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Old 08-30-2011, 06:44 PM   #41
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[Edit: Full disclosure - I work for a very conservative financial institution that had zero sub-prime exposure in its bank, zero Lehman exposure in its money market mutual fund and zero exposure to Bernie Madoff in its alternative investments desk and I am not sure our firm would not have gotten washed out with the flood if there was no government intervention in 2008.]

im am art student, what do i know.
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Old 08-30-2011, 07:05 PM   #42
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A) Why is money in the bank better than money in the sales ledger of the used parts dealer?

B) I am not sure that banks need your money to fund new loan growth. That seems to imply that banks need reserves before creating new loans and I do not think that is accurate. I might argue that banks are not reserve constrained but demand constrained at this stage (and possibly in all stages).

Under current law, banks are allowed to loan money equal to multiple times the amount of reserves they hold: therefore money in the bank = some multiple of that same amount in someone else's sales ledger. As a bank gets more reserves in the form of consumer savings accounts, those increased reserves are immediately reflected as lower interest rates. Lower interest rates stimulate more borrowing. This is "free market money"

If a bank has to borrow from the Federal Reserve, the Federal Reserve charges a "Federal funds rate" - the consumer bank charges interest on money that it loans out, and then it adds the "federal funds rate" to that interest. When the Federal Reserve lowers the "federal funds rate", that reduction is passed directly to the consumer. This money is derived out of thin air, and is the polar opposite of "free market", and it significantly overwhelms the free market's ability to control lending.




global banking system
AFAIK, there is no such thing. (I understand that we borrow/lend/give money to other countries all the time) We would have to place absolute financial trust in every other country involved, and at this point, I suspect that we can count the number of countries we financially trust on one hand. Furthermore, who the hell would trust us?

I am honestly not sure what would have happened to home values. They probably would have dropped even more as unemployment went higher and bankruptcy workouts took long enough that a much larger percentage of people opted for strategic defaults.

Housing prices are still artificially inflated, otherwise they would all be sold. Remember the $8,000 "first time homebuyer" credit? It did not give first time homebuyers $8,000 more purchasing power - which means that it did not give homebuyers $8,000 more house; the real effect was that it gave homesellers $8,000 more resale value... THE $8,000 FIRST TIME HOMEBUYER CREDIT WAS A REAL INCENTIVE TO SELL, and only a perceived incentive to buy. Prior to the credit, a home might have been worth $100k. Upon knowledge that the credit existed, that exact same home was now worth $108k. The secondary *real* effect was that second-time homebuyers, who were not eligible for the credit, could now afford $8,000 *less* house than before.
a
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Old 08-30-2011, 09:07 PM   #43
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A) Why is money in the bank better than money in the sales ledger of the used parts dealer?
It isn't necessarily. What's more important to realize, is that it is better for private individuals or companies to spend the money than gov't. Gov't, spending other people's money, will tend to be less careful how it's spent.

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I might argue that banks are not reserve constrained but demand constrained at this stage (and possibly in all stages).
This is only true now; banks have excess reserves. The official money multiplier stats show this. Banks aren't lending because they're afraid that the borrower will go belly up, in this economy. In more normal times, banks lend all the way to the hilt (fractional reserve requirement) as set by the FED. In a free market, each bank or group of banks will lend at a ratio which they think is a good balance between risk and profitability. With the FED acting as a rich uncle to bail them out, they lend to the highest ratio possible. The whole system is overleveraged, which was gonna kill the imprudent banks in 2008, if not for the bailouts.

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However, I am not 100% sure how this total hands-off approach would have worked in 2008.
... I believe the ensuing chaos would have made for a great post-apocalyptic movie script.
Read this for a counterpoint:
http://mises.org/daily/5113/The-End-...ony-Capitalism
Paulson and the big banks' scare tactics to get bailout money from Congress, are debunked. Basically the carnage would have been limited to the large over-leveraged banks that deserved to fail. Small businesses (the largest employers in this country) would still have been able to borrow, after the dust settled after a couple of weeks.

