There’s an interesting post on the Atlantic by Jim Manzi, Stimulus predictions: put up or shut up, that calls on economists who are making predictions about what Obama’s stimulus package will or won’t do to present their models on which these predictions are based.
In part, he says:
So here’s what we would need to falsify a prediction. Anyone who claims to know the impact should escrow a copy of the source code of the econometric model that is used to make the prediction, along with a stated confidence interval, operational scripts, and assumptions for all required non-stimulus inputs that populate the model with a named third-party. Upon reaching the date for which the prediction is made, the third-party should run the model with the actual data for all non-stimulus assumptions and compare the model result to actual. Any difference would be due to model error. We actually still would not be able to partition the sources of error between “error in predicting causal impact of stimulus” and “other”, but at least we would have a real measurement of model accuracy for this instance.
Of course, I sincerely doubt this will happen. I wonder why not?
As readers of this blog will understand, I don’t make empirical predictions from my models, but I do make qualitative ones; and my models aren’t the econometric giants that conventional economists build, but smaller models that, in contrast to the econometric lot, are truly dynamic (for those who don’t realise that standard economic models aren’t genuinely dynamic, please read this blog post “Why Did I See it Coming and “They” Didn’t?” ).
So I’ve taken up Jim’s challenge, and wrote the following comment on his blog:
Dear Jim,
I’m willing to take your challenge, but from an unusual perspective.
While I am an academic economist, I don’t build nor believe in the type of econometric models that dominate economics these days–generally so-called “New Keynesian” or “Dynamic Stochastic General Equilibrium” models.
Instead I build nonlinear dynamic models based on Minsky’s “Financial Instability Hypothesis”, and I have started constructing a strictly monetary model of a pure credit economy.
My predictions based on these models are qualitative rather than quantitative, but on the grounds of Minsky’s extremely prescient hypothesis the sheer scale of private debt that has been accumulated, and the abundant historical data on debt with which we can review past economic performance in the light of Minsky’s hypothesis, I have been arguing that this crisis is beyond bailouts.
Therefore while I think the bailouts are better than doing nothing, ultimately I see them as futile. All they will do is replace some private debt with even more public debt as has happened in Japan (if the spending is debt-financed), or pump fiat money into the economy only to see it disappear into debt repayment and not reflate the economy if (as Bernanke is now doing with M0) the helicopter approach is used.
To check my reasoning and qualitative predictions on this front, I proffer two models that are elucidated on posts on my blog http://www.debtdeflation.com/blogs:
http://www.debtdeflation.com/blogs/2008/11/26/parliamentary-library-vital-issues-seminar/
and
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
The former includes a model of Minsky’s Hypothesis built in the systems engineering program Vissim, which is downloadable from the blog; the latter details a model of a pure credit economy that undergoes a credit crunch, using the mathematics program Mathcad.
The former can be downloaded and run; the latter I only explain in the post, though there is a draft of a forthcoming paper that details the mathematics of the model:
http://www.debtdeflation.com/blogs/wp-content/uploads/papers/NotKeenOnBailoutsFinal.pdf
Both models, which I’m now working on integrating and extending, imply that there is no way out of this crisis while we still in effect honour the debt that was run up during this speculative bubble. We either have to inflate it out of existence, or selectively abolish it.
Since, as you’ll see from the second post above, I also doubt the possibility of causing inflation simply by driving up M0, the second option is the only one that I expect will work: at some point, to end this crisis, much of the debt is going to have to be repudiated.
I’ll keep an eye on that blog entry to see what eventuates, and whether any neoclassical economists submit their models for scrutiny.
February 8th, 2009 at 11:38 am
If I might off a prediction, mainstream economics will ignore the challenge.
They will then continue to call themselves a “science”, despite the fact that their methodology is not published, and their results are not replicable.
February 8th, 2009 at 1:12 pm
I seem to remember something about how floating currencies were meant (in theory) to mitigate against large current account deficits, as the strenght of demand for a currency would affect terms of trade and so adjust imports and exports accordingly. (I don’t know how repatriation of profits fits in with this.) With the size of our current account deficit does theory need re-evaluating here, or am I remembering this wrongly?
