Pepper sprayed for public safety.

[Adder]

Originally Posted by sebastian_dangerfield

Krugman and his ilk seem to think inflation is the only humane option.

It's a little funny to me that you've got Krugman in the forefront here. He's one voice for doing more, but only one. And he disagrees with plenty of the others.

They seem to think its painless. That debasing the value of someone's savings is somehow different than simply allowing them to collapse. This is bizarre.

Its really not. Your savings are only being debased if you've got them tied up in long term fixed-rate investments, or they are in cash. Anything earning a variable return should also benefit from higher rates of growth and employment that are associated with higher inflation.

Will that be enough to fully offset the inflation? Who knows. But it's not a simple story that savers lose from inflation, and right now we really should be more concerned about getting the debtors (basically all of us) to a healthier place.

You don't need this, but I thought it was pretty good and frankly often misunderstood.

If you have $500k, and due to govt policies allowing us to endure a collapse (think Hayek, or Mellon in the Great Depression), it drops to $200k, is this different than if due to a policy which causes hyperinflation (Keynes) the real purchasing power of your $500k becomes $200k?

How is inflation at or around the levels of Reagan's second term "hyperinflation?"

And yes, they are very different. Because in the latter scenario, your $500K increases to more than $500K.

You'll argue, no doubt, that we will never get hyperinflation, so we should run deficits for as long as it might take.

I'll argue that we can go right back to tighter money and higher unemployment if we start heading down the path of higher than desired inflation.

Instead of dicking around and trying to inflate ourselves out of the debt overhang, why not just agree to shrink it?

Because it's nearly impossible. Who do you get in a room to shrink the nation's collective mortgage debt?

But we can get there by allowing this Depression to do what Depressions should: Force creditors to write off more debt, freeing more discretionary income.

I know you're fixated on certain inter-war economists who thought Depressions served a purpose, but that's an attitude the profession abandoned long ago. First and foremost because the Great Depression proved them wrong.

The only way to get creditors to concede portions of what they're owed is through fear. Let things falter as they ought to and you will see banks engage in broad principal write-downs.

Accepting for the sake of argument that this is a good thing, you seem to be ignoring the tremendous cost of going this. You're talking about making many individuals permanently poorer (some never recover from long term unemployment) and potentially also the nation as a whole. If those costs can be avoided, why wouldn't we?

Lenders will loan to people coming out of bankruptcy, whereas a guy in deep debt struggling to stay current will receive no such offers. That's us right now.

Yes, and that's why we need looser money. Lenders need to have enough base money to be comfortable lending.

If our aim is to clear the decks of debt, why do it indirectly via monetary policy?

Because those are the tools we have.

What's your proposal and how can we make it work? Assume that no one is going to advocate purposely inflicting a ton of pain to get there.

Why not put the fear into investors that causes them to start conceding on the debts owed?

Because it causes a downward spiral that is no self correcting. That's the lesson of the Great Depression.

ETA: I think what's missing in your thinking is that one person's debt is another person's asset.

[Greedy,Greedy,Greedy]

Originally Posted by Hank Chinaski

sounds like you're really struggling over who to vote for.

Best tweet I saw today was a link to a Romney story labelled "I did not have economic relations with that company!"

Romney has been caught lying about stuff that shouldn't have been a big deal admitting. He's now going to spend the next month trying to untangle himself from a pack of half-truths, lies, and prevarications. Sooner he faces the music and comes clean, sooner he gets through it.

[Tyrone Slothrop]

Originally Posted by sebastian_dangerfield

I agree with Krugman's suggestion that unconventional purchases of debt by the govt may be helpful. We've already wildly expanded the FHA's exposure, the Fed's bond holdings. Why not go further and create a massive federal "bad bank" to run off the bad mortgages? We could fix housing tomorrow by setting up a shit bank and letting it convert all the distressed mortgages to longer term, more manageable debt.

But the rest of Krugman's suggestions are hollow. The govt can't create employment for all the workers being laid off in the private sector. The best it can do is maintain its own employment rolls, which isn't enough, and arguably damages the private sector over the longer term.

