The stock market's record 778 point drop today will no doubt lead many people to conclude that the House of Representatives was wrong to vote down the bailout plan backed by both the Bush Administration and the Democratic leadership. Indeed, Senate Majority Leader Harry Reid has already made that argument. Here's why I think such claims are wrong.
What is good for stockholders isn't necessarily good for the economy as a whole. Normally, I'm not much moved by populist rhetoric about how the interests of "Main Street" are at odds with those of "Wall Street." This, however, is one of the rare cases where such cliches have a measure of truth. If Congress were planning to pass a bill providing, say, a $100 per share subsidy to stockholders at the expense of taxpayers, no doubt stock values would rise in anticipation and then fall precipitously if the plan were unexpectedly voted down. That is essentially what happened here. Many stockholders owned shares in firms that expected to be bailed out. In addition to the financial firms that would have been the immediate beneficiaries of the bailout, shareholders in many other industries could foresee a "slippery slope" under which their firms could expect an increased chance of a bailout for themselves. At least for the moment, this slippery slope has been forestalled. Naturally, shareholders are disappointed, and their stocks are falling in value. But the outcome is good for the larger economy because we will not have a massive orgy of wealth transfers from successful industries to failing ones, nor will we create a serious moral hazard by signalling that firms that make overly risky investments that fail can expect to be bailed out in the future.
Past history shows that stock market drops, even big ones, don't necessarily cause longterm damage to the economy. Today's drop in stock values, while the largest in absolute terms, is not even in the top 10 relative to total shareholder value. The 1987 stock market crash was much more severe - a 22.6% loss in share value on the Dow Jones in one day - three times today's 7% drop. Yet the economy recovered swiftly, in part because policymakers were wise enough to let failing firms go bankrupt and free up their resources for use by more efficient industries.
Even in the Great Depression, most economic historians agree the harm caused by the stock market crash of 1929 was not by itself enough to cause a severe economic downturn. Rather, the Depression got as deep and prolonged as it did because of a wide range of failed government policies, including a massive currency deflation, the Smoot-Hawley Tariff of 1930, and gargantuan boondoggles such as the National Recovery Act.
I'm not a macroeconomist. So I can't be certain that no government action is required by the present crisis. Perhaps a modest and narrowly-targeted intervention would be desirable. I do, however, have some expertise in political economy and public choice problems, and the just-defeated bailout has all the classic indicators of a massive interest group power grab in the guise of an "emergency measure." I also draw some reassurance from evidence showing that numerous prominent economists across the political spectrum also believe that the bailout is ill-advised and likely to cause more harm than good to the economy in the long run. What makes the present situation different from many past crises is that the power grab has - so far - failed.
UPDATE: University of Chicago economist Casey Mulligan provides a helpful summary of the reasons why the performance of Wall Street generally and finance firms in particular isn't a good predictor of the condition of the economy as a whole.
All Related Posts (on one page) | Some Related Posts:
- The Bailout and the Market:
- Does the Stock Market Fall Prove that the Bailout Would have Been Worth it? - Round II:
- Poof!
- Why the Stock Market Drop Doesn't Prove that Congress was Wrong to Reject the Bailout:
- Cautionary Lessons from the Great Depression;...
- A Simple Argument Against the Bailout:
- Gary Becker's Doubts About the Wisdom of the Bailout:
- Crony Capitalism:
One of these things is not like the others. The National Recovery Act was terrible legislation, but it also was enacted in 1933, WELL AFTER the economy had sunk into its deep Depression. Nor did the NRA affect the length of the Depression-- which was worldwide and really wasn't affected by whether the Schechter Poultry company was subjected to some stupid federal regulations.
Look, Ilya, I don't know how to tell you this except bluntly-- your ideology cannot accept the reality that was the Great Depression. You can't accept that sometimes the government has to step in during profound crises, not only to try to save the economy but also to try and provide a safety net for individuals. And that when things have really hit bottom, government intervention just isn't going to result in the sorts of harm that libertarians claim it would.
That doesn't mean, however, that you are wrong about the bailout, which is a very complex question. Only that you probably shouldn't write about the Depression anymore unless you are willing to admit that the perfect and beautiful libertarianism doesn't have a lot useful to say about whether the New Deal should have been enacted.
The House of Representatives is at least partially functioning as a deliberative body.
It's time for Congress to do what Congress does best: Hold hearings.
I do not mean this facetiously, nor in any way other than as a very serious proposal. The nation, and the nation's Congress need to hear from these “prominent economists across the political spectrum”.
It's short notice, but emergency committee hearings should begin on Wednesday, and perhaps continue through Thursday.
Look, Ilya, I don't know how to tell you this except bluntly-- your ideology cannot accept the reality that was the Great Depression. You can't accept that sometimes the government has to step in during profound crises, not only to try to save the economy but also to try and provide a safety net for individuals. And that when things have really hit bottom, government intervention just isn't going to result in the sorts of harm that libertarians claim it would.