Speaking of the CAD, what I would like to know is how international trade imbalances fit in with the description of the way credit and the money supply are created (re Cavaliers of Credit). Steve, you seem to be suggesting that banks borrow money eg from overseas to retrospectively make up their required fractional reserves, to cover the amount of credit they have already created. Do they never borrow in order to lend on to others eg for housing loans? The common perception (ie mine) is that what has been going on with the asset bubble is at least in part a great inpouring of cash into net debtor nations from creditor nations, which due to bad banking regulation and misconceived economic controls, has gone into unproductive investments (just like in the ’70’s and ’80’s with Latin American debt and oil dollars). How does this idea fit with endogenous credit creation?
February 8th, 2009 at 1:13 pm
So many neoclassical economists hide behind a thin veil where they pretend to possess superior quantitative skills, but it is a house of cards.
Most of them stumble when asked to contrast Fourier synthesis vs. analysis, much less partial differential equations.
This Atlantic reporter appears to be no exception.
In my studies of the literature, I am thunderstruck by the inferior quantitative methods of “mainstream” economists as compared with epidemiologists or medical researchers in general.
For example, neoclassical economists’ eyes roll over when I point out the complete absence of kappas in their work, which makes quite a bit of it deeply suspect.
Kappas are used in epidemiology to denote “interrater reliability” i.e. how many doctors would come to the same diagnosis when presented with the same set of data.
It’s a reality check on a study’s findings, but is never employed in economics, at least in the several hundred peer-reviewed economics papers I have studied over the years.
Along similar lines, we have the much ballyhooed Wilhem Buiter, darling of the neoclassical blogosphere and the Wall Street Journal, whose Jackson Hole paper of 2008 recently proclaimed that the term “tail risk” was “jargon” despite that term being routinely used in decision matrices employed by medical schools throughout the world.
Matt Dubuque
February 8th, 2009 at 1:30 pm
The “after the fact” borrowing from other banks to meet reserve requirements generated by a loan can and does happen within the domestic system Margaret,
but I’m also sure that some of the international borrowing that banks have undertaken is because they calculated at the time that this was a cheaper option than doing so on the domestic market. Maybe BullTurnedBear has some internal knowledge on this?
As for the floating of currencies and the automagical (as a colleague of mine likes to describe it!) elimination of all current account deficits and surpluses, this was another neoclassical theoretical fantasy that has proven to be wildly at odds with reality. Persistent enormous deficits and surpluses have been the rule rather than the exception. It, like all other neoclassical theories, was an equilibrium notion that needs not so much revision as wholesale rejection.
February 8th, 2009 at 3:17 pm
Steve, thanks for your reply. The current account deficit seems one very big obvious disconnect between theory and reality, that it is strange that government is not very much put under question on this, as to at what point they ask their expert economic advisers to ‘please explain’.
On the borrowing that banks do, I may not have explained my question very well. I am not disputing that banks do borrow for purposes such as to make up their fractional reserve requirements. What I mean is, if banks do borrow money to lend on to customers in Australia, whether the money is sourced domestically or from overseas, then is not at least this portion of their lending from ‘real’ money (ie the lenders will want it back with interest) rather than it being this endogenously created credit (is created out of thin air on their books). Where do trade imbalances that creates all this spare cash held by some nations and needing an outlet, fit into the picture of asset bubbles and poor credit practices? I understand that you may not have the time to reply.
February 8th, 2009 at 6:25 pm
I know that most of the media avoids the “D” word like the plague but here are two links that should make it clear where the world is heading.
IMF Says Advanced Economies Already in Depression
http://www.bloomberg.com/apps/news?pid=20601087&sid=a6aaWZ8ab8yU&refer=home#
GE chief warns on US depression threat
http://www.ft.com/cms/s/0/9cdf7854-f3b6-11dd-9c4b-0000779fd2ac.html?nclick_check=1
Of course Australia is different – we have a fairy godmother that will turn the $trillions in foreign debt into pumpkins.
Hi Margaret
On the current account deficit – there is now a sharp fall in demand for our exports which is unlikely to be matched by the small fall in imports – but this is not the main problem. The big issue is that Australia has an interest/dividends bill of around $6 billion each month that we have effectively been paying for by “borrowing” an additional $6 billion in foreign debt/equity.
As the source of foreign “cash” dries up we are faced with the options of
- a dramatic drop in imports
- Government borrowing overseas then lending to the private sector
- Selling off the farm/mines
- Or a combination of all of the above.