Let's stop right there. First of all, the government (federal, state, local) isn't even maintaining its own employment. It is losing jobs, undercutting anemic private sector job growth.

Second, even if adding government jobs "isn't enough," whatever that means, why not do something beneficial?

Third, why do you think that government hiring "arguably damages the private sector over the longer term?" As I've said, that is arguably true in normal times, but these are not normal times. What's the mechanism you see by which -- right now -- government hiring crowds out private investment?

Krugman and his ilk seem to think inflation is the only humane option. They seem to think its painless. That debasing the value of someone's savings is somehow different than simply allowing them to collapse. This is bizarre.

What is absolutely bizarre is that you are talking about inflation as a problem when the government is selling 10-year paper for the lowest rates ever:

The Financial Times
The demand for 10-year notes suggests a significant buyer or group of investors expect US interest rates will remain low or fall further for several more years. It also demonstrates that some investors are using Treasury auctions as a vehicle to buy large amounts of bonds, rather than relying on securing such paper via the secondary market.

In other words: No one in the market sees inflation on the horizon, and investors are parking their money in Treasuries for lack of good alternatives.

Sebby again
If you have $500k, and due to govt policies allowing us to endure a collapse (think Hayek, or Mellon in the Great Depression), it drops to $200k, is this different than if due to a policy which causes hyperinflation (Keynes) the real purchasing power of your $500k becomes $200k?

Yes. There is a trade-off between inflation and unemployment. Right now we have historically low inflation and painfully high unemployment. If we didn't have broken politics and institutions, there would be widespread consensus that we need to accept higher interest rates to get people working. But as you demonstrate, on the margin the interests of those with capital consistently trump the interests of everyone else -- even when things are this f*cked up.

But we can get there by allowing this Depression to do what Depressions should: Force creditors to write off more debt, freeing more discretionary income.

The only way to get creditors to concede portions of what they're owed is through fear. Let things falter as they ought to and you will see banks engage in broad principal write-downs. You'll see Congress allow student debt to be discharged at least in part.

Lenders will loan to people coming out of bankruptcy, whereas a guy in deep debt struggling to stay current will receive no such offers. That's us right now. We can't get a fresh start because we're not working to remove the debt overhang aggressively enough. If our aim is to clear the decks of debt, why do it indirectly via monetary policy? Why not put the fear into investors that causes them to start conceding on the debts owed? There's certainly no moral argument against it. He who invests in something that made loans to dicey credit risks deserves to lose his ass.

The best course is a giant debt workout. It's faster and far more efficient than the current stumble>print>rally>stumble>print>rally scenario we have.

So, I think we have a real problem in housing, with people who cannot get out from under debt for various reasons that boil down to a lack of willingness on the part of our political institutions to let less affluent homeowners get the advantage of crazy-low interest rates because it would affect the profits of various financial institutions that are sucking the blood out of that market. To their discredit and our harm, neither the Democrats nor the Republicans want to solve this problem -- the Republicans are openly captive to the interests of financial institutions, and the Democrats either lack conviction or will, or something worse.

But if what you're saying is that private money doesn't want to lend, instead of forcing private money to lend, the obvious answer is to have the government lend more. The solution is sitting in front of your nose but you refuse to see it.

[Adder]

Originally Posted by Tyrone Slothrop

the Republicans are openly captive to the interests of financial institutions, and the Democrats either lack conviction or will, or something worse.

Democrats are mostly captive too.

[Tyrone Slothrop]

Originally Posted by Tyrone Slothrop

Let's stop right there.

I don't usually respond to my own post, but the exchange between Sachs, Krugman and Delong here, here and here is pretty worthwhile, I think.

