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02/08/2009

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Josh

Nice post. Thanks. I must argue against your semantics, however: given the importance of confidence on the part of consumers, investors, etc., insisting on calling this thing a "depression" seems imprudent at best. Though I don't consider your blog part of the media establishment, it just might happen that the media read your blog and will adopt your usage. If the TV tells hundreds of millions of people that this is a depression, then is there any possibility of not having a depression? It's largely a self-fulfilling prophecy.

Jake

Ignore Jack. By his comments, he makes clear that he has never gotten any dirt under his fingernails. Those of us who have need not pay heed to such prattle. Beware false prophets.

Jack

Jake: Thanks for the honor of your feeling the need to post a warning! I wonder what set you off? I HOPE I haven't, dishonestly, made "it clear that I've not" gotten my hands dirty, and while many should be able to extrapolate from the cards that have landed face up, I make no claim to being a prophet, especially after seeing what has been done to them. Anyway, thanks for reading me!

Simone

"A banker is not going to forgo a risk that should it materialize would wreck the economy, because his forbearance would have no consequence, as long as his competitors continued running the risk;"

First: I doubt that Bankers actually thought like this.
Second: Even if they did, the developments demonstrated that although the banking system got wrecked, risk-averse banks and bankers are still better off than the ones which went with the herd. There are people who saw the crash coming and acted accordingly and in the end, they were or will get rewarded for their foresight in some way or another. Your reasoning suggests that these people - the people who did their jobs - acted irrationally.

If a proponent of free markets - of individual freedom in general - comes to the conclusion that madness is more reasonable than reason something must have gone wrong along the way.

Jim

Our new president goes to Elkhart, Indiana to pitch his stimulus bill because there is a 15% unemployment rate there and by doing so implies that he and the trillions he wants to spend will somehow help restore things. Well, Elkhart is and has been a one industry town making very big very expensive RUVs which no one wants and no one can afford not to mention that they burn huge amounts of gasoline and pollute the air. For our president to ignore all of that in his remarks there and use the town's stage for a political show is fundamentally dishonest. The same is true of his visit the following day to Fort Meyer, Florida where the unemployment rate is 10% in response to the collapse of an overheated real estate market populated by greedy developers, builders, lenders and buyers(flippers).

And some of you expect that same dishonesty to control the incomes of the bankers. Dream on.

neilehat

Jim, Dishonesty? Or just good public relations? In solving Depressions and Recessions, Attitude is everything. Roosevelt recognized this when he said, "We have nothing to fear except fear itself". As for Obama, his presence told Elkhart and Ft. Meyers, you are not forgotten. A strong swipe at FEAR.

Jake

Jack, thank you for confirming that you've never gotten your fingernails dirty. I use the terminology literally, not figuratively. Ever do an honest day of manual labor in your life? Carrying the trash out to the curb does not count. And you are mistaken when you assert that anyone who visits this site comes here to "read" your infantile rants.

bob

"... for I insist that it is a depression, and not a mere recession, that the country is in ..."

In "Dollars and Deficits" (Prentice-Hall, Inc., 1968), Milton Friedman introduced an essay entitled "Why the American Economy is Depression-Proof" with the words "The Swedish talk was written and delivered partway through the next recession, which began in mid-1953 and ended in 1954. That downturn revived all the earlier fears. Some prominent business forecasters issued alarming predictions that, unless massive action was taken, another major contraction, like that from 1929-33, was in store for the U.S., and these predictions were taken seriously both in the U.S. and abroad." The gist of it seems to me (not an economist) that the policies and practices in place in the 50's meant that the pronounced and prolonged contraction of the money supply needed to precipitate a depression could no longer occur, though the statement that "The combined effect of the Federal Deposit Insurance Corporation, the higher ratio of government obligations to other assets of banks, and the dethroning of gold, is to eliminate as a practical possibility anything approaching a collapse of the American banking structure." is at least called into question by recent actions.

Also, in the Wednesday Wall Street Journal, Peter Ferrara (who served in the White House Office of Policy Development under President Reagan) expressed the opinion that Reagan faced a situation that appeared no better than that of today, but that the situation turned around in two years. According to Mr. Ferrara, none of the four major points of Reagan's policy appear in the current program. Again simplifying, Reagan's policy moved resources from the government, with its presumably lower multiplier, to the private sector; whereas the current program does the reverse.