Refinancing of existing Debt only makes this situation even more disastrous if banks are unable to find willing lenders.
February 8th, 2009 at 7:00 pm
Stats, see my comments under the “Today Tonight” thread.
This is one of Australia’s greatest dangers at the moment. We borrow foreign currency to pay foreign currency loans. And we have no significant reserves.
Managing this, without a collapse and the IMF coming is, arguably, the Govt’s single biggest challenge.
There are no easy options. Imports have to drop significantly, but there goes the retail industry and hello to large numbers of unemployment.
Doing this under the WTC rules is not easy, though there is a sneaky way by varying GST rates. Make all ‘luxury’ (ie mostly imported) goods all high GST (25%+), drop it on essential (mostly domestic) goods (1%). Fiddle with the FBT to make Australian cars cheaper (make changes for ‘family’ cars for ’social equity family friendly’ reasons). Do it right and it is revenue neutral. Add in some urgent ‘dumping’ investigations and waffle away complaints from the WTC (which won’t last much longer anyway)and our ‘free trade’ partners (when the US inevitably complains start talking about halting F-18, F-35, wedgetail and Boeing 787 orders due to foreign currency shortages). Repeat with evryone else.
February 8th, 2009 at 9:13 pm
Hi all,
Did you guys see this story in the Australian?
http://www.theaustralian.news.com.au/business/story/0,28124,25019161-5018019,00.html
Opening two paragraphs:
MORE than 100,000 small- and medium-sized enterprises could hit the wall this year as banks tighten their lending requirements and big business customers delay paying invoices.
According to research from Dun & Bradstreet, the country’s leading credit report company, one in nine companies have fallen into the “high risk” category of financial distress, with small businesses facing the biggest likelihood of failure.
February 9th, 2009 at 12:05 am
Hi Oldskeptic
I agree that imports have to drop – the problem is that the size of the drop is going to make a dramatic impact on our lifestyle – eg total petrol imports are $3 billion a month, motor vehicles just over $1 billion
I would be interested in your thoughts on which categories Australia could reduce imports by a total of $6 billion a month – (lets assume that banks and companies can roll over existing debt) I think that raising an import duty on oil isn’t going to reduce consumption by very much.
February 9th, 2009 at 2:52 am
From The Weekend Australian – ‘Bitten punters are wary of experts’.
http://www.theaustralian.news.com.au/business/story/0,28124,25017575-5018717,00.html
Statements from investors at focus groups saying they are disillusioned ‘with so-called market experts and downright distrustful of financial planners … whose advice was tainted by the fees and commissions they generated from clients.’ “It’s bad enough losing money on your investments but it’s worse to pay somebody to lose money on your investments”. My personal comment is that I can really relate to the above!
Other comments: ‘…little faith in the ability of auditors and accountants to detect and report inaccuracies in company statements’. And ‘less faith in the ability of the Australian Securities and Investments Commissions to police the auditors and ensure companies’ financial reports were accurate.’
However, a glimmer of hope for recognition for Steve’s tireless work?
‘The only group of experts that has come out with any credibility are the academic economists, who were dismissed as doomsayers when they began warning several years ago that there was too much debt and complexity in financial markets, pointing to a potential crisis.’
February 9th, 2009 at 3:27 am
G’day Oldskeptic
Surely the WTO, and the IMF are part of the problem and need to be “reformed”, preferably into oblivion.
When, as long ago as 20 years I raised the CAD problem (then having been continually in deficit for 52 quarters) with some senior and recently graduated economists they all said it did not matter because the debt was private and that it is OK for a private debtor to go into default. The implication here was that we did not really need the banks. What was important was that the government would have no debt. I have heard this argument for the ensuing 20 years and have explained the flaws, but I am not part of the brotherhood so what would I know? They won’t talk now.
If they were correct, why have these people now be advising the government to issue $200,000,000,000 in treasury bonds presumeably to take over this debt. Isn’t this time for their default?
I hope that they intend to have the debt written in AUD! But then I wouln’t send them to Mr Whippy to buy an Icecream with a $50 note they would probably come back with 20 cents change.
When we hear that politicians are disregarding these neoclassical idiots (sending them to the dole queues); and, having done that, sought the aid of Steve Keen and the handfull of other economists who have proven their mettle by predicting and warning of this mess; then and only then a solution will come into sight.