For the reasons, I discussed in the linked post about the NRA, it made the Depression longer and deeper than it would have been otherwise - and by the way deeper in the US than in other countries that didn't enact such ill-advised policies. The NRA wasn't limited to a few "stupid" regulations that affected Schechter Poultry. It was a massive cartel scheme covering most of the nonagricultural economy, one that greatly reduced output and unemployment. It didn't cause the Depression in the first place, but it did make it a lot worse than it would have been otherwise.
I did not claim that NO action by govt is ever necessary in a deep crisis. I do, however, argue - in line with may leading economic historians (from Milton Friedman on down) that the Depression was partly caused and severely exacerbated by failed government policies. No one denies that the Depression occurred. The debate is over its causes and remedies.
It does seem we may get a chance to find out.
(Concur w/ Esper re: Depression, but take Somin's point that a stock drop, in/of itself, isn't the same as the economy's collapsing.)
It will take a depression, first. But that was going to happen anyway. Far better for the American people to see it start, on the Republicans' watch, as the eminently fitting finale to the most wretched administration in American history. The Boy President once said that his paramount political aim was to "complete the Reagan Revolution." Ladies and gentlemen, let's have a hand for Mr. Bush! Today his dream comes true!
If we're lucky, the downturn will be severe and short, more on the order of a nineteenth-century "panic" than of the Great Depression. A lot of paper wealth will get wiped out, there will be real-world economic suffering, but once the rocks stop falling, investors will begin cautiously poking their heads out. When they see that there is no returning to the self-serving mumbo-jumbo of Reaganomics--that the United States is finally becoming a grown-up nation--then capital will begin again to flow, and we will begin to consider how best to reconstruct our society along more sustainable--and therefore more equitable--lines.
At bottom, the vast and still mushrooming economic inequality fostered by Reaganomics is no longer acceptable to the American people. They will no longer tolerate routine political chicanery to ensure enrichment of those who can purchase a whole political party, along with its evangelical shock troops. They will no longer support reflexive spending lurches, simply because the political class doesn't have any other idea what to do. They want responsibility--proven responsibility, checked-up-on responsibility--in administering not just public funds, but the whole of the public welfare.
This will, after time and suffering, add up to a demand not necessarily for more government, but for better government, more competent government, farther-seeing government, more modest government. Government able to anticipate what will happen in the real world, not react blindly when its ideological fantasies fail to come true. Government able to comprehend that the real foundations of national power are saving, education and innovation, not weapons systems. Government that grasps the difference between leadership and force. Government focused on this nation, on what we need--not on the globalist agendas of neo-cons . Government that cares about the quality of life of the whole society, not about the ignorant prejudices of religious demagogues.
So perhaps this cataclysmic end of the Bush administration will someday be seen as the beginning of national regeneration. Thanks, Texas Republicans. You've saved your country. But you and your ilk will not inherit it.
1) Isn't the problem the worthlessness of debt rather than equity. If equity markets collapse, I think I agree. But if commercial paper becomes worthless and banks have difficult time raising new equity capital and credit dries up - isn't that something that will affect "main street?"
2) run on the hedge funds? I have no idea what that means (aren't most hedge funds private), but people have been throwing that out.
Look, again, the NRA was a terrible law. It wasn't in effect for very long (two years until the Supreme Court declared it unconstitutional in 1935), and the Depression continued for 6 more years after it was repealed. It was less significant than several other New Deal laws that either involved a far bigger government (the WPA, the CCC) or lasted for a far longer time. There's no basis for isolating the effect of the NRA rather than taking the New Deal as a whole, given that FDR was committed to bold persistent experimentation, i.e., some stuff would work, some stuff wouldn't.
Further, you are making a huge mistake by ignoring the global nature of the Depression. How, exactly, did the NRA lengthen the depression of the British economy, or the economies of continental Europe, or the Soviet economy? The Depression was worldwide. Again, delegating all that authority to micromanage American business was stupid, but there's no warrant for concluding that a crisis that was caused by gigantic worldwide macroeconomic forces in the 1920's and 1930's could have been lengthened by a single law that imposed some stupid regulations on American business for only 2 years.
I did not claim that NO action by govt is ever necessary in a deep crisis. I do, however, argue - in line with may leading economic historians (from Milton Friedman on down) that the Depression was partly caused and severely exacerbated by failed government policies. No one denies that the Depression occurred. The debate is over its causes and remedies.
Except as far as I know, this "debate" doesn't exist outside the extreme libertarian wing of economics. I have never heard any political scientist, or legal scholar, or mainstream economist advance your position. I suspect the reason for that is because it is a make-work claim-- condemning the New Deal is very important to you, because the New Deal did a lot of things that libertarians hate. And the standard excuse for the New Deal (which happens to be true) is that even the stupid parts of it were part of a justified response to a national emergency that involved a lot of experimentation. Much better for libertarians to lay the intellectual groundwork to ensure that if another Depression hits, we don't enact national health care or nationalize businesses or something.
Frankly, a lot of this is just hype - hype spread by interested parties (i.e. those wanting the money, and those wanting the political benefits of blaming the other side), and hype spread through Conventional Wisdom by those who haven't the foggiest idea what a REMIC is, how the CDO process works, or why there's a problem on Wall Street today. Hype sells, and panic sells low when it should buy, or buys high when it should sell.
