Predict jobs in a double dip recession...or worse Forum

[sumus romani]

Paul Krugman is a leftist jackass. He skews examples, analogies and data to ram his leftist ideology down the throats of his readers. It's generally safe to ignore his opinion.

There may be a double-dip recession, but I wouldn't read Paul Krugman with the hopes of learning why it may occur or the chances of its occurrence.

Krugman is indeed a leftist hack outside economics (just look at his columns during the waning months of the Bush admin.). But, within economics he is really good. And no one can deny that his calling of the housing bubble a long time before anyone else is a feather in his cap and one of the reasons for his nobel. He has been right about the size of the recession all along, while the white house radically underestimated it. He called for a bigger stimulus in order to avoid depression back in November of 08, and he was right--just look around.

Actually, Peter Schiff predicted the housing bubble collapse long before Krugman. He wrote an entire book about it prior to the collapse, and in specific detail to boot.

I was using hyperbole. I am aware that a few others knew of the bubble early. But I think that going against the vast majority counts for a lot if one is ultimately proved right. It is like those who said that going into Iraq qas a mistake from the beginning. Basically one risks one's career on this sort of stuff.

[TheOcho]

Paul Krugman is a leftist jackass. He skews examples, analogies and data to ram his leftist ideology down the throats of his readers. It's generally safe to ignore his opinion.

There may be a double-dip recession, but I wouldn't read Paul Krugman with the hopes of learning why it may occur or the chances of its occurrence.

Krugman is indeed a leftist hack outside economics (just look at his columns during the waning months of the Bush admin.). But, within economics he is really good. And no one can deny that his calling of the housing bubble a long time before anyone else is a feather in his cap and one of the reasons for his nobel. He has been right about the size of the recession all along, while the white house radically underestimated it. He called for a bigger stimulus in order to avoid depression back in November of 08, and he was right--just look around.

Actually, Peter Schiff predicted the housing bubble collapse long before Krugman. He wrote an entire book about it prior to the collapse, and in specific detail to boot.

I was using hyperbole. I am aware that a few others knew of the bubble early. But I think that going against the vast majority counts for a lot if one is ultimately proved right. It is like those who said that going into Iraq qas a mistake from the beginning. Basically one risks one's career on this sort of stuff.

I think what is most important is the reasoning why we had a housing bubble. If I say a meteor is going to hit Earth and then it does, it doesn't mean I'm necessarily qualified or intelligent in the field. But, it is a point in his favor that he was at least able to see the looming collapse, but I don't think he actually knew why the collapse was coming.

I'm sure it's been said on this board, but here is the gist of the scenario, as Schiff and others see it...

The internet boom was artificial. The stimulus to counteract that corresponding internet bust only shifted that bust into another sector of the economy. The stimulus tampered with market signals and created a new boom in the housing industry. This boom, like the internet boom, was artificial. It was brought on by tampering with interest rates. The housing bust was fought off by more stimulus spending, among other things. This also, tampers with market signals and does not allow resources to be allocated in their most efficient industries. In the absence of the stimulus these projects will also fail. The problem is that each successive round of stimulus creates further distortions in the market. Eventually, the market will correct itself and the bust will be far worse than it would have been initially.

Brief and only an overview. But that's the general point. Schiff argues that we are at the breaking point with our continued stimulus. We could have endured a mild recession or depression after the internet bust, or we could do what we did, temporarily post-poning the inevitable. He says the next bust will be monetary and many people will probably want to killself.

[mec30]

Paul Krugman and his Neo-Keynesian gravy train have just about reached the end of the line. The "stimulus" made things worse, as predicted by the Austrian economists, along with every other negative consequence of the policies advocated by Krugman and the only slightly better Friedman.

The more interesting question is whether we will throw off the parasites and recover, or go Weimar.

again, +100000. austrians' predictions are almost invariably dead on.

HAHAHA. And please, what are the predictions? Hyperinflation as a result of monetary inflation? A second credit bubble? That stimulus only delays a more serious contraction?

We've seen none of that.