Personally, I would have preferred that the +/- 800 billion dollar package be expressed as a recurrent income stream, and realized as a reduction in taxes. I do not expect much of the bill that is likely to pass, and to the extent that my physicist training allows, will act accordingly.

Jim

Neilehat,

I am more fearful of the government than I am of circumstances. And regardless I will take care of myself and deal with my own fears. I don't believe anything politicians say and certainly don't bhelieve that they act in my interest or the interest of the country unless it happens to coincide with their re-election probabilities. As far as I am concerned, they should all be run out of office the sooner the better. My point was that Obama could have alluded to the underlying causes in Elkhart and Ft. Meyer as a matter of realistic assessment. He didn't. He is dishonest just as he was when he claimed after twenty years in the church that he didn't know what Rev. Wright stood for and that he didn't know Bill Ayers well. He also supported the corrupt state, county and city government in Illinois at least by virtue of his silence on the matters. He is PURE politician and in my view nothing special

Anonymous

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1L at low ranked school

I'm no genius like Posner. My criticism of this post comes with total acceptance of my ignorance to the depths of economic and legal theory Posner possesses. I think pay caps are the perfect solution. I understand that yes, the best talent may run away from the industry, and it offers no real solution...fundamentally a lot of the capitalistic "best talent" are why we are in this mess....and "real solutions" are a fiction in themselves.

It comes down to culture...something beyond law and economics. Fundamentally...the average American has been fed the ideal that they can live a $60k life on a $50k salary. Everywhere we are forced to consume. Those with even the most remote means seek to dress the best, have the biggest house, make more and spend more.

The $500k cap says one thing to every person applying for the position of saving these industries..."the money is not the most important part." If a young genius can't pay his country club bill but finds a way to keep 2,000 families from bankruptcy...the reward can not be measured monetarily. Everything is measured economically in Posner's perspective(from my shallow viewpoint)...and like just about anyone with his resume, I can't feel his touch on humanity.

Our lower middle income groups need a message. The work comes before the reward. A pay-cap shows that. We've seen too many people come home with 20 million...30million a year salaries. The average middle class worker needs the message that it is not about the big bonus so you can have a flat screen tv and go to a concert(supply and demand for $200 a seat tickets right?)

It goes to the basics...reevaluate! If your capitalistic mentality gets so out of hand that your company needs government help to get out of the mess...YOU MUST REEVLUATE!!! If nothing else, it sends a message to the majority of the American people.

I probably don't know enough about ol Poz to post here...but I've been in chi-town a while...and my advice to the majority of the U of C "Chicago school" folks is...take a walk a mile west. If you want to understand what is REALLY at issue in this country, get out of your HYDE PARK mansions and walk to 61st and Michigan(yes bad generalization...but I used to work there). The talented CEO who denies the job due to a $500k paycap has NO CLUE where this country is...so simply put...I'd rather have a marginally talented person with a sense of the purpose than the genius speaking strictly in formula running our finances.

SA

Judge Posner is quite right that the bulk of bonus compensation goes to employees well below the executive level. Traders, and to a much lesser extent these days, M&A bankers. I think it's worth asking whether proprietary trading and risky M&A bridge loans are appropriate activities for government-supported institutions. While the argument can be made that these activities, if profitable, can help restore the capital of these institutions, nevertheless the trading losses incurred last quarter show that the risk to capital is substantial (for example, Deutsche Bank, which is not subsidized, lost $1.8B in fixed income trading through a basis shift on CDS). Perhaps the question is not so much how much these folks should be paid, but rather what it is they should be doing at subsidized institutions.

SA

(last comment was truncated)

Switzerland has imposed significant business limits on UBS and CS in exchange for extraordinary public support. Both firms have been forced to exit business lines and to restrict risk capital, and to concentrate their resources on their core business as wealth managers. In the U.S., regulators have not required their charges to exit risky trading activities and concentrate on credit flows into the real economy; perhaps they should.

neilehat

Jim, We all know the underlying causes, it's called job loss. Whether it be an RUV factory, Steel Mill, Foundry, Engine Plant (BTW have you heard about the new one planned for Flint, it was canceled), Refineries, etc., and what about the many Light Industries across the Nation and samll business's?

As a resident and voter in Illinois, I'm offended by your depiction of the State's various Governmental Apparatus as corrupt. At least we deal with problems when they get out of hand. Like the current Economic Crisis. So what's your excuse? Use of "non-sequitor" as fact to support a warped world view?

