IPO share price lows, unemployment is still at 8%, (government backed) student debt is past a trillion dollars and
other countries are starting to shy away from the USD for trading commodities.
Coming to general stability offered by central banking, the Fed not only failed to predict the crash in house prices, it actively stated there would be no crash even as Austrian economists were warning about it in 2006 . The BoE was complicit in fixing LIBOR and the ECB is sitting on the verge of bankruptcy thanks to all the bailouts and toxic debt on its sheets. In China the state's property bubble has burst, Israel's central bank made the genius purchase of Apple shares at new highs at the start of the year, in India the RBI's only managed to devalue the INR to unsustainable lows.

[FDR]

(Original post by ish90an)
Have they? All the BLS in the US has done is repeatedly change the methodology used to measure inflation. Use the models used before 1980 and the real inflation rate in the US isn't 3.1%, it is 11%. Use the methodology before 1990, it is 6.5%
All that QE money has done nothing for savers and the working population, it disappeared straight into bank balance sheets as lending still hasn't improved and now the government(i.e. the taxpayer) has taken on the toxic debt of banks. This is not a free market, a free market does not reward failure.
What you have written is an incredibly short sighted and naive version of the housing bubble. The lenders sold on risky knowledge because of government implicitly backing them up, the biggest underwriters of toxic debt was a centrally planned Fannie Mae, that is why the banks could package "AAA" rated CDOs(not to forget that most of the major IBs in the US sit on the same Federal Reserve that controls the money supply in the first place). The US has now done so well thanks to the almighty Fed that California is slowly declaring bankruptcy, the bailed out General Motors is at new post IPO share price lows, unemployment is still at 8%, (government backed) student debt is past a trillion dollars and
other countries are starting to shy away from the USD for trading commodities.
Coming to general stability offered by central banking, the Fed not only failed to predict the crash in house prices, it actively stated there would be no crash even as Austrian economists were warning about it in 2006 . The BoE was complicit in fixing LIBOR and the ECB is sitting on the verge of bankruptcy thanks to all the bailouts and toxic debt on its sheets. In China the state's property bubble has burst, Israel's central bank made the genius purchase of Apple shares at new highs at the start of the year, in India the RBI's only managed to devalue the INR to unsustainable lows.

But we aren't using outdated methodology, we are using methodology that is relevant today, and they've been pretty reliable.

As for QE, I don't think it's the solution at all, but it has been useful in that it has managed to have an impact on GDP growth as well as inflation.

Freddie and Fannie were the biggest underwriters of toxic debt you say? That's completely untrue - they don't even make the top 25 (see here: http://www.thecuttingedgenews.com/in...ename=Page+One ) and infact had massively less toxic debt than many private institutions. Did they make bad loans? Yes. Are they blameless? No. But they were by no means the leaders in this area. Not to mention, the so called toxic loans that they made were much less toxic than those made by private lenders, with Fannie and Freddie's default rates six times lower.

Central Banks are by no means perfect; The ECB has consistently failed to step up in the crises for example, but without their existence whatsoever, we would be be in a much worse position thanks to deflation. And by the way, the ECB, like the BoE, will never go bankrupt because it has the power to create money to pay off it's debts.

[TheSophist]

(Original post by Llamageddon)
guys guys guys... can we stop talking about banks as though they were sentient beings capable of emotion or malice?

Institutions can't literally feel an emotion... no one would disagree with that. But the resultant pain is real and should not be belittled

[ish90an]

(Original post by FDR)
But we aren't using outdated methodology, we are using methodology that is relevant today, and they've been pretty reliable.

So reliable the BLS continously takes out/replaces products that ordinary people still buy because they are now more expensive, and so reliable it thinks gas is only just as important to consumers as the iPad.

As for QE, I don't think it's the solution at all, but it has been useful in that it has managed to have an impact on GDP growth as well as inflation.

The UK is still in recession, the ECB's backing hasn't helped Europe, the US faces rising inflation and unemployment. The only thing QE's been useful for is burdening taxpayers with toxic debt and letting banks get virtually risk free profits, main street has seen very little of the money
.

