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11/14/2010

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Jack

Chris -- Perhaps I was a LOT closer to the elephant that took down the world financial system and much of the economy.
Jack, while I would agree that regulation is necessary in markets, and especially financial markets, I see the basic cause of the boom and bust cycle that we are in the process of recovering from as the culmination of an on-going process of the Federal Reserve attempting to blunt the effects of past boom and bust cycles by introducing increasing amounts of credit into the financial system thereby artificially lowering the interest rate. This process induced entrepreneurs to invest at rates that the system"

++++++++ This simple does not fly in the real world for several of the following reasons...... and then some!

A. We had cheap money in the 50's but also had integrity in banking, "banking" per Steagal was not mingled with "insurance" and largely did not operate across state lines.

B. Where did "too much capital" come from? The Fed must have been asleep or accomplices as "lending" and ""securitization"" had now infamous "bankers" lending at OVER 30 times capital. What that means is just a 3% down draft puts those outfits in the position of "backing loans" with NO assets.

But I suggested NOT using this era of negligent oversight replete with a Congress that ........ forgot? to rebuild the parts of G-Steagal that were discussed even as the poorly thought out bill was shoved through in the same lame duck time we're now in, and sponsor Phil Gramm sidled off to his reward of being "investment banker".

You kinda ducked my question on capital flows and needs not being automatically balanced by capital availability -- but understandable when simple ideology is the thing.

Gold standard? What relationship does the amount of gold we can dig out of the ground have with the amount of capital that exists in an economy or is needed? Can you imagine in today's world what would happen with a "gold standard?" Do you recall France insisting on physical gold shipment? which played a role in our abandoning the archaic system. Truth may be that we ARE on a gold std, don't like Big Head buck? buy the gold bricks we were not allowed to own while "on the gold standard.

"Rules and gold standards" do not have the needed flexibility....... it's formulas and response to messes such as we have now is the task of a central bank.

An aside? Here in AK there's a huge issue of (Pebble Mine) in one of America's most scenic and pristine areas with the lake that spawns much of Bristol Bay's huge salmon run....... other fish like 20 pound plus trout dwell in the seismic area where they want to construct the highest dam for sediment pond in the world as well. There are huge quantities of gold to be had by some Canadian consortium, but the question arises "Why despoil an environment to bring more gold out of the ground?

Well the quick retort is because it's worth $1000/oz and money to be made. But really why? We've more than enough gold for practical uses above ground today --- so it would become "store of value" gold. Think about it......... leave it there, the price of gold rises, the store of value is smaller and easier to move around or protect. Industrial gold? ha! at these prices we'll be sure to recycle as much as possible.

Observer: Congrats on having mastered a word or so of teabagger terminology!

John

Chris

As I wrote before, this is not investing, it is gambling

"a rational calculation by market players even when they catch on to what is happening as they attempt to ride the crest of the wave"

People my think they are that smart, but they aren't

But don't take my word. Read Charlie Munger, Warren Buffett's partner, great essay, the Psychology of Human Misjudgment. He details why this is gambling, not investing and why the belief that one can get off is a false one

Or you could just look at the evidence. My the time everything collapsed a Lehman, there were a lot of wave riders wanting out. If they were so smart, why did we have to bail them all out?

IOW Chris, you don't have clue

Beyond that, as for all this what about the deficit bs, where were all of you when Reagan and Bush I ran huge deficits, or when RR appointed Greenspan, or when Cheeney said deficits don't matter.

The fact is everyone here who is opposed to QE2 is dishonest, just attempting to assure we have no recovery

Jack

I just recently got around to seeing Inside Job. Even though I'd followed and predicted much of what was to come, I still found the film a worthwhile watch. Chris I think it would be good in the sense of how FAR reality IS from any ivory tower ideology. In fact they spend some time dealing with how ivory tower profs HAVE been co-opted. Lots of $$$$$$$$$$$! Even THIS admin, like why are pigs like Summers still in power? Why have those who committed record setting fraud not been criminally charged? Or civilly charged to claw back some of the billions they stole?

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Quantitative Easing

Quantitative easing is a famous technique used by almost all banking sectors. It is a government monetary policy occasionally used to increase the money supply by buying government securities, bonds to stabilize or raise their prices and thereby, to lower long-term interest rates from the market. Central banks tend to use it when interest rates are already been lowered to near 0% levels and failed to produce the desired effect. Thanks for the post.

Rob Claassen

Posner,
This is a late post, but an important one, but just found this thread. You and Becker are missing the worst aspect of quantitative easing. Quantitative easing is not "easing" at all. If the Fed were to drop currency out of helicopters, that would be easing. But don't think for a second that that's what QE is. QE inolves buying assets, or better said, it is the extraction of hard-earned, productive assets (mortgage bonds and treasuries) from the private sector by the Fed in exchange for vapor currency. In other words it is a tax. It may or may not cause inflation once the currency dilution is felt, and it may or may not spur lending. But it is most-definitely a tax.

But it's even worse than a normal tax. When the Fed chooses to extract productive assets from the private sector at a time when American households are over-leveraged, it's potentially disasterous. American households need more productive assets to offset their liabilities, not less. QE extracts the productive assets while leaving the liabilities. Dropping currency from helicopters would just reallocate the spending power of the currency, but it wouldn't have any real aggreate balance sheet impact on the private sector.

People express surprise that the recovery has been so tepid in the face of $2 trillion of QE. I'm surprised it has happened at all. Perhaps it is because most of the new currency is sitting in excess reserves, so it hasn't yet percolated out into the money supply causing the currency dilution, or maybe it's that the effects of QE2 haven't yet been felt.

This will sound a bit harsh, but I'm convinced future economists will look back on QE the same way the medical profession thinks of the lobotomy ... it's a terrible procedure that became wide-spread before it was fully understood and caused serious damage to not only the reputation of the profession, but the very patients they were trying to cure.

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The first and third effects are probably more important than the second, the effect on long-term interest rates. Those rates are low in part because short-term rates are very low and there is considerable substitution between short- and long-term loans. Moreover, the modest incremental effect on long-term interest rates of increasing the demand for and thus price of long-term bonds may be offset by the effect of enlarging the money supply in causing inflation expectations to rise, which in turn increases interest rates.

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