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Money market mutual funds could have been decimated,
If you invest in a loser, you deserve to lose your investment. That correction would have been painful short term, but better long term. As it is now, the system is being propped up. The pain will be worse later when the final correction happens.
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Old 08-30-2011, 09:11 PM   #44
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inherent riskzzzzzzzzzzzzzzzzzzzzz
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Old 08-31-2011, 09:17 AM   #45
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fooger03 - I think you are coming to the same conclusion I did: that bank lending is not reserve constrained, but demand (or possibly capital) constrained? That is, a bank need not have reserves prior to lending.

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It isn't necessarily. What's more important to realize, is that it is better for private individuals or companies to spend the money than gov't. Gov't, spending other people's money, will tend to be less careful how it's spent.
I made no mention of whether it was better to be in the hands of the government or the private sector, only the bank vs the retailer. My point was related to the concept of reserve restrained lending.

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This is only true now; banks have excess reserves.
I am not sure I agree with your assessment. I think this would have been true on the gold standard or some other commodity-backed currency, but not true with the present-day US system.

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Read this for a counterpoint:
http://mises.org/daily/5113/The-End-...ony-Capitalism
Paulson and the big banks' scare tactics to get bailout money from Congress, are debunked.
Only a quarter of that had anything to do with the collapse of lending in 2008 and it touched only on one very narrowly defined niche of the market. I am certainly not in any way convinced that the author "debunked" the need for government intervention in 2008.

That said, I think there was a lot of relevant information. Please note that, because I reject portions of an argument or find it incomplete, does not mean I reject all aspects of that argument. Again, the author made what I feel are many excellent points regarding leverage, corporate favoritism, etc.

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Basically the carnage would have been limited to the large over-leveraged banks that deserved to fail. Small businesses (the largest employers in this country) would still have been able to borrow, after the dust settled after a couple of weeks.
I will say again that I think this is exactly how it should have played out on paper. BUT - having been on the "inside" of an extremely well-run financial institution during that time - one that did not need to accept TARP money and held way more cash and ran way less leverage than its peers (and showed net profit throughout the whole ordeal) - I am not sure that is how it would have played out in the real world.

This will be my constant refrain when trying to apply strict Keynesian or strict Austrian philosophies to the real world as it has existed for the past 40 years.

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Given "perfect information", it is impossible for free market to fail.
I think I would be in total agreement with this.

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Originally Posted by fooger03 View Post
Perfect information: means that all consumers know all things, about all products, at all times (including knowing the probabilistic outcome of all future events) , and therefore always make the best decision regarding purchase. In competitive markets, perfect competition does not require that agents have complete knowledge about the actions of others; all relevant information is reflected in prices.
But this is where I have a disconnect between theory and application. That is basically the definition of the rational efficient market hypothesis and I reject the premise that such markets are common place (if they exist at all) and strongly reject that the broader equity, futures and credit markets match that definition.
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Old 08-31-2011, 10:11 AM   #46
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A) Why is money in the bank better than money in the sales ledger of the used parts dealer?
that comment was directly related to post #17 and #18.

There's a belief that when rich people get richer, they don't spend thier money. Or when people get a tax break they just bank the money and don't dump it back into the economy. Or when there's economic scare, people get more wise with how they spend a buck.

This is a big argument for goverment stimulus spending. They'll say stuff like "during the great drepression, people saved their money, therefore the government has to spend it." In a nutshell, they belive that when the flow of money stops, so does the economy.

The theory is flawed and proven wrong time after time. One example is Japan's "Lost Decade", google it.

Basically, they believe that if you take millions of dollars away from the wealthy, who may or may not be saving the money, and give it to poor people, they will spend it [because saving for future is evil and unwise] and thus stimulate the ecomony.