Freddie and Fannie were the biggest underwriters of toxic debt you say? That's completely untrue - they don't even make the top 25 (see here: http://www.thecuttingedgenews.com/in...ename=Page+One ) and infact had massively less toxic debt than many private institutions. Did they make bad loans? Yes. Are they blameless? No. But they were by no means the leaders in this area. Not to mention, the so called toxic loans that they made were much less toxic than those made by private lenders, with Fannie and Freddie's default rates six times lower.

Between 2005 and 2007, more than 50% of Fannie Mae's loan acquisitions were subprime, and more than 60% of Freddie Mac's loans were subprime. Default rates don't tell you the whole story when the bubble hasn't completely popped yet(not to forget %age comparisons alone become meaningless when you realize that 1 in 4 house mortgages in the US are, in some form or another, on these companies).

Central Banks are by no means perfect; The ECB has consistently failed to step up in the crises for example, but without their existence whatsoever, we would be be in a much worse position thanks to deflation. And by the way, the ECB, like the BoE, will never go bankrupt because it has the power to create money to pay off it's debts.

Yes, all deflation is bad, spiraling house and oil prices are good, what we really need is more magic Fed money that eventually no country will accept in exchange of goods and commodities and Weimar or Zimbabwe never happened(which is why anyone can forever print money to pay off debt, who needs an actual economy anyways?). All hail the church of central planners. As for the ECB, it is nothing like the BoE(taxpayers don't directly back it, central banks and treasuries do but in a very unclear way). All the toxic debt it is taking on its books has to be paid, the problem is you can either pass it on to the next generation or you print too much too fast to pay it off and you not only get shut out of capital markets, you risk hyperinflation(not that the church of central planners sees anything wrong with this kind of debt slavery).
If central banking is so brilliant please explain to us mere mortals why financial crises are not only more frequent, but also more severe since the 1930s, and why they have worsened since Nixon took the USD off Bretton Woods.

[FDR]

(Original post by ish90an)

The UK is still in recession, the ECB's backing hasn't helped Europe, the US faces rising inflation and unemployment. The only thing QE's been useful for is burdening taxpayers with toxic debt and letting banks get virtually risk free profits, main street has seen very little of the money.

The UK is still in recession, and in a much greater depression because of government policy; we are in a liquidity trap, and as interest rates are near zero, monetary policy has limited power. QE has managed to raise GDP by around 1.5%, which given the dire policies of the Tories (cutting spending in a depressed economy), may have been the difference between positive and negative GDP growth. Monetary policy can't influence the economy alone, fiscal policy is also important, and has never been more so than right now.

The ECB I have complained about in my previous posts. As for the US, unemployment stems from the fact that there is massive private debt which is being reduced, and the government isn't spending enough to offset the cuts in private expenditure, as well as making cuts to things like police and education.

Between 2005 and 2007, more than 50% of Fannie Mae's loan acquisitions were subprime, and more than 60% of Freddie Mac's loans were subprime. Default rates don't tell you the whole story when the bubble hasn't completely popped yet(not to forget %age comparisons alone become meaningless when you realize that 1 in 4 house mortgages in the US are, in some form or another, on these companies).

Default rates tell a useful tale, that being that the loans Fannie and Freddie made were much less toxic than those made by private lenders. The fact that there may be more defaults is as true for FF as it is for everyone else. Between 2005 and 2007 Fannie and Freddie made a lot more bad loans, but that's because they wanted to get into the game - like I said earlier, they weren't leaders at all, and as I showed, didn't make anywhere near as many bad loans as other players. The fact that there were asset bubbles in the UK and Ireland, as well as elsewhere leads to the conclusion that poor regulation was the cause.

Yes, all deflation is bad, spiraling house and oil prices are good, what we really need is more magic Fed money that eventually no country will accept in exchange of goods and commodities and Weimar or Zimbabwe never happened(which is why anyone can forever print money to pay off debt, who needs an actual economy anyways?). All hail the church of central planners. As for the ECB, it is nothing like the BoE(taxpayers don't directly back it, central banks and treasuries do but in a very unclear way). All the toxic debt it is taking on its books has to be paid, the problem is you can either pass it on to the next generation or you print too much too fast to pay it off and you not only get shut out of capital markets, you risk hyperinflation(not that the church of central planners sees anything wrong with this kind of debt slavery).
If central banking is so brilliant please explain to us mere mortals why financial crises are not only more frequent, but also more severe since the 1930s, and why they have worsened since Nixon took the USD off Bretton Woods.