Spoken a little early, don't you think? I'm not saying these predictions will certainly come to fruition, but it's very early to discount them.

Quantitative easting will probably work, there are no signs of any unusual growth in any sector, and it's unlikely the economy will contract anymore than it already has. A slowdown? Yes, probably. Another downturn? Probably not.

[swc65]

^^ This is what I am thinking too.

Besides, even if there is a slowdown or another recession, it is unlikely to cripple the legal sector as much as the last one did. We are not on the verge of another banking bust with law as collateral damage.

We also have tons of new regs coming down the pipeline from healthcare to finreg to possible immigration reform. I have heard people call the finreg bill a veiled full employment bill for lawyers.

[TheOcho]

The more interesting question is whether we will throw off the parasites and recover, or go Weimar.[/quote]

again, +100000. austrians' predictions are almost invariably dead on. [/quote]

HAHAHA. And please, what are the predictions? Hyperinflation as a result of monetary inflation? A second credit bubble? That stimulus only delays a more serious contraction?

We've seen none of that.[/quote]
Spoken a little early, don't you think? I'm not saying these predictions will certainly come to fruition, but it's very early to discount them.[/quote]

Quantitative easting will probably work, there are no signs of any unusual growth in any sector, and it's unlikely the economy will contract anymore than it already has. A slowdown? Yes, probably. Another downturn? Probably not.[/quote]

Statistics don't mean much in the absence of theory. The reason we haven't seen unusual growth in any sectors is because the monetary stimulus is simply enough to support the industries. The statistics don't tell us what would be in the absence of the stimulus. A good economist takes into account both the seen and the unseen. If, in the absence of the stimulus, these sectors would be much smaller than they are currently, the market has still been significantly distorted. Thus, when the stimulus is ended, these sectors will contract significantly.

EDIT: Sorry for the quote fail

[ravens9111]

Unemployment checks actually are a great means of fiscal stimulus because it almost always results in spending and not savings. Though you're right that extending unemployment does tend to raise the unemployment rate, the effect is minor - 9.4% without and 10% with says one estimate by the federal reserve.

I don't see the logic in that. Have you ever tried surviving on an unemployment check? Do you know how much it is every two weeks? It is not enough to cover your bills. Not even close. Sure, the money will be spent. Why wouldn't it be? People need to pay rent, food, utility bills, etc. How is that going to CREATE JOBS? We aren't talking about the unemployment rate going up or down temporarily as it did today because 650,000 left the labor force.

What jobs are being created from extending unemployment? It has been extended for two years now. Are you saying that unemployment would be higher if benefits weren't extended? Or there would be higher job losses? Do you think the grocery store will lay off workers if people on unemployment can no longer buy food? Or your cable/internet/gas/electric company will lay off people if you can't pay your bill? Or if you have a car payment and you can no longer afford to pay, is the bank going to layoff an employee?You can't honestly believe that extending unemployment benefits CREATES jobs, do you?

You’re confusing fiscal stimulus with job creation. Transfer payments (unlike wage increases or general economic growth) are direct contributors to disposable income, in part, becuase it’s not subject to the automatic stabilization measures of the economy (taxes, other welfare aid, ect). This higher spending, taken as a whole, leads to higher aggregate demand, which in turn leads to inflation and higher production. Econ 101. The marginal propensity to spend is higher for the unemployed then it is for people with money who pay into UI. That might mean trouble when you have a large number of savers (as in a depression), but people forget that UI transfers are hedged against future savers, not current ones.

Unemployment raises the reservation wage, the wage at which people are willing to leave unemployment for a job. However, if there is no demand for labor, that effect is irrelevant.

