There are other sorts of anniversaries I would prefer to be celebrating, but realism must be given its due.

You’re quite right about the need for bankruptcy reorganisation as the only way out of this mess. There is simply no way that the crisis can be “papered over” and the outstanding levels of debt honoured–particularly as the toxic unwind of derivatives proceeds. Debt levels, which on the recorded stats are already twice as bad (relative to GDP) as those prior to the Great Depression, will ultimately turn out to be worse again by god knows how many multiples, once all those positions collapse.

What we now need is a campaign to legitimise what, in normal circumstances (whatever they are) is seen as illegitimate behaviour: debt cancellation. And we need a revised financial system that removes the encouragement for debt-financed asset price speculation–I agree with you as I’ve seen on your blog that reform and regulation won’t control this beast.

In Europe, it is Italian Finance Minister Giulio Tremonti who, as a government representative, has had the courage to call a spade a spade, when he compared the financial crisis to a video game, in which every time you kill one monster, another pops up.

And when you kill all of them, along comes the super-monster, which is derivatives outstanding.

This is exactly where the body is buried!

Now panic is setting in, as investors in November have been massively withdrawing their deposits from hedge funds and financial institutions, in turn, forcing these to sell whatever assets they can.

This generates a double feedback-loop: Since the depression is coming to a head, asset prices are falling — most of them having been bought on credit in the first place — which further stresses the balance sheets of banks and hedge funds, which therefore curtail their lending even further.

These various intensifying phases of “deleveraging” of so-called structured paper are the main problem.

The volume of derivative contracts outstanding was said to be, according to the Bank for International Settlements, $675 trillion at the end of 2007; the French magazine Marianne recently gave the figure as $1.4 quadrillion, but it could be much more.

If an attempt is now made to honour what these bankers themselves call “toxic waste”, then, on the one hand, this leads to hyperinflation, since more and more liquidity is pumped in to try to back up the virtual values; but at the same time, it brings on deflation, since the collapse of the real economy leads to falling prices.

This is the reason for the breathtaking speed of collapse of the real economy worldwide — the auto sector, the steel industry, petrochemicals, construction, shipping, etc., etc.

And it is a global phenomenon: The U.S.A. is plunging into depression; China’s American export market is collapsing; the Chinese economy is falling apart; China is no longer buying textile machinery in Germany; shipping is collapsing, since in the four or five weeks that it takes a ship to go from Europe to Asia, conditions have dramatically changed, so that the letters of credit are no longer accepted, etc., etc.: a downward spiral to … !

Until an orderly bankruptcy reorganisation of the financial system is carried out.

I have to agree that Greenspan is no Austrian–I made a comment on ABC Radio National Perspective recently that if he had been true to his alleged Austrian beliefs, he would have stood back in 1987 (let alone later) and not done any of his rescues.

However, to pre-empt a post from a new member Anarcho (that I’ve already approved, but which for some reason hasn’t got through to the blog yet–Wordpress and/or my ISP is doing some strange things on posting right now), the Austrian theory of both money and cycles is deficient.

I’ll add just one thing to that post–prior to its arrival here. As well as it being quite valid to describe fractional banking as an evolutionary development in capitalist banking, there is more to credit generation than fractional banking alone. In fact, the fractional money theory can only explain about 10 percent of the money supply, and the timing of economic data strongly contradicts it as a sole model of money creation.

Were it true, movements in Base Money and/or changes in reserve ratios would precede movements in credit/broad money. In fact, the sequencing is the reverse: movements in credit money precede changes in Base Money by roughly a year.

The empirical and theoretical issues behind this are ones I intend explaining in the long-promised post on the dynamics of credit money.

Yes, like Trotskyists they have successfully predicted ten of the last 2 recessions…

The problem with the “Austrian” school is that it does not recognise that fractional reserve banking is a natural evolutionary development by profit seeking companies (banks). In other words, it complains that capitalist banks act like, well, capitalists!

Moreover, their “theory” of the business cycle is rooting in equilibrium (the “natural” rate of interest). Given that the rest of their ideology assumes (or, more correctly, they state) that equilibrium cannot be reached and so is a meaningless concept, this is somewhat ironic.

Simply put, banks in the pursuit of profit will set interest rates appropriately. During a crisis and after it, the interest rate will approximate the “natural” rate but (as Minsky argued) with the boom the banks will seek to increase profits, adjust to demand and so create credit. The interest rate no longer is close to the “natural” rate because of the entrepreneurial actions of banks.

But the credit creation comes in response to other factors and while it may make them bigger, it does not create them.

Marx wrote interesting material on credit and how it interacts with the real economy. It contains the true part of the “Austrian” school (namely that credit expansion can make a boom bigger and a bust deeper) but without the silly bits.

Ultimately, there is a reason why von Hayek lost the business cycle debates of the 1930s. Sraffa and Kaldor successfully destroyed his argument and that is why the “Austrian” school remains a sect.

for more discussion: http://anarchism.pageabode.com/afaq/secC8.html

The Austrian school predicted this mess. Fractional Reserve Banking created the biggest credit bubble in history.

Reasons, Steve and others: I sent Steve copy of my paper and I’ll set up a link when I get back.

Reason: I agree, when in doubt brute force it. I could build a model, say using tax data (I wish), of every persons’ income and tax, then put in tax changes and calculate, basically exactly, the impacts on everyone.

There seems to be a reluctance to creating models using the massive data available now, people keep using appriximations based on, sometimes, questionable assumptions.

Technically I think it is the a combination of attitude and software that people use. A lot of large data handling software is inadequate for mathematical/statistical calculations. The ones that do the maths/stats well, often struggle with large data volumes.

Me? I use ‘old fashioned’ APL which does both extremely well, so I regularly analyse and build models based on large volumes of very low level data. Hundreds of gigabytes of data? Run it on my PC easily.

I once did a project for a major organisation, downloading hundreds of gigabytes of very low level data .. and ran analyses on a laptop, live in front of people. Twice I’ve built costing models for insurance companies that calculate the cost (and profit) of every single person, with the last one I could reconcile back up to the published accounts to an accuracy of 1%.

With the computing power available nowadays it is easy, real tough back in the days of punched cards or “shudder” paper tape.

Good luck on the road.

Unfortunately, certainly for economics, these types of maps can change the territory. They forgot that also.