February 9th, 2009 at 8:23 am
Stats & Brightspark. Yep it is going to brutal, there goes the retail sector. Either the Govt does it in a controlled and targetted way, or the IMF will do it in a brutal and very damaging way.
Worse, actually, our oil is running out rapidly = increasing imports over time.
Simply put, retail sales of non-essential goods is going to have to reduce by a corresponding amount, to save money for essential goods (machinary, fertiliser, chemicals, drug, oil, etc). And that amount will grow over time, if just to pay for oil, unless we move to an import replacement mode (forget exports for years to come).
When I arrived in Oz in 1983, 85% of cars were made here and virtually all clothing.
The private/public debate was nonsense. It was a political idiology, not economic theory.
Part of Steve’s frustration is that he thought he was having technical arguments with neo-classical theory.
He wasn’t.
Neo-classic economics was a sophist argument to justify a broader neo-liberal political agenda. Frankly a lot of their arguments were made up as they went along, cherry picking bits of economic theory here and there to justify a political argument set by someone else.
Think unilateral tarrif cuts, manufacturing run down, ‘trade deficits and debt don’t matter’, ‘public debt is terrible’, ‘PPP’s’, ‘twin deficits’, ‘Free Trade’ agreements that wern’t, trickle down (or as I call it pi***ng down on the peasants from a great height), et al.
If I added up all the wealth improvements that were promised to benefit everyone at the time these actions were introduced (by all those think tanks, neo-liberal bastions like the Treasury & the RBA, lobby groups, etc) .. we’d all be a millionaires, instead of broke and up to our eyeballs in debt.
Total piffle all of it. Think pigs at a trough.
Steve, this is one for the Brickbats.
For a laugh read Lucy Ellis’s RBA paper on Austrlian house prices made in Dec 2006 at http://www.rba.gov.au/PublicationsAndResearch/RDP/RDP2006-12.html.
February 9th, 2009 at 9:26 am
OldSkeptic,
What it means to be a free-marketer (essentially a neoclassical) is to support intellectual property rights that increase the price of goods (pharmaceuticals, software, etc) in the range of hundreds, thousands, and tens of thousands of a percent above marginal cost, whilst simultaneously denouncing workers for “hiding” behind tariffs and quotas that raise the price of textiles, for example, 20-40%.
Economic reform in Australia (like much of the rest of the world) is very one-sided and hypocritical, like what I mentioned above. If those economists who call themselves free-marketers were really in favor of free markets, they would abolish restrictions of the free movement of labor and open Australia to any foreign economists who wished to work here. I would imagine that thousands of Chinese, Indian and other foreign economists (who speak fluent English) would pour into Australia, driving down wages of economists to around $30,000-$50,000 per year. Try to find an economist who is in favor of this!
Neoclassicals will denounce workers for supporting protectionism (tariffs, quotas, subsidies, etc) and will use the required basic economic model to show the consumer and pure inefficacy losses. Yet this is highly hypocritical, when IPR, inflexible labor markets in the services of highly-paid professions (economists, executives, surgeons, etc), corporate welfare in all its forms, and so on, are far more economically distorting than what little protectionism that blue-collar workers are given.
Dean Baker, of CEPR, wrote an excellent book in 2006 called “The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer”, which is freely available on the Internet. Other CEPR reports run along the same lines.
You’re definitely right when you say that they cherry-pick their economic theory. It’s quite possible that if we truly had free markets in Australia, that no billionaires would exist, and few millionaires would.
It’s essentially what neoliberalism is (or economic rationalism, as it is called in Australia): state protection for the rich, free markets for everyone else. The rich, since the inception of capitalism centuries ago, have never been willing to submit themselves to the discipline of the market, which also explains why we will never have small, limited government.
February 9th, 2009 at 9:53 am
Stats Watcher,
Ray Dalio, the influential founder and head of international money manager Bridgewater Associates, has used the “D-word” just this weekend in an interview published in Barron’s.
His conclusions are expressed simply, clearly, and unemotionally, and are much the same as Steve Keen’s.