No, I am not confusing fiscal stimulus with job creation. First, let's clear up a couple things. Unemployment benefits are taxed. You get a 1099 from the government. You must file it on your tax returns. Also, transfer payments are NOT included in GDP growth. Your assumption that extending unemployment benefits increases aggregate demand is false. Extending benefits does not increase aggregate demand. The only way to increase aggregate demand would be if that person receives a higher benefit amount or finds a job that pays more than the benefit amount. Extending the benefit would keep aggregate demand flat since there is no increase in income. On the flip side, allowing unemployment benefits to expire would lower aggregate demand. It is debatable if the expiration in benefit would cause others to lose their jobs. Most likely, these people will go on another form of public assistance such as welfare, food stamps, section 8, etc. That would in essence nullify the loss in unemployment income.

Your point of the propensity to consume is correct. These benefits are so small that there is nothing left over. Disposable income is after taxes. Again, after paying rent, food, utilities, etc. there won't be much left over, if anything. What we need is discretionary income. That is what will create jobs. Extending unemployment benefits is not the answer. It has not worked for two years. What jobs could possibly be created from unemployment income? The grocery store hiring cashiers or baggers? The postal service hiring more mailmen to deliver your bills to the utility company? Is the farmer going to hire more laborers to raise more chicken and cows for you? Is your landlord going to hire more maintenance men or leasing agents because you pay your rent? Would losing unemployment benefits cause these people to layoff workers? I just don't see it.

You also mention the reservation wage for the unemployed. They won't take a job unless they earn x amount. I assume that amount would have to be more than the benefit amount. Why should they be afforded the luxury to turn down a job because it is not enough? Why should these people be allowed to continue milking the system for money when they choose not to work? If you take the benefit away, then they would take that low paying job. Maybe that would be more productive than getting unemployment benefits? You think getting unemployment income would create more jobs than actually working and producing?

[mec30]

Actually, Peter Schiff predicted the housing bubble collapse long before Krugman. He wrote an entire book about it prior to the collapse, and in specific detail to boot.

I was using hyperbole. I am aware that a few others knew of the bubble early. But I think that going against the vast majority counts for a lot if one is ultimately proved right. It is like those who said that going into Iraq qas a mistake from the beginning. Basically one risks one's career on this sort of stuff.

I think what is most important is the reasoning why we had a housing bubble. If I say a meteor is going to hit Earth and then it does, it doesn't mean I'm necessarily qualified or intelligent in the field. But, it is a point in his favor that he was at least able to see the looming collapse, but I don't think he actually knew why the collapse was coming.

I'm sure it's been said on this board, but here is the gist of the scenario, as Schiff and others see it...

The internet boom was artificial. The stimulus to counteract that corresponding internet bust only shifted that bust into another sector of the economy. The stimulus tampered with market signals and created a new boom in the housing industry. This boom, like the internet boom, was artificial. It was brought on by tampering with interest rates. The housing bust was fought off by more stimulus spending, among other things. This also, tampers with market signals and does not allow resources to be allocated in their most efficient industries. In the absence of the stimulus these projects will also fail. The problem is that each successive round of stimulus creates further distortions in the market. Eventually, the market will correct itself and the bust will be far worse than it would have been initially.

Brief and only an overview. But that's the general point. Schiff argues that we are at the breaking point with our continued stimulus. We could have endured a mild recession or depression after the internet bust, or we could do what we did, temporarily post-poning the inevitable. He says the next bust will be monetary and many people will probably want to killself.

That’s just wrong. The rise in housing prices started in the mid 90s, well before interest rates were at all favorable. Even as interest rates rose in 2005-2008, home prices continued to rise at ridiculous levels. Interest rates were set appropriately after the 9/11 recession. That’s not to say that low interest rates didn’t contribute to the bubble, but lax underwriting standards caused the proportion of that rise to be from ARMs and other subprimes rather than Prime fixed rate mortgages - primes, btw, which have not seen an unusually high uptick in default rates.

[ravens9111]

Actually, Peter Schiff predicted the housing bubble collapse long before Krugman. He wrote an entire book about it prior to the collapse, and in specific detail to boot.

I was using hyperbole. I am aware that a few others knew of the bubble early. But I think that going against the vast majority counts for a lot if one is ultimately proved right. It is like those who said that going into Iraq qas a mistake from the beginning. Basically one risks one's career on this sort of stuff.