Inflation is nowhere near the level of Zimbabwe or Weimar, and no policy at all right now will lead to such a situation. We are more likely to experience the deflation and depression seen during the rise of Hitler.

You seem to be slating central banks a lot, yet propose no alternative to what you would do should the economy experience deflation, or severe inflation. Who knows, maybe you actually do have all the answers, and we could be ushering in a new, golden age of macroeconomics...

[jesusandtequila]

(Original post by FDR)
Default rates tell a useful tale, that being that the loans Fannie and Freddie made were much less toxic than those made by private lenders. The fact that there may be more defaults is as true for FF as it is for everyone else. Between 2005 and 2007 Fannie and Freddie made a lot more bad loans, but that's because they wanted to get into the game - like I said earlier, they weren't leaders at all, and as I showed, didn't make anywhere near as many bad loans as other players. The fact that there were asset bubbles in the UK and Ireland, as well as elsewhere leads to the conclusion that poor regulation was the cause.

A few questions.

1. You know Fanny Mae and Freddie Mac created the secondary market for mortgage-back securities?
2. You know the whole sub-prime market was pretty much created in 1994 by the Community Reinvestment Act passed under Clinton.
3. Why do you assume that because an asset bubble exists, it's the result of poor regulation? Rather than say...distortions arising from the monetary system.

[FDR]

(Original post by jesusandtequila)
A few questions.

1. You know Fanny Mae and Freddie Mac created the secondary market for mortgage-back securities?

Well, Ginnie Mae first sold mortgage bonds in the 70s, but Ginnie sold mortgage bonds that were backed by the government, the condition being that the loans it made be incredibly low risk. It was really Saloman Brothers (a US investment bank) which created the secondary market for such mortgage bonds in the late 70s and early 80s.

2. You know the whole sub-prime market was pretty much created in 1994 by the Community Reinvestment Act passed under Clinton.

Firstly, the Community Reinvestment act was passed in 1977, not 1994. Secondly, and I honestly don't know how many times I need to say this for it to get through, the CRA was not responsible for the crisis because a) 80% of the subprime loans were made either by institutions not supervised by the CRA, or were loans that weren't covered by the CRA and b) Many bad loans were made outside the US, e.g in Europe.

3. Why do you assume that because an asset bubble exists, it's the result of poor regulation? Rather than say...distortions arising from the monetary system.

I don't think all asset bubbles are the result of poor regulation, I mean they can occur because of negative real interest rates, when inflation is high and interest rates low.

However, I think poor financial regulation had a big role to play in this asset bubble because in the EU, from it's inception, there was lots of lending, mostly to private firms in periphery countries like Portugal and Spain that helped fuel a bubble, but with tougher regulations may not have been widespread. In the US, there was the huge surge in house prices as credit was extended to everyone and anyone, pushing up the demand for houses, but these loans had interest rates that spiked a few years later making them unrepayable - these are loans that should never have been made in the first place, but were, and fuelled the bubble.

[TheSophist]

(Original post by FDR)
Well, Ginnie Mae first sold mortgage bonds in the 70s, but Ginnie sold mortgage bonds that were backed by the government, the condition being that the loans it made be incredibly low risk. It was really Saloman Brothers (a US investment bank) which created the secondary market for such mortgage bonds in the late 70s and early 80s.



Firstly, the Community Reinvestment act was passed in 1977, not 1994. Secondly, and I honestly don't know how many times I need to say this for it to get through, the CRA was not responsible for the crisis because a) 80% of the subprime loans were made either by institutions not supervised by the CRA, or were loans that weren't covered by the CRA and b) Many bad loans were made outside the US, e.g in Europe.




I don't think all asset bubbles are the result of poor regulation, I mean they can occur because of negative real interest rates, when inflation is high and interest rates low.

