Wednesday, September 9, 2009

Seeing the Crisis Coming...

From the Financial Times (via Andrew Jackson at the Progressive Economics Forum)

Official models missed the crisis not because the conditions were so unusual, as we are often told. They missed it by design. It is impossible to warn against a debt deflation recession in a model world where debt does not exist. This is the world our policymakers have been living in. They urgently need to change habitat.

I [Dirk Bezemer] undertook a study of the models used by those who did see it coming...

5 comments:

Brenda Rosser said...

"Editorial: Last fall, Fed. Reserve failed to heed urgent warnings for months before the crash; New York Reserve bank and others were noting “orgy of speculation” [leveraged] and urging increase in rates, but Fed “followed schoolteacher tactics of issuing admonitions and warnings.” If new Fed appointments are more “aggressive and forceful,” a great deal will have been gained.

Monday, September 8, 1930
http://newsfrom1930.blogspot.com/

Jack said...

Brenda,
You will better understand the decision making process at the Federal Reserve when you look more closely at its Board of Governors and and recognize that it is little more than a "good old boy" organization whose members have always understood the concept that one goes along to get along. Their individual backgrounds are indicative of a status quo arrangement rather than the intended oversight and directive concept embodied in the original legislation setting up the Fed. And here directly from the Fed's mission statement:

Today, the Federal Reserve's duties fall into four general areas:

* conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
* supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers
* maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
* providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system

That second paragraph is a real whopper, don't yah think!!

Brenda Rosser said...

They're all 'whoppers', Jack. It's clear that the reserve banks have way too much power. But then, it doesn't stop there. The ability of officers of the Fed and other similar agencies to use their insider information to make millions of unearned dollars. I despair about the question of whether one can regulate away that sort of cheating of the system. The bottom line seems to me that big centralised decision-making bodies are unsustainable in every sense of the word.

The system ambles along with lumps and bumps but then collapse happens. The warnings have been around about capitalism for as long as the system began to dominate world economic activity. I feel that we're living in the time these folks prophesied.

Exploiting FDIC Loopholes Enriches Former U.S. Bank Regulators
By David Evans
http://www.bloomberg.com/apps/news?pid=20601170&refer=home&sid=aBaYKQD_UPcE

Don said...

Since Bernanke gave a speech in 2002 on Debt-Deflation, and the possibility of it occurring was discussed in 2002 & 2003, I don't think that it's possible that the Fed wasn't aware of it. The question is: If they were aware of it in those years, in which the economy was better and we were in less debt, then how could we approach the precipice of a Debt-Deflationary Spiral in 2008?

To me, the answer lies in how the Fed's actions have been perceived since the 80's. It is not simply that the Fed has intervened, but that it has been seen by investors as acting in order to buoy up the markets. Along with govt bailouts since the 80's, investors came to believe that the Fed and Govt would rescue them if a financial crisis occurred. This happened as the system was also being deregulated. That's a bad mix.

In other words, the previous actions of the Fed led investors to believe that Lehman would be saved, for example. This history meant that at the same time as they were trying to stave off a disaster, they were adding to the moral hazard of it occurring by doing so. They were in a Catch-22. There were no good choices left. They were beyond the point of backing off, even though they gave it a shot.

A lot of assumptions about Monetary Policy need to be investigated going forward.

Don the libertarian Democrat

TheTrucker said...

Revisiting an April 2007 Forecast Regarding The Connection Between Peak Oil and the Collapse of the Monetary System

We ran out of gas.