I think what is most important is the reasoning why we had a housing bubble. If I say a meteor is going to hit Earth and then it does, it doesn't mean I'm necessarily qualified or intelligent in the field. But, it is a point in his favor that he was at least able to see the looming collapse, but I don't think he actually knew why the collapse was coming.

I'm sure it's been said on this board, but here is the gist of the scenario, as Schiff and others see it...

The internet boom was artificial. The stimulus to counteract that corresponding internet bust only shifted that bust into another sector of the economy. The stimulus tampered with market signals and created a new boom in the housing industry. This boom, like the internet boom, was artificial. It was brought on by tampering with interest rates. The housing bust was fought off by more stimulus spending, among other things. This also, tampers with market signals and does not allow resources to be allocated in their most efficient industries. In the absence of the stimulus these projects will also fail. The problem is that each successive round of stimulus creates further distortions in the market. Eventually, the market will correct itself and the bust will be far worse than it would have been initially.

Brief and only an overview. But that's the general point. Schiff argues that we are at the breaking point with our continued stimulus. We could have endured a mild recession or depression after the internet bust, or we could do what we did, temporarily post-poning the inevitable. He says the next bust will be monetary and many people will probably want to killself.

That’s just wrong. The rise in housing prices started in the mid 90s, well before interest rates were at all favorable. Even as interest rates rose in 2005-2008, home prices continued to rise at ridiculous levels. Interest rates were set appropriately after the 9/11 recession. That’s not to say that low interest rates didn’t contribute to the bubble, but lax underwriting standards caused the proportion of that rise to be from ARMs and other subprimes rather than Prime fixed rate mortgages - primes, btw, which have not seen an unusually high uptick in default rates.

The rise in housing in the mid '90s was due to the Community Reinvestment Act and the internet bubble. When phantom wealth was created from the internet bubble, people were able to pay more for homes. Interest rates went down after 9/11 to avert another recession. Greenspan lowered the Fed Funds Rate to 1%. There was too much easy money. Anyone with a pulse could get a mortgage. Also, you can't forget that these loans were sold as AAA when they were junk. The CDO, CDS, derivatives market played a big role. And by the way, prime mortgages are defaulting at the highest pace ever. In fact, do a google search on "strategic default". These are mostly prime borrowers who are walking away from their home since they are so upside down.

[mec30]

I think what is most important is the reasoning why we had a housing bubble. If I say a meteor is going to hit Earth and then it does, it doesn't mean I'm necessarily qualified or intelligent in the field. But, it is a point in his favor that he was at least able to see the looming collapse, but I don't think he actually knew why the collapse was coming.

I'm sure it's been said on this board, but here is the gist of the scenario, as Schiff and others see it...

The internet boom was artificial. The stimulus to counteract that corresponding internet bust only shifted that bust into another sector of the economy. The stimulus tampered with market signals and created a new boom in the housing industry. This boom, like the internet boom, was artificial. It was brought on by tampering with interest rates. The housing bust was fought off by more stimulus spending, among other things. This also, tampers with market signals and does not allow resources to be allocated in their most efficient industries. In the absence of the stimulus these projects will also fail. The problem is that each successive round of stimulus creates further distortions in the market. Eventually, the market will correct itself and the bust will be far worse than it would have been initially.

Brief and only an overview. But that's the general point. Schiff argues that we are at the breaking point with our continued stimulus. We could have endured a mild recession or depression after the internet bust, or we could do what we did, temporarily post-poning the inevitable. He says the next bust will be monetary and many people will probably want to killself.

That’s just wrong. The rise in housing prices started in the mid 90s, well before interest rates were at all favorable. Even as interest rates rose in 2005-2008, home prices continued to rise at ridiculous levels. Interest rates were set appropriately after the 9/11 recession. That’s not to say that low interest rates didn’t contribute to the bubble, but lax underwriting standards caused the proportion of that rise to be from ARMs and other subprimes rather than Prime fixed rate mortgages - primes, btw, which have not seen an unusually high uptick in default rates.