Jim

Neilehat,

Blago, Ryan, Kerner, Walker, ogilvie, Stroger I, Stroger II, 10 or 12 alderpersons, various other hangers on like Duff, Rezko, Warner etc. The highest county sales tax in the country, a huge state defict and multiple bankrupt municipalities. Yeah, I guess you're right, Illinois is a great state. I must have forgotten to take my happy drugs yesterday.

Observer283

I am young, naive, and not well informed.

Now that that is out of the way, here is my question: Why was it OK for us to condition giving government funds to automakers upon labor unions agreeing to reduced compensation for their workers but it is not OK for us to condition giving government funds to large banks upon senior executives agreeing to reduced compensation?

As I see it, both measures would involve considerable encroachment upon the compensation markets. Laborers who join together in unions use their numbers as leverage to create more favorable working conditions and receive better benefits. Senior executives use their expertise and the fierce competition for their services as leverage to obtain high compensation.

Both measures also seemed to be based on the notion that government rescue funds can be better spent on things other than employee compensation. Consequently, intervention in the compensation markets is warranted when companies seek government funds to bailout them out. This, as evidenced by the last two blog entries, is a debatable point.

But I just don't understand the difference between asking the labor unions to take a haircut and asking CEO's to do the same. In both cases, we are preventing employees from taking full advantage of their bargaining power for what we believe is the common good.

Jack

Ha! Observer; you're wise beyond your self-assessment! Interestingly it seems the same voices calling to beat down working folks wages and even our miserly minimum wage who think it requires millions in pay for the "geniuses" who took down the financial systems of the world. Perhaps one will come back with a reason for the, seeming, paradox.

JK

Bob, Having lived through the Reagan era, I remembered it somewhat differently from the WSJ writer and thought I'd take a look.


Note: It looks as though the "blog owners" hold posts with links......... for a LONG time, so I've had to strip them out. Sorry, I thought it would be handy to have the graphs that support each of my contentions. Kind of a shame as much of the mythology is well entrenched. But! a quick googling will turn them up.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
"Also, in the Wednesday Wall Street Journal, Peter Ferrara (who served in the White House Office of Policy Development under President Reagan) expressed the opinion that Reagan faced a situation that appeared no better than that of today, but that the situation turned around in two years. According to Mr. Ferrara, none of the four major points of Reagan's policy appear in the current program. Again simplifying, Reagan's policy moved resources from the government, with its presumably lower multiplier, to the private sector; whereas the current program does the reverse.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Looking back it seems that the major thing Reagan and Congress did was to embark upon an era of massive deficit spending which as a percentage of GDP was more aggressive than even the W.Bush deficits combined with what Obama and Congress propose.

In terms of the "situation faced" this graph shows the unemployment rates of the era. Looks like Reagan inherited a rate of 7.5 which did not decline in two years, but instead peaked at 10.8 and only after four years of deficit spending did it slowly return to the 7.5 range. The rate dropped 2 more percent before he left office and one wonders what it would have been w/o quadrupling the national debt.

http://www.miseryindex.us/URbymonth.asp

Then I wondered if there had been some "magic" in terms of GDP growth, but still no luck, after the predictable pop of transactions made shortly after the tax changes were implemented GDP muddled along at about 3% albeit with less volatility than in the post WWII era before we went off the gold standard.

As for "moving resources from government" it appears that spending as a percentage of GDP continued upwards and other than during our two WW's was higher than any time in history.


I had thought one reason Reagan didn't get much bang for his deficit spending was that of spending too much on the military which, in economic terms, has one of the lowest multipliers, but this graph shows that the mix of government spending during Reagan's terms were not that different from before or after.


So no "magic" that I can see, just the Keynesian hopes of spurring a troubled economy via massive deficit spending. HW continued the same policies with somewhat worse results until we were awash in debt and again in an era of high unemployment.

To be fair there's nothing to compare to; would we have been yet worse off without the deficit spending? Do we have an economy that is not sustainable but for propping it up 22 years out of 25 or so with more of the same for years to come?

neilehat

Jim, At least we try to eliminate the problems as they develop. The large number of prosecutions points to anti-corruption laws that are alive and well. As for the taxing issues, at least we're taking action to compensate for the loss of tax revenue by the "give-aways" to the wealthy and Corporatocracy. Not only at the State & Local level, but at the Federal level as well.

How about the other 49? I doubt they are as pure as the driven snow, Hmmm ....

Christian Debt Help

Good info. Thanks.