I’m not certain if this URL will work for non-subscribers to Barron’s, but am loath to violate copyright rules. I’m sure the interview will be widely available in the next few days if this doesn’t work for you now:
http://online.barrons.com/article/SB123396545910358867.html?page=sp
Tom Drake
http://twocents.blogs.com
February 9th, 2009 at 11:27 am
It is very clear that people are starting to wake up (far too late) to the financial planner scam that has been screwing them all these years. I expect though that the powerful super fund lobby groups (of which the FP industry is one major parasite) will successfully influence KRudds Govt to maintain status quo. That being that most Aussies are way too stupid to be allowed to manage their own super, so therefore let’s pile on obstacles that keep FP’s handsomely skimming off the top of our retirement funds.
Comments here tend to lead wider public debate in the “real world” so the shift now to studying our current account weakness and loss of local manufacture are very pertinent in my book. Globalization is now seen to be fraught with failures- the elephant in the room being the driving down of wages.Of course the corperates have actually pocketed increasingly larger margins at the expense of the Australian citizens wages in 2 ways- holding down costs (wages) whilst margins on cheaper goods made offshore have risen. All good while debt funded economy.
That’s in reverse now as we know.In a world of what will be 10% unemployment that will not be publicly sustainable, so a movement to BUY LOCAL and jobs HERE will gain serious traction.
Probably of more concern though should be; what options are open to the Govt to fund the current account deficit and ward off a potentially catastrophic markdown in Australia’s credit worthiness. Here I’m thinking that Super savings and confiscation of privately held Gold ( at mints or in mines) whilst being dramatic, could fall into the ” we will move heaven and earth” or ” national security” type scenario’s we are now seeing daily from KRudds Govt in it’s manic efforts to hold back the tide.
Thoughts anyone?
February 9th, 2009 at 4:49 pm
MACCA
I’m sorry but I need to inform you that you have already fallen for one of the government’s deceptions. That is the myth of low unemployment. Acording to the Australian Bureau of Statistics, a person is NOT unemployed if they have one hour per fortnight of paid ot unpaid work. This definition was devised by the International Labour Organisation, so the trade union movement is colaborating in this deception.
In reality, unemployment, if we use the definition used during the great depression and up to the sixties by real trade unions, has exceeded 10% for several years. This definition included the effect of underemployment.
Steve Keen advised me of a website run by a team at the University of Newcastle (NSW), which publishes genuine unemployment data. This site has the title COFFEE.
Our superannuation has been used as ponzi scheme fodder and we see, that very little of it is left when this “dust settles”.
February 9th, 2009 at 4:59 pm
The press is waking to the fraud. On this week’s Landline (a rural program) on the ABC Kerry Lonergan uttered words to the effect that; if these people didn’t see this comming how would they know what is going to happen now.
February 9th, 2009 at 5:14 pm
Hi Macca & All.
ING announced a 3.2 billion Euro loss for the fourth quarter, ANZ owns 49% of ING Aust’, start joining the dots.
As for gold confiscation, lets hope not. The last refuge for personal wealth.
CK.
February 9th, 2009 at 5:23 pm
Brightspark1,
As you will see from my several previous posts, I have repeatedly commented on what clearly are fraudulent numbers emanating for the MOT (Ministry of Truth), in particular the rigged employment stats. So rest assurred I do not in any way beleive them.
My point above was referring to the “headline” or officially announced public figures which I will agree will push the real unemplyment rate well into the high teens when “official” unemployment figs hit 10% plus.
Stats Watcher,
Many thanks for that Barrons artcle link.I’ve circulated it to some freinds.
February 9th, 2009 at 5:26 pm
Apologies twocents,
My thanks actually are to you for the Dalio article link.
Cheers.
February 9th, 2009 at 5:35 pm
Hi CK and others
‘ING announced a 3.2 billion Euro loss for the fourth quarter, ANZ owns 49% of ING Aust’, start joining the dots.’
B*gger – I’ve just opened an internet deposit account with ING with some of my hard earned money withdrawn from Super. They DID announce on 6 Feb 2009 an adjustment down in the Interest Rate.
Those under-bed containers are looking more attractive every day!
February 9th, 2009 at 9:23 pm
Hi Steve,
Hi Steve,
has a bailout like Richard Cook is proposing a place in your models, if so, as a basic Income supporter, I would be very interested in the results.
http://dandelionsalad.wordpress.com/2009/02/08/the-cook-plan-video/
“Quote:”
Richard C. Cook proposes “A Bailout for the People: Dividend Economics and the Basic Income Guarantee.” Cook is a former analyst for the U.S. federal government. His book on monetary reform “We Hold These Truths: The Hope of Monetary Reform” is available at http://www.amazon.com. He can be contacted at richardccook.com
“unquote”
and many thanks for your interesting work
Paul
http://www.basicincome.org/bien/
February 9th, 2009 at 10:19 pm
Paul Nollen
I followed your link – very interesting. It happens to correspond pretty closely to my own line of thinking.