The rise in housing in the mid '90s was due to the Community Reinvestment Act and the internet bubble. When phantom wealth was created from the internet bubble, people were able to pay more for homes. Interest rates went down after 9/11 to avert another recession. Greenspan lowered the Fed Funds Rate to 1%. There was too much easy money. Anyone with a pulse could get a mortgage. Also, you can't forget that these loans were sold as AAA when they were junk. The CDO, CDS, derivatives market played a big role. And by the way, prime mortgages are defaulting at the highest pace ever. In fact, do a google search on "strategic default". These are mostly prime borrowers who are walking away from their home since they are so upside down.

CRA had almost nothing to do with the housing bubble. It’s borderline racist drivel. Because most CRA mortgages were in low-income predominantly black areas had nothing to do with the quality of the loan. If fact, CRA loans were subject to stricter scrutiny and escaped the mortgage crisis moderatly well. Only 6% of those loans were subprime. Total myth created from whole cloth.

Low interest rates were appropriate for the economy at the time. You can deflate a housing bubble by raising interest rates during a recession. That’s using a bulldozer to swat a fly. AAAs prime mortgages were not (are still not) junk. Strategic defaults are not the main driver of the defaults we’re seeing. Banks have shown a willingness to renegotiate those loans rather than foreclose.


--ImageRemoved--

AAA rated traunches of MBS CDOs and synthetic CDOs based on BBB or subprime loans were junk. It was essentially a backdoor method to invest in subprime mortgages without calling it subprime. Big difference. The CDO market is complicated, but you can read up on it online.

[mec30]

You’re confusing fiscal stimulus with job creation. Transfer payments (unlike wage increases or general economic growth) are direct contributors to disposable income, in part, becuase it’s not subject to the automatic stabilization measures of the economy (taxes, other welfare aid, ect). This higher spending, taken as a whole, leads to higher aggregate demand, which in turn leads to inflation and higher production. Econ 101. The marginal propensity to spend is higher for the unemployed then it is for people with money who pay into UI. That might mean trouble when you have a large number of savers (as in a depression), but people forget that UI transfers are hedged against future savers, not current ones.

Unemployment raises the reservation wage, the wage at which people are willing to leave unemployment for a job. However, if there is no demand for labor, that effect is irrelevant.

No, I am not confusing fiscal stimulus with job creation. First, let's clear up a couple things. Unemployment benefits are taxed. You get a 1099 from the government. You must file it on your tax returns. Also, transfer payments are NOT included in GDP growth. Your assumption that extending unemployment benefits increases aggregate demand is false. Extending benefits does not increase aggregate demand. The only way to increase aggregate demand would be if that person receives a higher benefit amount or finds a job that pays more than the benefit amount. Extending the benefit would keep aggregate demand flat since there is no increase in income. On the flip side, allowing unemployment benefits to expire would lower aggregate demand. It is debatable if the expiration in benefit would cause others to lose their jobs. Most likely, these people will go on another form of public assistance such as welfare, food stamps, section 8, etc. That would in essence nullify the loss in unemployment income.

Your point of the propensity to consume is correct. These benefits are so small that there is nothing left over. Disposable income is after taxes. Again, after paying rent, food, utilities, etc. there won't be much left over, if anything. What we need is discretionary income. That is what will create jobs. Extending unemployment benefits is not the answer. It has not worked for two years. What jobs could possibly be created from unemployment income? The grocery store hiring cashiers or baggers? The postal service hiring more mailmen to deliver your bills to the utility company? Is the farmer going to hire more laborers to raise more chicken and cows for you? Is your landlord going to hire more maintenance men or leasing agents because you pay your rent? Would losing unemployment benefits cause these people to layoff workers? I just don't see it.

You also mention the reservation wage for the unemployed. They won't take a job unless they earn x amount. I assume that amount would have to be more than the benefit amount. Why should they be afforded the luxury to turn down a job because it is not enough? Why should these people be allowed to continue milking the system for money when they choose not to work? If you take the benefit away, then they would take that low paying job. Maybe that would be more productive than getting unemployment benefits? You think getting unemployment income would create more jobs than actually working and producing?