Any idiot can figure out this is a stupid concept; that All Spending = All Income. If this were true, then can someone explain why the highest government spending and debt rate essentially doubled our unemployment rate?

These people do not believe that there is a human factor in the economy, they disregard incentives. They ignore that the FACT that the less incentive they have to work, the less they work and the more incentive they have to spend, the more they spend. They forget that people are smart and know when they're being robbed or cheated.

They believe the government can change the size of the pie, so to speak. That if I have a big slice of pie, they can take a sliver of my piece and give it to someone with a smaller slice. And when they do this, they believe that the size of the pie has gotten bigger, but in fact, it's quite possible that it got smaller...because the economy is not a math problem. Since my size of the pie became smaller, I might not want to eat the whole piece all at once, since I don't have as much.

If you want to stimulate an ecomony, you need to look at incentives, not robbery. People increase their spending when they feel that their own personal economic situation is either good or getting better and people begin to decrease their spending when the opposite seems true to them.

Simple and true.

Could that explain why a direct stimulus of our economy by the government and the current inflation spending has done ziltch for substaining weath creation? We have greatly increased government spending and yet our economy continues to lose jobs and lose wealth. Why?

Could it have to do with what I just said? Yep.

Our last government stimulus in the economy caused people both rich and poor, employer and employee, to slow their production down and cause them to take a very defensive position towards protecting the little wealth they have from further loss. Whoops, who would have thought...

Now we keep hearing calls of more taxation, and more stimulus packages. So what do the people that know how to produce wealth do? Well, they get defensive and entrench further to protect their current economic situation. This causes more job loss and more loss of wealth. At the same time, this causes the working man who relies on a steady wage, to spend less and less.

The Human Factor. The "I’ve just got to hold on to what I have and wait for things to get better" Factor.

The problem is, this loss of jobs and lost revenue comes back full circle. Like I said, I kepe hearing talks of a second stimulus and I'm sure this jobs bill has more usless spending and tax hikes. So what will happen?

**** will continue to be shitty until some sort of balance is acheieved. But this just means things stopped getting worse...not that we are operating at full steam ahead. They won't improve until all the policies that were created to solve the problem get lifted. The profit motive needs ot be increased so the producers can feel comfortable enough to put their labor and capital at risk again.

So to summerize this issue: Government does not create wealth. Printing money is counter-productive. When money is in the bank, the money is working.


Full disclosure: I went to art school for 2 years before transferring to a Mass Communications program where I got a degree in Advertising. I received a D in Art History but an A in my newly required Econ 101 class. This is the only formal training I have on the subject, but I have a massive bank account, 401k, roth IRAs, Rollover IRA and credit score to back me up.
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Old 08-31-2011, 10:23 AM   #47
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Brain - When I have some more time, I'll go through your post in more detail. In brief, though, you (I am sure intentionally) rely too much on colorful hyperbole, attack exaggerations that become straw men and seem to muddle political and economic philosophies.

In sum, I think you are pointed in the right general direction but your analysis falls short in detail and nuance. Your implications regarding Japan is a perfect example.


That said, I do appreciate that this is a healthy conversation and I think informative for everyone (myself included).
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Old 08-31-2011, 10:37 AM   #48
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I like colors. I'd rather pull-part the opposing theory than actually go into detail about money in the banks specifically.

While there is much more to it, basically money in the banks, to me in its most simplified explanation, more wealth in the hands of the people who spend and create it. If people don't have the money to put into banks, they surely ain't going to be spending it and risking it.

I'll just quote this and actually go get some work done:

Quote:
Consumption is the final, not the efficient, cause of production. The efficient cause is savings, which can be said to represent the opposite of consumption: they represent unconsumed goods. Consumption is the end of production, and a dead end, as far as the productive process is concerned. The worker who produces so little that he consumes everything he earns, carries his own weight economically, but contributes nothing to future production. The worker who has a modest savings account, and the millionaire who invests a fortune (and all the men in between), are those who finance the future.
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Deferred consumption (i.e., savings) on a gigantic scale is required to keep industrial production going. Savings pay for machines which enable men to produce in a day an amount of goods they would not be able to produce by hand in a year (if at all). This enables the workers in turn to defer consumption and to save some of their income for their future needs or goals. The hallmark of an industrial society is its members’ distance from a hand-to-mouth mode of living; the greater this distance, the greater men’s progress.