Billionaires for Bush

Let me get this straight: you're against pay caps even though the government is now effectively funding the banks.

Posner, you've just lost all credibility. Everyone knows your basic strategy is to keep the money flowing to people who could further endow places like the Milton Friedman Center at Chicago. . . . so it can keep justifying their outrageous wealth. . . so they can keep endowing it. . . .in a vicious cycle.

When people look back on this sort of shameless worship of wealth in ten or twenty years, they'll be filled with scorn and contempt.

DanC

JK you are wrong. The 81-82 was worse, so far, then the current economic troubles.

The Obama debt is off the charts, to fund pork.

One theory in finance is that if you have managers who will not work in the best interest of stockholders, and revenues are rather steady, you can saddle the beats with debt to force prudence. In this way Reagan starved the beast from silly spending programs.

Clearly Democrats care nothing about deficits anymore.

And again the Obama message is not one of change. Bush doubled federal spending on education. Bush created a federal health care entitlement. Bush increased the debt. So what is the big difference from Bush other then he is spending more on everything>

Anonymous

The pols and their handlers want a revolution which propably explains why none of this makes sense. They are likely to get one. The question is will it be the one that they want.

Jack

DanC sez:JK you are wrong. The 81-82 was worse, so far, then the current economic troubles.

......... Dan I posted the unemployment figures which conform to what I described, and indeed they did worsen in Reagan's first term, in contrast to the seeming mythology posted by "Bob".

The Obama debt is off the charts, to fund pork.

........... yeah, geez in mid-melt down this year's DEFICITS (not debt) will likely add to over two years of the Bush deficits when there were no emergencies to address. "Pork?" Well, and the President counseled stimulus does require spending....... and it seems "pork" is that which some might not like. Which items did you not favor?

One theory in finance is that if you have managers who will not work in the best interest of stockholders, and revenues are rather steady, you can saddle the beats with debt to force prudence. In this way Reagan starved the beast from silly spending programs.

...... Whew! The TRUTH is a certain David Stockman who advised Reagan on the cut taxes and "starve the beast" policy was promptly dumped as the "voodoo" econ of cutting taxes while plumping up the Pentagon was dumped. I think he wrote a book on the failure.

here's an Atlantic article of which the last part tells what happened:

http://www.theatlantic.com/doc/print/198112/david-stockman

Spending, as I pointed out to Bob increased during the Reagan era. BTW the plan Stockman had lined out was much like the Clinton-Rubin plan that finally was passed by Congress, of at least holding the line on spending while revenues increased to fill the coffers.

Clearly Democrats care nothing about deficits anymore.

......... When shipwreck I guess it's OK to saw up the mahogany tables to build lifeboats. Did you have in mind contracting federal spending at this point to maximize bankruptcies and unemployment?

And again the Obama message is not one of change. Bush doubled federal spending on education. Bush created a federal health care entitlement. Bush increased the debt. So what is the big difference from Bush other then he is spending more on everything?

........... Well had we discussed this sans The Mess, I'd quickly point out that one can NOT run costly wars and go on a spending binge w/o either raising taxes or running up nation tanking D E B T. BTW...... HAD median and lower incomes increased on par with the doubling of productivity, our tax revenues and SS contributions would have been FAR higher than they have been with ALL of the productivity gains going to the upper 20% income group.


However, waking up to find some $50 TRILLION of world capital having disappeared, I'd venture that the mix is VERY lean and if we don't want to burn a piston and melt down the engine, we'd better just keep on running huge deficits. Better to try to spur economic activity than have 20% unemployment with all the attendant costs.

Shygetz

A banker is not going to forgo a risk that should it materialize would wreck the economy, because his forbearance would have no consequence, as long as his competitors continued running the risk; it is a classic case of external costs, requiring government intervention.

Your calculus assumes that the institutions (and their leaders) will come out of a central reorganization in roughly the same shape they were in before they failed. If we change this calculus by intentionally limiting the earning potential of those responsible for running their company onto a reef, then suddenly there is a personal disincentive to running a risk even if a sizable enough portion of your competitors to trigger government intervention are running that risk. This can be extended to entire organizations if the bailout was tied directly to an organized bankruptcy process (or brief nationalization, if you prefer). The calculus Judge Posner insists upon is based on the assumption that the bailout will be relatively harmless, both from the POV of the executives and from the POV of the institution as a whole. The government must forcefully disabuse them of that assumption.

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