Unemployment benefits are taxed at a significantly lower rate than regular income. In fact, I think for 2009 the first several thousand dollars of unemployment was tax free. Transfer payments do contribute to both aggregate demand and GDP by increasing otherwise non-existent consumption. It’s essentially back door government spending allocated by individuals.

The idea that letting unemployment benefits lapse and shifting those people to other aid is utterly ridiculous. Most people on unemployment won’t qualify for TANF, section 8 housing does not contribute to economic stimulus (in fact it creates a crowding out effect), and a significant number of people on unemployment take advantage of SNAP (food stamps) already. I’ve never seen that argument promoted at any legitimate source – even rabid economic liberals.

Unemployment benefits need to match the economic realties on the ground to be effective. The average length of unemployment now is 30 weeks and benefits should be extended to reflect those realities until the economy recovers. Underemployment can be just as disastrous as unemployment. See the Great Depression.

[TheOcho]

Actually, Peter Schiff predicted the housing bubble collapse long before Krugman. He wrote an entire book about it prior to the collapse, and in specific detail to boot.

I was using hyperbole. I am aware that a few others knew of the bubble early. But I think that going against the vast majority counts for a lot if one is ultimately proved right. It is like those who said that going into Iraq qas a mistake from the beginning. Basically one risks one's career on this sort of stuff.

I think what is most important is the reasoning why we had a housing bubble. If I say a meteor is going to hit Earth and then it does, it doesn't mean I'm necessarily qualified or intelligent in the field. But, it is a point in his favor that he was at least able to see the looming collapse, but I don't think he actually knew why the collapse was coming.

I'm sure it's been said on this board, but here is the gist of the scenario, as Schiff and others see it...

The internet boom was artificial. The stimulus to counteract that corresponding internet bust only shifted that bust into another sector of the economy. The stimulus tampered with market signals and created a new boom in the housing industry. This boom, like the internet boom, was artificial. It was brought on by tampering with interest rates. The housing bust was fought off by more stimulus spending, among other things. This also, tampers with market signals and does not allow resources to be allocated in their most efficient industries. In the absence of the stimulus these projects will also fail. The problem is that each successive round of stimulus creates further distortions in the market. Eventually, the market will correct itself and the bust will be far worse than it would have been initially.

Brief and only an overview. But that's the general point. Schiff argues that we are at the breaking point with our continued stimulus. We could have endured a mild recession or depression after the internet bust, or we could do what we did, temporarily post-poning the inevitable. He says the next bust will be monetary and many people will probably want to killself.

That’s absolutely correct. The rise in housing prices started in the mid 90s, after monetary stimulus to offset the dotcom bust. I recognize that the interest rates were lowered beyond market levels and were more favorable than they should have been. Even as interest rates rose in 2005-2008, home prices continued to rise at ridiculous levels, but I recognize that this doesn't necessarily mean it was not the result of tampering with interest rates following the dotcom bubble. Interest rates can't be set appropriately by a government agency. So I agree that low interest rates contributed to the bubble, but lax underwriting standards caused the proportion of that rise to be from ARMs and other subprimes rather than Prime fixed rate mortgages - primes, btw, which have also seen an unusually high uptick in default rates. I also agree that the CRA did, in fact, play a role in the housing bubble, albeit not a primary one.

FTFY.

Sorry, I've just never done that to anyone before. Are you an econ major? If so, you've likely been bombarded with Keynesian economic theory and not much else. My cousin who recently received a full ride to Cornell for a graduate degree in economics, had never heard of F.A. Hayek. Impressive the diversity some schools teach, huh? Anyway, I suggest reading some alternative theories to the housing bubble and the boom and bust cycle of the economy in general. I've studied a few of the more popular accounts, but it seems like only one is even remotely logical. If you don't know Hayek, he's also a Nobel Prize winning economist (for his theory on the business cycle, I believe), and draws his ideas from the likes of Mises. Maybe you know all this, maybe not. If not, it's worth a look.