I think we need international financial reform and large scale replacement of debt money with base money. The problem is how to accomplish the latter – and that is where printing money and distributing it widely (as for instance by BI) comes in. I agree with Steve a period of decline is inevitable, but I’m not sure how debt forgiveness can happen politically, or how you can avoid gross unfairness (why should we reward irresponsible risk takers?). I notice though that Richard C Cook also thinks debt forgiveness will be needed.
I extracted this link from the site, that may be better for many readers here than the vidio:
http://dandelionsalad.wordpress.com/2009/02/03/bailout-for-the-people-the-cook-plan-by-richard-c-cook-2/
February 10th, 2009 at 7:39 am
Even as a just a political theory neo-liberalism wasn’t very coherent and was full of contradictions.
Best I have been able to make of it (and boy is it torturous to look at this stuff, like going down the rabbit hole) this was built on a few foundations:
A deep hatred of unionism, to frankly insane and irrational levels.
A dislike of ’step up’ socio-economic policies, such a free education, technical training, etc.
An incredible ‘kow towing’ to financial and some traditional (land linked) elites, manufacturing elites got shafted though.
A real dislike and suspicion of science, particularly research, especially in areas that conflicted with idiological postions.
A real belief that the resources of the world are infinite, just waiting got be tapped by some enterprising (middle/upper class of course) soul.
All in all, the only thing I can make of it was a conscious/inconscious desire to return to an imagined late 19th century, social and economic order. Their fiercer cousins, neo-conservatives, took that further, wanting to go back to an 18th/19th century World colonial order (trouble with that one was that the ‘fuzzie wuzzies’ now have the maxim gun).
Almost like a revenge by some, strangly mostly middle class, throwbacks from the 1890’s who got passed by modernity.
The fact that it was insane and illogical escaped them, TINA was the endless cry. Plus the fact that this imagined 1890’s Nirvana never existed, except in their fevered imagination (in reality it was a period of immense turmoil and change).
Plus the greatest pushers of this line of thought came mostly from middle class backgrounds, which barely existed then and if they were actually successful they would essentially be eliminating their own class.
Bizzaro stuff.
February 10th, 2009 at 10:58 am
Steve,
Great post. I have been looking for a blog like yours for some time and finally came across it through Naked Capitalism. I have been studying System Dynamics and working on qualitative models to try to express what you so eloquently did in your last post on the Roving Cavaliers of Credit. Awesome job!
My comment is this….you say: We either have to inflate it out of existence, or selectively abolish it. While I agree that these are the options, I wonder about the possibility of creating inflation through the mechanism of creating additional debt. My logic runs like this: Since we live in a credit based economy, and the US government through its forced loans to the banks are now in control of most major banks, is it conceivable that they could force the banks to make commercial loans and thus start the inflation/credit cycle which would then be amplified by the Chinese converting their dollar holdings into commodities in order to escape the end product of having their debts marginalized by the inflation?
Thanks again.
February 10th, 2009 at 7:45 pm
firefly, jumping in for Steve (sorry), a lot is going to have to be abolished.
Either through controlled mechanisms (ie Govt) or uncontrolled by bankruptcy. The amounts are so great in many areas that they can NEVER be paid off.
So smart Govts can:
(1) let organisations go under, then nationalising the remains and recapitalising those who are critically important, which is a possible mechanism for some banks (10 banks go under, save only 1, thats all you need to provide services).
(2) Cancel debt by law. The classic example would be CDOs. It is doubtful many are legal anyway. This does require international cooperation.
Govts around the World announcement “At 12:00 Zulu time, all CDO contracts are now declared null and void and have no legal standing”. Poof 65 trillion goes away. The will bankrupt some organisations on the creditor side, but then you use method (1) for those who need to be saved, the others you let go.
On the debtor side, put in an emergency once off tax for a reasonable % of that money, to put something back into the general efforts to save the economy.
