Monday, September 22, 2008

I Don't Know What To Do

I am about to go out of town for nearly two weeks (including to a conference in my honor in Urbino, Italy), and so will probably disappear from here mostly for awhile. So, will do three posts in a row.

This one is a confession of ignorance and inability to speak by a usual loudmouth. I am one of those like Dean Baker and Robert Shiller who has been calling loudly for a long time that we were in a housing bubble and that this would lead to bad trouble. More recently here I pointed out that we were probably in a period of financial distress, with a much worse panic and crash likely to be coming. As of last Wednesday, when US Treasuries briefly were in negative interest rate territory, we were as close to 1931 as we have been since, well, 1931. Unfortunately, we may yet get a lot closer.

Everybody else seems to have well-formed opinions about the Paulson bailout and what we should or should not do. I do not. The plan has all kinds of problems, money for the undeserving rich, too much power for Paulson and later TreasSecs, not enough protection for homeowners, unclear defense of the global financial markets, not enough protection of US taxpayers, and on and on, see lots of commentators everywhere. Unfortunately, if nothing is done, well, could be into a situation making last Wednesday look like child's play. What is even worse is that even doing it (after all, we have had scads of "saves" during the past year) may not work and could still lead to something worse than 1931. After all, after this bailout, I think that Bernanke and Paulson and Geithner and company will have pretty much used up all their arrows or magic rabbits in hats, or whatever. If it (or whatever variation on it might come out of Congress) does not work, we may really be up that famous creek without a you know what. And, I do not know what to do.


Anonymous said...

A price floor under residential properties would let people who have been snowed in by ARMs get out without pulling the entire banking system down on all our heads.

Long term, distribution of income must be fixed. said...

Actually, what I left out and what I have been saying for a long time is that this will not be over until housing prices in the US stop falling. The one clear thing about the last few days that might help on that is that mortgage interest rates have gone down, which I think resulted from the Fannie/Freddie bailout. But they still look overvalued, ugh.

Sandwichman said...

Not to worry, Barkley. If you did know what to do, no one would be able to figure out what the heck you were talking about.

And here's why: the established paradigm is wrong. But people can only understand analyses that conform to the frame of reference they are accustomed to.

"Pour que vous aimiez quelque chose il faut que vous l'ayez vu et entendu depuis longtemps tas d'idiots." -- Francis Picabia
(In order for you to like something it is necessary for you to have seen and understood it a long time ago, you bunch of idiots.)

Anonymous said...

something must be done...something must be done....the sky is falling.

Simply amazing. Apparently the lessons of the success of the command economy ca. 1942-1945 is conveniently forgotten.

So this is history as farce, eh? We DO live in amazing times.

Myrtle Blackwood said...

"Everybody else seems to have well-formed opinions about the Paulson bailout and what we should or should not do. I do not..."

I can appreciate this position. There are financial commitments that simply must be made. A 'bailout' of some form is probably essential.

But let us have the details. Who is being bailed out? On what basis? For how long? What can the public receive in return? Who oversees the funds and are they the appropriate people for perform such functions?

Is it possible to have a coordinated global response and change the fallacious financial/economic architecture that caused this problem?

It means new governments for new forms of (ethical) governance.

The hope that I have is that such a revolution is in everyone's interest. said...

One can laugh, but the sky is indeed in danger of falling. Think 1931, and if you do not know what happened then, go check it out. And the markets were pretty gonzo today, with the highest jump in oil prices ever seen in a single day. Will we be back at negative interest rates on Treasuries shortly?

BTW, just saw the Dodd bill on Brad DeLong. Guess I would take it over the Paulson plan, but do not have a lot of confidence in it either.

Simon Halliday said...

Where is this conference, exactly? I am a student in Siena and would love to go to Urbino to hear you speak if at all possible, but I can't seem to find details on google... said...

Urbino, Department of Economics, Sept. 25-27 (I speak on the 26th), Modeli Dinamiche Economiche e Finanza, or something like that. Contact Laura Gardini.

Myrtle Blackwood said...

In 1931

The US Fed dropped the discount rate.

The dustbowl from overplowing of the US Great Plains.

Germany. Woytinski seeking to promote public works.

1930 – 1933. The US price level fell about 10 percent per year.

Andrew Mellon, US Secretary of the Treasury, continued his policy of balancing the budget by cutting spending and increasing taxes.

“The Dow’s Biggest One-Day Jump

Keynes muses on what a ‘sound banker’ is.

International banking crisis sparked off by the collapse of Austria’s Creditanstalt.

Great Britain abandons the gold standard completely. A full global financial collapse occurs this year that brought the full Great Depression.

Large levels of inflation and government deficits in the US rendered the support of US dollars by gold impossible. President Roosevelt adjusted the dollar/gold ratio as he saw fit in the early 1930s. He takes the US off the gold standard.

Industrial hemp products banned in all western countries thereby giving artificial fibres a market foothold

British artist Eric Gill gives a series of lectures on the unhelpful (even ‘vicious’) aim of commercial profit.

Several politicians from Texas assumed important positions of power in the US Government. The beginnings of the Suite 8F Group.

barter groups established.

The run on the banks began late in 1930.
Large loan companies force farmers to pay up or get out. There is utter disregard of the possibilities of repayment and refinancing. Farm commodity prices were low. Savings and reserves were gradually exhausted. Taxes and interest could not be paid.

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation s economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped...."

Marriner S. Eccles who served as Franklin D. Roosevelt’s Chairman of the Federal Reserve from November, 1934 to February, 1948 gave his view of what caused the Depression in his memoirs, "Beckoning Frontiers" (New York, Alfred A. Knopf, 1951):

Ah! The good old days when most people still lived on farms and resources hadn't been wastefully depleted by the thoughtless production-consumption machine that Eccles wanted to continue.

Anonymous said...

Fair and honest. But I'm not understanding why so many honest people don't see any way out within the constraints of capitalist solution space and still don't try to break out of the box.

Why not socialism?

Anonymous said...


my point exactly above. thank you.