[romothesavior]

I don't know jack about the economy... Just got this email and it actually put all of this nonsense into language that I understand. Somebody please tell me if this is a good rough outline for what happened:

"An Easily Understandable Explanation of Derivative Markets."


Heidi is the proprietor of a bar in Detroit . She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar.

To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later. She keeps track of the drinks consumed in a ledger (thereby granting the customers loans).

Word gets around about Heidi's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit by providing her customers freedom from immediate payment demands. Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi's gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi's borrowing limit. He sees no reason for any undue concern, since
he has the debts of the unemployed alcoholics as collateral.

At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS.

These securities are then bundled and traded on international security markets. Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. He so informs Heidi.

Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy.

The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS,ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Heidi's bar had granted her generous payment extensions and had invested their firms' pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds.

Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from their cronies in Government.

The funds required for this bailout are obtained by new taxes levied on employed,hard working middle-class, non-drinkers who have never been in Heidi's bar.

[nycparalegal]

I don't know jack about the economy... Just got this email and it actually put all of this nonsense into language that I understand. Somebody please tell me if this is a good rough outline for what happened:

"An Easily Understandable Explanation of Derivative Markets."


Heidi is the proprietor of a bar in Detroit . She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar.

To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later. She keeps track of the drinks consumed in a ledger (thereby granting the customers loans).

Word gets around about Heidi's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit by providing her customers freedom from immediate payment demands. Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi's gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi's borrowing limit. He sees no reason for any undue concern, since
he has the debts of the unemployed alcoholics as collateral.

At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS.

These securities are then bundled and traded on international security markets. Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. He so informs Heidi.

Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy.

The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS,ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Heidi's bar had granted her generous payment extensions and had invested their firms' pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds.

Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from their cronies in Government.

The funds required for this bailout are obtained by new taxes levied on employed,hard working middle-class, non-drinkers who have never been in Heidi's bar.

It's not a very good discription of the derivatives market.

[romothesavior]

It's not a very good discription of the derivatives market.

So I figured, but I wanted to ask.

I could write forever on metaethics or church/state relations, but I'll be damned if I ever have a solid grasp of economics. I need layman's explanations.

[tarheel87]

I don't know much about all the economics behind it but what's everyone's take on this:

--LinkRemoved--

[nycparalegal]

Fanastic article on Apple's supply chain.

http://www.nytimes.com/2010/07/06/techn ... ogy&src=me

[yinz]

...all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar...

Did you just call me an unemployed alcoholic?

[mec30]

I was using hyperbole. I am aware that a few others knew of the bubble early. But I think that going against the vast majority counts for a lot if one is ultimately proved right. It is like those who said that going into Iraq qas a mistake from the beginning. Basically one risks one's career on this sort of stuff.

I think what is most important is the reasoning why we had a housing bubble. If I say a meteor is going to hit Earth and then it does, it doesn't mean I'm necessarily qualified or intelligent in the field. But, it is a point in his favor that he was at least able to see the looming collapse, but I don't think he actually knew why the collapse was coming.

I'm sure it's been said on this board, but here is the gist of the scenario, as Schiff and others see it...

The internet boom was artificial. The stimulus to counteract that corresponding internet bust only shifted that bust into another sector of the economy. The stimulus tampered with market signals and created a new boom in the housing industry. This boom, like the internet boom, was artificial. It was brought on by tampering with interest rates. The housing bust was fought off by more stimulus spending, among other things. This also, tampers with market signals and does not allow resources to be allocated in their most efficient industries. In the absence of the stimulus these projects will also fail. The problem is that each successive round of stimulus creates further distortions in the market. Eventually, the market will correct itself and the bust will be far worse than it would have been initially.

Brief and only an overview. But that's the general point. Schiff argues that we are at the breaking point with our continued stimulus. We could have endured a mild recession or depression after the internet bust, or we could do what we did, temporarily post-poning the inevitable. He says the next bust will be monetary and many people will probably want to killself.