The major part of this country’s stock seed is not the fortunes of the rich (who are a small minority), but the savings of the middle class—i.e., of responsible men who have the ability to grasp the concept “future” and to deposit one dollar (or more) into a bank account. A man of this type saves money for his own future, but the bank invests his money in productive enterprises; thus, the goods he did not consume today, are available to him when he needs them tomorrow—and, in the meantime, these goods serve as fuel for the country’s productive process.
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Agriculture is the first step toward civilization, because it requires a significant advance in men’s conceptual development: it requires that they grasp two cardinal concepts which the perceptual, concrete-bound mentality of the hunters could not grasp fully: time and savings. Once you grasp these, you have grasped the three essentials of human survival: time-savings-production. You have grasped the fact that production is not a matter confined to the immediate moment, but a continuous process, and that production is fueled by previous production. The concept of “stock seed” unites the three essentials and applies not merely to agriculture, but much, much more widely: to all forms of productive work. Anything above the level of a savage’s precarious, hand-to-mouth existence requires savings. Savings buy time.
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Old 08-31-2011, 11:06 AM   #49
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Maybe they should just pass a law requiring everyone to buy one.

Worked for healthcare right?


Besides the disconnect and misnomer stated there, (Should have been called "Forced Health INSURANCE act" and not "Health CARE reform") i did lol hard.


Especially as someone who works deep within the biggest health insurance company in the country.
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Old 08-31-2011, 11:57 AM   #50
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Originally Posted by Braineack
I'd rather pull-part the opposing theory than actually go into detail about money in the banks specifically.
I won't say definitively, but I am beginning to believe that the specifics of the banking functions in the US (and the countries that share our economic model) as it operates today, in reality is very important and that few people really have a great grasp of it (myself and most of the "professionals" on TV or in print included).

For example:

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Originally Posted by Braineack View Post
While there is much more to it, basically money in the banks, to me in its most simplified explanation, more wealth in the hands of the people who spend and create it. If people don't have the money to put into banks, they surely ain't going to be spending it and risking it.
I am beginning to think that "money in the banks" is not necessarily serving an expansionary function by default in all scenarios. I know you are trying to keep it to bullet point-style discussion for brevity's sake.

However, I think this oversimplification and/or an ignorance of how our banking and monetary system actually works is incorrectly influencing the economic models of a majority of the orthodox "schools" on both sides.
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Old 08-31-2011, 12:11 PM   #51
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I didn't bother expanding on the banking issue, only that the current "truth" in Washington is that money in banks = bad and pointing out why it's wrong.

I don't believe there is a need to explore the banking system and what good can come out from banks having capital on hand. I over simplified into a metaphor on purpose. Basically, the more wealth in banks = a larger pie.

I like to do this, my feeble minds demands it.
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Old 08-31-2011, 12:54 PM   #52
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fooger03
This will be my constant refrain when trying to apply strict Keynesian or strict Austrian philosophies to the real world as it has existed for the past 40 years.
Do you only disagree with the statement "in 2008 there should have been no bailouts", or do you also disagree with this statement?:

"if not for the crony capitalism and central bank monopoly, we wouldn't have had this whole unstable financial system in the first place"

Bailing out the banks wasn't strictly Keynesianism either. Keynes merely believed in deficit spending during recessions. He never said "let the financial industry grow enormously due to overleverage and bail them out when necessary".

