Comments on: "Orwellian accounting cannot damp economic cycles"

By: M_Biz

M_Biz — Fri, 24 Jul 2009 17:16:50 +0000

Coming from an engineering background, this seems to be a positive feedback loop with too high of a gain & very little damping. You could dial back the gain (raise capital requirements) in order to elimitate the bubbles, but that would be too much of a drag especially when coming out of the hole of a recession. The other (better) approach is to add damping to the system to smooth the zigs and zags. One possiblity is to require banks and government spending to be managed to moving average of a number of years, perhaps 10 or 20 (inflation adjusted of course). It is not a perfect solution but would be far better than the extreme boom/bust cycles that otherwise will occur.

By: Anonymous

Anonymous — Sat, 18 Jul 2009 06:53:02 +0000

That's because no executives are compensated for reducing unemployment, nor for stabilizing home prices.

shhhhhh... Don't tell Obama!

By: Dave Raithel

Dave Raithel — Sat, 18 Jul 2009 03:37:14 +0000

What all this brings to my mind: Fred Von Hayek's little essay on the problems of central planning due to information flows. Of all the arguments offered for "free markets", it's one I've taken seriously (which is not to say I concur, but only that I still think about counter-arguments.) So what's worse (and worse for whom, would follow): Inefficiencies due to bad data at central planning, or calamity accounting for all the facts?

From whom do we permissibly withhold the truth? Small children and the feeble minded. Yeah, let's build a culture on that motif ....

Wait, we might already have one.

By: skippy

skippy — Fri, 17 Jul 2009 07:28:47 +0000

@Hugh and attempter…agreed [?] America is under new management for re-branding, but from the same investors and for their vested interest and not the over all health of the country, economic or socially.

By: attempter

attempter — Fri, 17 Jul 2009 05:25:16 +0000

As a postscript, I should note that, unlike the conservatives' embrace and then rejection of Bush, progressives never claimed Obama as one of their own. Even for those who supported him eventually in his campaign he was their third or fourth choice. For myself, I have already started a scandals list on Obama, something I did not do on Bush until early 2007. When Obama crashes and burns it will not be because he pursued progressive ideals but because he saw his Presidency as Bush and Clinton's third terms..

That's almost word for word how I might've phrased it. It was last December that I started my "Obama Ownership" sheet, where I would list Bush policies as Obama took personal ownership of them.

It's already a pretty long list.

(For anybody who's interested in this subject, my last blog post is my "Obama Six-Month Report Card".)

By: skippy

skippy — Fri, 17 Jul 2009 04:40:00 +0000

@Yves said...We live in a credit money system, not a fractional reserve banking system.

From reserve to credit manufacture of currency and the difference in flow direction/velocity upon creation is beastly (markets usage). On one hand one affords rapid adjustment, where as the other tries to smooth out the curve especially in trying times(pick your poison?).

Is the Fed's problem staff or mandate...um don't know, but I do have a GS frat boy problem (collusion).

Skippy...have I learned any thing yet teach.

By: Hugh

Hugh — Fri, 17 Jul 2009 04:06:25 +0000

You know JO when Bush had 90% approval ratings after 9/11, conservatives were saying that he represented the triumph of conservatism and that Republicans would be in the majority forever. But after years of lies, bungling, and deception Bush's approval ratings went into the toilet in his second term and stayed there. Suddenly, conservatives discovered that Bush really wasn't a conservative at all, and that therefore conservatism was not to blame for his failures.

Now the same thing seems to be happening among free marketeers. On the upside of the bubble, free markets got all the credit. Securitization and deregulation proved that the markets really did know better. All we had to do was let the unseen hand work its magic. And then housing crashed and then finance generally. And suddenly markets were no longer free, never had been, etc. In other words, in good times, markets worked and in bad times, it was government's fault.

Personally, I doubt if there has ever been a truly free market in the history of the world. I do not see this as a bad thing, just the way things are. For me, what is important is who controls the market and for whose benefit. Knowing that helps me understand what has and will happen in the economy.

As a postscript, I should note that, unlike the conservatives' embrace and then rejection of Bush, progressives never claimed Obama as one of their own. Even for those who supported him eventually in his campaign he was their third or fourth choice. For myself, I have already started a scandals list on Obama, something I did not do on Bush until early 2007. When Obama crashes and burns it will not be because he pursued progressive ideals but because he saw his Presidency as Bush and Clinton's third terms.

By: Yves Smith

Yves Smith — Fri, 17 Jul 2009 03:52:30 +0000

JD,

You need to read Steve Keen. You are mistaken re credit mechanisms. We live in a credit money system, not a fractional reserve banking system. Fractional reserves do not contrain lending.

Second, I am not fan of the Fed, but do your homework. We had far more frequent panics in the 19th century, under a hard money system. You also need to do your research on the record of the gold standard. Infation rates whipsawed under it. going from marked and volatile inflation to deflation. The record for any gold standard country will show that pattern. That is very destructive to investors and to businesses. You cannot plan or make investments with that much uncertainty.

By: JO

JO — Fri, 17 Jul 2009 03:33:06 +0000

I am tired of hearing the message about how "free markets" are to blame. Make no mistake, we have not had anything close to free market capitalism…a debt based, highly leveraged fractional reserve, fiat money system is the result of explicit gov't action to allow a private agency (the Fed) the right to micro manage short term interest rates, misdirect captial, and make other policies that extended the leverage in the system. A true free market banking system, while very likely never possible due to political wishes, would be based on a currency managed to maintain a value based on a commodity index, and no central bank. In addition, leverage in the system would be reduced until such time the fractional reserve ponzi / counterfeiting operation is eliminated as the amount of credit outstanding roughly matches the amount of savings. Taking it one step further, in a pure free market monetary system, the gov'ts monopoly on legal tender would be eliminated as the large banks would issue their own currencies backed by their reputation and safety ratings…other basic elements that contributed to this nonsense we are going through and prove it is gov't/central bank/commercial bank manipualtion that caused this is all gov't laws that seek to provide an advantage to an industry or create artifical demand in a sector. None is a better example than the home insurance buying programs where the weakest borrowers were permitted to buy homes using fraudulent taxpayer backed "guarantees" which allowed a massive issuance of shaky debt with weak covenents and artificially low rates. I can go on and on, but the point is free markets were not the main cause of this deep recession…look to your friends in government and the Fed. The danger of letting the myth of the big bad free markets go on is that the same morons who got us into this will preach for more regulation and control over our lives…meaning less wealth and less liberty.
JO

By: moslof

moslof — Fri, 17 Jul 2009 01:26:43 +0000

If you read Paul Krugman's columns about banks before and after his dinner meeting at the White House you can surmise that Orwell is alive and well…….