However, I think poor financial regulation had a big role to play in this asset bubble because in the EU, from it's inception, there was lots of lending, mostly to private firms in periphery countries like Portugal and Spain that helped fuel a bubble, but with tougher regulations may not have been widespread. In the US, there was the huge surge in house prices as credit was extended to everyone and anyone, pushing up the demand for houses, but these loans had interest rates that spiked a few years later making them unrepayable - these are loans that should never have been made in the first place, but were, and fuelled the bubble.

The Best regulation is free market regulation. Greed regulated by fear. Take away free market consequences of bankruptcy and competition then you get a poor economy. You get unbridled greed

[ish90an]

(Original post by FDR)
The UK is still in recession, and in a much greater depression because of government policy; we are in a liquidity trap, and as interest rates are near zero, monetary policy has limited power. QE has managed to raise GDP by around 1.5%, which given the dire policies of the Tories (cutting spending in a depressed economy), may have been the difference between positive and negative GDP growth. Monetary policy can't influence the economy alone, fiscal policy is also important, and has never been more so than right now.

The UK is not in a credit crunch, it is in a structural crisis thanks to boom time deficits and high personal and finance debt. Simply flooding in more money won't fix it, this is what the EU's been doing for the past year and it has had no impact. As for the 1.5% "growth", this isn't growth in manufacturing or high skilled jobs, it is the same "growth" that was basically the housing bubble.
In reality, this same QE has also increased the collective company pension scheme deficit, artificially pushed up stock prices and not helped lending. Fact is no guarantee QE is what has caused this minimal 1.5%(and these are official estimates, wait a few months and they will be revised down again).

The ECB I have complained about in my previous posts. As for the US, unemployment stems from the fact that there is massive private debt which is being reduced, and the government isn't spending enough to offset the cuts in private expenditure, as well as making cuts to things like police and education.

Isn't spending enough? Obama's doubled the US debt and is going to hit 16trn by the end of the year. Your argument is what a junkie uses, "give me more cocaine and I will get off it". California, that bastion of high public spending, is slowly declaring bankruptcy. Unemployment is high because the housing bubble has burst, there are fewer ponzi public sector jobs about and private corporations are hoarding cash instead of investing.

Default rates tell a useful tale, that being that the loans Fannie and Freddie made were much less toxic than those made by private lenders. The fact that there may be more defaults is as true for FF as it is for everyone else. Between 2005 and 2007 Fannie and Freddie made a lot more bad loans, but that's because they wanted to get into the game - like I said earlier, they weren't leaders at all, and as I showed, didn't make anywhere near as many bad loans as other players. The fact that there were asset bubbles in the UK and Ireland, as well as elsewhere leads to the conclusion that poor regulation was the cause.

Default rates are only useful for percentages, in absolute terms when you have a very large(dare I say it TBTF) lender even a slightly lower default rate will catch up. Poor regulation had nothing to do with the housing bubble, politicians wanted lenders to increase home ownership and this pushed house prices to unsustainable levels, even when incomes were clearly not rising to keep up. Look at the countries worst hurt by the housing bubble and you realize it is those where the craze for home ownership was(still is really) at its peak.

Inflation is nowhere near the level of Zimbabwe or Weimar, and no policy at all right now will lead to such a situation. We are more likely to experience the deflation and depression seen during the rise of Hitler.

Real inflation is already at 11% in the US. What do you think will happen in Europe when they have to pay all their ever rising debts? Forever kicking the can is no longer working, the half life of every bailout's market impact in the past year has been shortening and not even Germany can protect Spain, Italy or France(and we haven't even come to the largest debtor in the world, the UK yet). They will print, and when they print the currency will devalue to being worthless.

You seem to be slating central banks a lot, yet propose no alternative to what you would do should the economy experience deflation, or severe inflation. Who knows, maybe you actually do have all the answers, and we could be ushering in a new, golden age of macroeconomics...

The answer is to go back to sound money backed by actual assets that helped control the spending of politicians and people instead of the debt based paper money and price manipulation by a tiny unaudited, uncontrolled and unaccountable cartel headquartered in Delaware.