(3) Shut down every hedge fund. These are destabilising organisations. With an estimated, at one time, 600+ trillion dollars in positions, they also act as positive feedback mechanisms increasing instability (think currencies, etc).
They are getting in the way of stabilisation efforts. They are just the same as people who light bushfires right here in Victoria .. and should be shown exactly the same mercy.
Internationally coordinated again, at (say) 12:00 Zulu time the police break into every hedge fund operation in the World and shut them down, taking away computers, papers, etc.
All those trades, and the associated debt and destabilisation .. gone. Use method (1) to save those on the losing side who have to be saved, the rest, e.g wealthy individuals … go under.
Basic Triage. Save the essentials to keep society going, let go the unsaveable, invest in the ones who are actually ok. Keep people in their homes and make sure they have food.
February 10th, 2009 at 7:56 pm
I shoukld add the reason you wait for bankruptcy before nationalising is that the debts are now gone. So the cost is just some capital.
Later on Govts can sell off those organisations and help pay off the taxpayer debts
Basically an extended form of the ‘Swedish model’ when they nearly went under in the 90’s (look it up). It worked for them, though now this solution has to be extended far further.
February 11th, 2009 at 7:52 am
Can’t argue with any of that at the first principles level OldSkeptic! The basic truth behind this is that we wouldn’t think twice about doing this to a Bernie Madoff, and yet in essence he’s just a more “honest” version of what the entire financial sector became.
February 12th, 2009 at 7:35 pm
Re the original subject of this blog entry, has anyone else noticed that Steve’s response to Jim Manzi’s challenge seems to have vanished (been deleted??) from the “Stimulus predictions: put up or shut up” article at http://business.theatlantic.com/2009/02/stimulus_predictions_put_up_or_shut_up.php ?
Rather odd, and a bit disturbing…
February 13th, 2009 at 4:14 am
I could have told you this without any modeling other than the stuff we were taught in 5th grade arithmetic.
Take a peek at this document, retrieved from the fed’s comptroller office:
http://www.occ.gov/ftp/release/2007-137a.pdf
and take a look at the very *last* chart. Remember that’s millions they’re talking so just add 6 zeros to those numbers.
So… 1 trillion? 10 trillion? Not enough. Not nearly enough, even if it was real money and not the fantasyland cotton candy it is.
What’s going on in DC right now is like asking whether to give coffee or coffee AND aspirin to to the terminal cancer patient. It’s all about votes – a show for our benefit. A new American Idol for the voters with congress playing the part of Simon.
Given these numbers, the terminal outcome for the world economy as it now exists is certain.
Cheers!
February 13th, 2009 at 8:44 pm
Ian, we can all argue about who was right in the past. Bit like saying I told you so about the impact of (e.g.) fuel build ups or high temps on bush fires.
But now we are in this mess, so how do we get out of it in the quickest way with the minimum possible damage?
There is going to be damage, it is in our power to make that devestating or just merely bad. The US has decided to make it devestating for them, by trying to protect the old order.
Anyone who has worked through Steve’s work knows that the old order cannot, in fact should not, be saved.
So what is the new order? More local production? Less trade? Where is the capital coming from? What about skill levels? What sort of society do we want?
I am always reminded about Australia before the 2nd World Waar. Broke (Australia like Germany and the US suffered terribly during the Depression), we could not even make a gun.
By the end of WW2 we were making, here in Australia, guns, ships, radar, computers, Mustangs and Mosquitos (the F-22 and F-35 of their day). In just 6 short years.
So it ain’t over until it is over. And in the end, the big boys, US, EU, China, Japan, will make their own good/bad decisions. But what are our decisions? What is right for us? What can we do to get through this? And emerge with a strong economy and a good standard of living?
{Though saying ‘I told you’ so to some people is so irresistible that you would have to be inhuman to avoid that pleasure. Plus some of these people deserve Guantanamo, they have made Bin Ladin look like an amateur in terms of damage to our society.}
February 20th, 2009 at 12:44 pm
Hi Steve,
At some time would you please post a blog fleshing out what debt repudiation will look like.
How do you select the beneficiaries and how do you prevent the debt teleporting elsewhere?
How do you do it without rewarding the imprudent at the expense of the prudent? If those rescued by debt repudiation are to be somehow stripped of material reward, then wouldn’t plain old bankruptcy do the same job?
Thanks,
Muzz (Joe Blow non-economist)