Quote:
Originally Posted by Jason
Banks have excess reserves during recessions because they are afraid to lend
Quote:
Originally Posted by Scrappy
I am not sure I agree with your assessment. I think this would have been true on the gold standard or some other commodity-backed currency, but not true with the present-day US system.
During good times banks will lend to the hilt allowed by the FED's reserve requirements because it maximizes profit.

Also, the more fundamental Austrian position is NOT the "gold standard" but *free market banking*, no legal tender monopoly, and competing central banks. The only thing gov't will do is to enforce contracts and prosecute fraud. Therefore by definition each bank or central banks will have its own reserve requirement and thus will really be no such thing as "excess reserves" like with today's monopoly central bank.
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Old 08-31-2011, 01:05 PM   #53
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Originally Posted by fooger03
Perfect information: ... In competitive markets, perfect competition does not require that agents have complete knowledge about the actions of others; all relevant information is reflected in prices.
Quote:
Originally Posted by Scrappy
But this is where I have a disconnect between theory and application.
The free market isn't perfect in that it produces perfect results for everyone everytime, nor produces a 100% optimized economy. It's not that the free market has nor requires perfect information.

The important concept is that knowledge in society is spread out amongst millions of actors. And that no central economic authority has more knowledge and thus improve on the free market. That a central authority can improve things over a de-centralized setup is what Hayek calls The Fatal Conceit. Greenspan must have fallen for this when he went from writing his famous essay on gold, to being central banker.

Additionally, centralized power of any form attracts the corrupt, and leads to corruption. The power to intervene in the economy is the power to dole out economic favors. The few get rich at the expense of the many.

Last edited by JasonC SBB; 08-31-2011 at 02:11 PM.
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Old 08-31-2011, 01:50 PM   #54
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Don't have the time to re-write this in my own thoughts but wanted to pass it along anyway. Feel free to disregard or to mock with funny cat pics.

The Monetary Tsunami is Coming

Quote:
In his speech at Jackson Hole, Wyoming, on August 26, 2011, the Fed chairman disappointed most pundits. He did not promise another massive infusion of fake money, i.e., QE3. I suspect that a strengthening in bank lending is an important factor behind the Fed's decision to postpone the pushing of more money into the economy.

The yearly rate of growth of our measure for banks' inflationary credit jumped to 8.2 percent so far in August from 4.3 percent in July. A visible strengthening in commercial bank inflationary credit, i.e., credit "out of thin air," will provide the "necessary" monetary stimulus. This means that the massive amount of money pumped by the Fed since 2008 (over $2 trillion) is starting to be funneled into to the economy by the banks.



This has long been the hope of the Fed, and the goal of the huge increases in bank reserves that have been created during the downturn. Until recently, these reserves have been stuck in the system unable to find lenders and borrowers willing to make a deal. This has been a good thing because prices have been held somewhat in check.

That is now changing. As the pace of lending picks up, and the fractional-reserve system of loan pyramids kicks in, we could see new floods of money pouring through our economic life and causing untold damage.


For the time being, the pace of pumping by the Fed remains buoyant. The yearly rate of growth of the central bank's balance sheet stood at 23.6 percent so far in August against 23.1 percent in July. The growth momentum of our monetary measure for the United States (AMS) jumped to 13.1 percent this month from 11.8 percent in July.



Now, according to most experts, massive monetary pumping is going to ignite inflationary expectations, which in turn will give the necessary push to consumer outlays.

Once consumers start spending more, via the famous Keynesian multiplier, this will reinvigorate general economic activity and will put the economy onto a path of self-sustaining economic growth. The key in this way of thinking is that currently there is a problem with consumer outlays that, for various reasons, are not strong enough to revive the economy.

For instance, rising unemployment causes people to be cautious in their spending, which, according to popular thinking, is bad news. Hence policies aimed at lifting employment must be introduced in order to get the economy going. Digging ditches or introducing various public projects, such as building roads, is strongly recommended.

According to this way of thinking, if the private sector is reluctant to boost spending then it is the duty of the government and the central bank to do so in order to bring the economy onto a self-sustaining economic-growth path.