[Tyrone Slothrop]

Originally Posted by Hank Chinaski

In the desert these pipes are the equivalent of the reservoir. None of you have any sense of responsibility and protecting one's family from people that want to wipe them out-

Peter Beinert:

One of the most depressing things about discussing Israel in the American Jewish community is the blindly tribal way in which some Americans Jews talk about “them.” “They hate us; they don’t want peace; they teach their children to kill; they don’t think like we do.” Sometimes it’s not even clear who the “they” is: 11 million Palestinians, 300 million Arabs, 1.5 billion Muslims, all of the above? It’s a rhetoric of dehumanization, practiced by people who lack the empathy or historical memory to see parallels between the way we talk about “them” and the way anti-Semites have long talked about us. A prominent right-wing Jewish activist recently told me, in a burst of fury, that “they” are “animals.” It reminded me of an encounter I had during a book signing. A dignified, elderly, heavily accented woman came up to me. I assumed she was Jewish. “I’m a Palestinian,” she said. “People talk about us like we have tails.”

link

[Greedy,Greedy,Greedy]

Originally Posted by Tyrone Slothrop

Let's stop right there.

I wanna know right now.

[sebastian_dangerfield]

Its really not. Your savings are only being debased if you've got them tied up in long term fixed-rate investments, or they are in cash. Anything earning a variable return should also benefit from higher rates of growth and employment that are associated with higher inflation.

You're aware how the old invest, right?

Will that be enough to fully offset the inflation? Who knows. But it's not a simple story that savers lose from inflation, and right now we really should be more concerned about getting the debtors (basically all of us) to a healthier place.

Yes it is. We've been coddling investors for four years at cost to youth and workers. The disequilibrium needs to be corrected. If you're an investor and haven't built back up decently from 2008 by now, and aren't prepared to shield your money, you deserve to lose when the second wall of the hurricane comes through.

I'll argue that we can go right back to tighter money and higher unemployment if we start heading down the path of higher than desired inflation.

The best we can get with blunt monetary policy is selective inflation. Essentials will spike. Housing? Not a fucking chance... and that's the stone around our necks

Because it's nearly impossible. Who do you get in a room to shrink the nation's collective mortgage debt?

Allow bkcy modification of mortgages. The banks will start writedowns and modification in earnest very quickly after that.

I know you're fixated on certain inter-war economists who thought Depressions served a purpose, but that's an attitude the profession abandoned long ago. First and foremost because the Great Depression proved them wrong.

No I'm not. They don't serve a purpose. But they happen for a reason, and when they occur, to fight them endlessly with monetary policy is simply to prolong the things.

Accepting for the sake of argument that this is a good thing, you seem to be ignoring the tremendous cost of going this. You're talking about making many individuals permanently poorer (some never recover from long term unemployment) and potentially also the nation as a whole. If those costs can be avoided, why wouldn't we?

This is different from the current situation how? I'm arguing for accelerating the process we're already following. All those horrible things are happening anyway. On Hayek's timetable, it'll go faster.

Yes, and that's why we need looser money. Lenders need to have enough base money to be comfortable lending.

We need jobs. Credit is not jobs. Unless you believe in "job creators." The notion we'd fix unemployment if only businesses could borrow to hire, or consumers could borrow to spend, is nonsense. We need wage-created economic activity. And we can't get it because labor here is too expensive, and more and more, what we want is made elsewhere, or delivered via digital means. Stimulus is a cure for yesterday's depression. Even Rogoff, who wrote about why it's never different, is admitting this time it actually is different.

What's your proposal and how can we make it work? Assume that no one is going to advocate purposely inflicting a ton of pain to get there.

For starters:

1. Allow bkcy modifications of primary residence mortgages;
2. Allow bkcy discharge of student loan debt to 50% of face;
3. Expand HARP to cover all underwater homeowners with closing costs capped at $1000;
4. Reduce bankruptcy refiling bar from 7 to 5 years.

This will drive a shitload of lower middle class to middle class money into the economy, spurring demand. It's not a huge wave of money, but it's substantial. And it'll be natural. It'll be borrower driven, on a case by case basis.

ETA: I think what's missing in your thinking is that one person's debt is another person's asset.

I get that. You're missing my point, which is an investor in a bad risk deserves to lose. If you can't see the current rally is build on quicksand, and the last few years were a gift from Uncle Sam - a respite in which to rebuild your portfolio and prepare for the next wall of the storm - shame on you.