That’s absolutely correct. The rise in housing prices started in the mid 90s, after monetary stimulus to offset the dotcom bust. I recognize that the interest rates were lowered beyond market levels and were more favorable than they should have been. Even as interest rates rose in 2005-2008, home prices continued to rise at ridiculous levels, but I recognize that this doesn't necessarily mean it was not the result of tampering with interest rates following the dotcom bubble. Interest rates can't be set appropriately by a government agency. So I agree that low interest rates contributed to the bubble, but lax underwriting standards caused the proportion of that rise to be from ARMs and other subprimes rather than Prime fixed rate mortgages - primes, btw, which have also seen an unusually high uptick in default rates. I also agree that the CRA did, in fact, play a role in the housing bubble, albeit not a primary one.

FTFY.

Sorry, I've just never done that to anyone before. Are you an econ major? If so, you've likely been bombarded with Keynesian economic theory and not much else. My cousin who recently received a full ride to Cornell for a graduate degree in economics, had never heard of F.A. Hayek. Impressive the diversity some schools teach, huh? Anyway, I suggest reading some alternative theories to the housing bubble and the boom and bust cycle of the economy in general. I've studied a few of the more popular accounts, but it seems like only one is even remotely logical. If you don't know Hayek, he's also a Nobel Prize winning economist (for his theory on the business cycle, I believe), and draws his ideas from the likes of Mises. Maybe you know all this, maybe not. If not, it's worth a look.

I concentrated on number and set theory in philosophy and focused on economic policy for my legal studies major. I think Keynesian economic theories provide more robust theoretical explanation of the markets assuming rational actors. That’s not to say I don’t embrace the idea that the Fed, via low interest rates, can inflate a bubble or by increasing the money supply you can (indirectly and not by necessity) increase the rate inflation. I don’t believe in neutral money. I also believe that Keynesian economics has difficult explaining stagflation. I’m pragmatic in my economic views.

[mec30]

I don't know jack about the economy... Just got this email and it actually put all of this nonsense into language that I understand. Somebody please tell me if this is a good rough outline for what happened:

I guess it depends. If you wanted to know why some of these securities were rated AAA when clearly they were based on sub-prime mortgages, how the federal funds target rate may have played a role in the crash, how the downward spiral continued and affected more than just one isolated sector (housing), how predatory lending played a role, then it's probably not a good explanation.

The last part about new taxes is also clearly wrong and so is the part about the no strings attached money. For TARP, the string attached was ownership of the various companies that received funds, the ultimate sting.

[mec30]

I don't know much about all the economics behind it but what's everyone's take on this:

--LinkRemoved--

I'm a little skeptical, if there is another recession the normal indicators won't show it. Treasuries are a flight to safety and the fed is unlikely to raise interest rates (thus keeping bond yields low) until the economy picks up. It's going to all come down to lending, consumer spending and confidence, capacity utilization, investment, and wages and unemployment.

[Merr]

I don't know jack about the economy... Just got this email and it actually put all of this nonsense into language that I understand. Somebody please tell me if this is a good rough outline for what happened:

"An Easily Understandable Explanation of Derivative Markets."


Heidi is the proprietor of a bar in Detroit . She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar.

To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later. She keeps track of the drinks consumed in a ledger (thereby granting the customers loans).

Word gets around about Heidi's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit by providing her customers freedom from immediate payment demands. Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi's gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi's borrowing limit. He sees no reason for any undue concern, since
he has the debts of the unemployed alcoholics as collateral.

At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS.

These securities are then bundled and traded on international security markets. Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. He so informs Heidi.

Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy.

The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS,ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Heidi's bar had granted her generous payment extensions and had invested their firms' pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds.

Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from their cronies in Government.

The funds required for this bailout are obtained by new taxes levied on employed,hard working middle-class, non-drinkers who have never been in Heidi's bar.

It's not a very good discription of the derivatives market.

It's a fairly good allegory for what happened with mortgage backed securities/the sub-prime crisis though.

One of my favorite videos on it.
http://www.youtube.com/watch?v=z-oIMJMGd1Q