This means that government and central-bank policies must err on the loose side, implying that the Fed should aggressively push money, which together with very low interest rates and loose fiscal policies, is expected to revive consumer confidence and push economic activity forward.


This is a good summary of the views of Bernanke, who believes that the key cause behind the Great Depression of the 1930s was inadequate pumping by the then-Fed. This time around Bernanke is determined not to repeat the same error.

Note again that, according to popular thinking, boosting the overall demand for goods and services is the key for the strengthening of US economic growth.

It's true that a strengthening in the demand for goods and services is required for an economic revival. However, any increase in demand must be fully backed up by an increase in the prior production of final goods and services. This increase in demand must be supported by the prior increase in saving and not by loose fiscal and monetary policies.

Neither monetary pumping nor any form of stimulatory policy can generate more real funding; rather they lead to the diversion of funding from wealth-generating activities to non-wealth-generating activities. These types of policies reduce the amount of available real funding to wealth generators and thus undermine the process of real wealth generation economic growth comes under pressure on account of these policies. (It leads to capital consumption. Instead of planting the seeds in order to reap a crop in the future these policies cause people to consume the seeds. Obviously one shouldn't be surprised that no future crop could emerge as a result. Yet policy makers are trying to convince us that one can eat the seeds and also have a crop.)

Contrary to most experts including Bernanke the more aggressive the Fed's policies are, the worse the economy is going to be. If all that is required to revive the economy is pushing more money, then all third-world economies would be very wealthy by now.

The latest trends in banking foretell the possibility of very dangerous times ahead where developed economies go the way of such undeveloped economies and destroy wealth through inflation in the name of stimulating production. As we may soon discover yet again, printing money is no substitute for real wealth creation.
Emphasis mine.
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Old 08-31-2011, 02:12 PM   #55
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The Keynesian emperor has no clothes.
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Old 08-31-2011, 02:17 PM   #56
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Yet Krugman is alive and well...and oh yeah, ruling.
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Old 08-31-2011, 02:27 PM   #57
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Quote:
Originally Posted by JasonC SBB View Post
Do you only disagree with the statement "in 2008 there should have been no bailouts", or do you also disagree with this statement?:

"if not for the crony capitalism and central bank monopoly, we wouldn't have had this whole unstable financial system in the first place"
Yes, I am much more supportive of the second quote than the first.

Quote:
Originally Posted by JasonC SBB View Post
Bailing out the banks wasn't strictly Keynesianism either. Keynes merely believed in deficit spending during recessions. He never said "let the financial industry grow enormously due to overleverage and bail them out when necessary".
Thank you for stating that. "Keynesian" gets thrown around like "liberal" or "Tea Party" as though it were a slur, when most people don't understand the details of the ideas behind them.


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Originally Posted by JasonC SBB View Post
During good times banks will lend to the hilt allowed by the FED's reserve requirements because it maximizes profit.
Or, in other words, they lend based on demand for loans - not the availability of deposits or reserves. Said another way, loans may actually create deposits not the other way around.

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Originally Posted by JasonC SBB View Post
The free market isn't perfect in that it produces perfect results for everyone everytime, nor produces a 100% optimized economy. It's not that the free market has nor requires perfect information.
Fair enough, but in the real world, there are monopoly central banks, there are political interventions, information is vastly disparate among actors and the actors are not always rational (or ethical).

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Originally Posted by JasonC SBB View Post
Additionally, centralized power of any form attracts the corrupt, and leads to corruption. The power to intervene in the economy is the power to dole out economic favors. The few get rich at the expense of the many.
You'll get no real argument from me there.
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Old 08-31-2011, 03:28 PM   #58
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lawls.

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Standard & Poor’s is giving a higher rating to securities backed by subprime home loans, the same type of investments that led to the worst financial crisis since the Great Depression, than it assigns the U.S. government.
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