[Adder]

Originally Posted by sebastian_dangerfield

You're aware how the old invest, right?

In all kinds of different ways. Perhaps they are more likely to have money parked in a shitty CD somewhere, but they also get cost of living increases in the Social Security that others in the world do not get.

But now we have to make economic policy for everyone because Grandma's a shitty investor? No thanks.

Yes it is.

I don't know what this means.

We've been coddling investors for four years at cost to youth and workers.

Huh? The cost to youth and workers, who are more likely to be workers than savers, is in persisting with low inflation and low growth.

The best we can get with blunt monetary policy is selective inflation.

The best we can get with blunt monetary policy is growing NGDP. Some of that will be real growth, some of that will be inflation. As we have no policy tool that allows us to separate the two, we can do what we can do.

But growing NDGP means growing income which means lessening relative debt burden and more nominal spending.

Allow bkcy modification of mortgages.

I'm not opposed to that, but it really isn't that simple.

And we have to admit that this will make credit more difficult and more expensive to get.

The banks will start writedowns and modification in earnest very quickly after that.

Woo hoo! The bank's actually insolvent now (rather than virtually) and your savings are either gone or on the taxpayer now. Success!

On top of that, which bank agrees? The servicer? The one who sponsored the MBS? The many who hold the MBSs? The one who sponsored the CDO that included the MBS? The holder of those CDOs?

No I'm not.

Okay then, but I don't follow why you keep saying the things they said about how everything will right itself if only we go through enough pain/prices fall enough.

They don't serve a purpose.

Funny how I have this distinct memory that you said otherwise just moments ago.

But they happen for a reason, and when they occur, to fight them endlessly with monetary policy is simply to prolong the things.

Now you're going Austrian? To fight them endlessly with monetary policy is to help solve them.

This is different from the current situation how?

Your approach is to make the current hole deeper. Granted, you believe that will make it shorter and I think it will make it longer, but nonetheless, your position is that we should make things worse so they can get better.

On Hayek's timetable, it'll go faster.

Yes, that worked so well in the Great Depression.

The problem with Hayek in times like these is that interest rates cannot fall to the market clearing level because they are already at zero. That's why Hayek disciples, in this situation, should actually be calling for more inflation. The resulting negative real interest rates are how you make the market for loanable funds clear.

We need jobs. Credit is not jobs.

Businesses invest via credit.

We need wage-created economic activity.

Yes, that's why we need more national income (NGDP).

For starters:

1. Allow bkcy modifications of primary residence mortgages;
2. Allow bkcy discharge of student loan debt to 50% of face;
3. Expand HARP to cover all underwater homeowners with closing costs capped at $1000;
4. Reduce bankruptcy refiling bar from 7 to 5 years.

I like all of those as ways to help people who are in trouble.

None of them should be expected to be particularly stimulative. To the extent it means more spending elsewhere, it's directly at the expense of the investors holding the mortgage and the housing industry (not to mention the other homeowners whose home values will drop yet further).

You're missing my point, which is an investor in a bad risk deserves to lose.

First and foremost, macroeconomics is not a morality play, and enforcing moral judgment doesn't help. All of the big banks deserved to go under back in 2008. We don't allow that because the outcome of enforcing those just desserts is 1929 (or any of the bank panics of the late 19th and early 20th centuries).

If you can't see the current rally is build on quicksand

I don't know what you mean by current rally. Stock prices are basically where they were a decade ago. That's not a rally, that's a lost decade.

[Greedy,Greedy,Greedy]

Before we go any further.

[Adder]

Originally Posted by Greedy,Greedy,Greedy

Before we go any further.

Was there to be more to this?

[Tyrone Slothrop]

Originally Posted by Adder

Was there to be more to this?

Do you love me?

[Adder]

Originally Posted by Tyrone Slothrop

Do you love me?

Depends on whether you have any business to send my way.

[Tyrone Slothrop]

Originally Posted by Adder

Depends on whether you have any business to send my way.

So you're saying, let me sleep on it?

[Adder]

Originally Posted by Tyrone Slothrop

So you're saying, let me sleep on it?

Exactly.