The simple fact is that the economy is not going to seize up because some investment banks and big institutional investors take a bath (admittedly, some will take a deep, cold bath).
And if it was, nothing in this bill would have stopped it - how is $700 billion going to save Wall Street when we're looking at tens of trillions of potential losses worldwide? The $700 billion bill was simply a vote for the status quo - a vote of confidence in the "smart guys" at Treasury and on Wall Street who claim to understand the unknowable.
Sputnik, are you serious, or are you Sarcastro in disguise? Actually, much funnier than Sarcastro.
Wall Street is all of us. Our pensions, our 401K's, our insurance policies, our investments if we're so lucky, our credit cards, etc. A melt down will result in a financial holocaust.
Congress is fiddling while the global economy burns. We need a simple, transparent, and accountable bill, much like what was proposed by Bernanke and Paulson originally instead of a larded up, politicized abortion the "leadership" offered up.
I hope you have canned goods and survival rations otherwise.
anon, A debate exists. But that doesn't mean that the proposition that Ilya argues about the central importance of the NRA to lengthening the Depression is seriously debated.
Your comment is like saying that because there is a debate about whether the US should have intervened in the Vietnam War, that this means that someone who argues that what Johnson really should have done in response to North Vietnamese aggression was started a full-scale nuclear war with the Soviet Union is part of that debate.
There's a common political syllogism that runs:
1) There is a problem; something must be done.
2) This is something
3) Therefore, This must be done
I'll leave it to the reader to find the logical flaw.
from this?
Jim Lindgren
Your apparent ignorance of the academic literature on this subject doesn't mean it doesn't exist. Milton Friedman, Allan Meltzer, and (ironically) Ben Bernanke are among the leading economists who have held views similar to mine. The Smoot-Hawley Tariff is regarded as an important contributing factor to the Depression by most economists, liberals as well as conservatives. So too with the errors of the Fed in causing a massive contraction of the monetary supply. Friedman won the Nobel Prize in large part for his work on this issue - a measure of the acceptance his position got in "mainstream" circles (the Prize is determined by mostly left of center European economists).
Look, again, the NRA was a terrible law. It wasn't in effect for very long (two years until the Supreme Court declared it unconstitutional in 1935), and the Depression continued for 6 more years after it was repealed. It was less significant than several other New Deal laws that either involved a far bigger government (the WPA, the CCC) or lasted for a far longer time. There's no basis for isolating the effect of the NRA rather than taking the New Deal as a whole, given that FDR was committed to bold persistent experimentation, i.e., some stuff would work, some stuff wouldn't.
The NRA's effects didn't end with its expiration in 1935. Industries that had shut down or reduced production couldn't ramp it up again overnight. TMoreover, it was by far the largest and most sweeping New Deal measure, because it eoncmpassed nearly all the nonagricultural economy. The WPA and CCC were minor by comparision. Even after it expired, numerous similar cartel schemes were enacted for other industries, many of which did not expire. I mentioned the AAA (which is with us still, in modified form) in the linked post.
Finally, as I pointed out in the original post, the New Deal, even "as a whole" did not end the Depression, as there was double digit unemployment up until WWII. Nations such as France and Britain, which did not adopt as sweepingly interventionist policies as the US, recovered faster.
Seriously, though, we're going to see a lean time on Wall Street no matter what bill passes (or if any or no bill passes). To be sure, there are some things that Congress and/or the agencies can do that are both cheap and effective - (1) eliminating "mark to market" accounting for certain financial entities, for instance, will have a major effect on the credit calls that are hitting the i-banks and institutional investors, but the rule won't cost the taxpayers a dime. (2) Rep. Cantor's insurance plan would be effective if Congress agrees to it - forcing the MSB investors to insure their own industry will save the taxpayers money, result in substantially less government interference in the market (and remove the scary prospect of government equity ownership in some of the banks) and restore the securities to a marketable status. (3) fixing or eliminating Fannie and Freddie will prevent new pollution from entering the stream, and will cost less than $700 billion. (4) public hangings of the Freddie/Fannie executives who ran the company from 1995-2007 would be cheap but entertaining, possibly replacing the "fireside chats" of yore.
The point is that a lot of institutional investors will hurt no matter what happens. But it is better to let them hurt now than feed them taxpayer money to let the sickliest of them linger for years - have you forgotten what happened to Japan in the 1990s after another real estate asset bubble burst? Keeping the banks on life support is a recipe for 10+ years of stagnation.
Most opponents of the plan don't understand the international monetary system, which is really just a system of "gentlemen's agreements" among central bankers worldwide. If they lose confidence in the fluidity of that arrangement, they all jump ship and it is every country for itself. The result is likely to be a severe contraction of global economic activity.
One fairly short-term effect may be the shipment of oil to the U.S., because most of that is based on credit, not cash. If foreign nations won't buy our bonds, or take our money, we will soon find no gas at the pumps, at any price, and rationing of it for a few users like government and farmers producing food, but without enough to get farm product to grovery shelves. Our "just-in-time" inventory system will collapse and manufacturing will come to a halt.
The Senate votes Wednesday and the bill could be brought up in the House on Thursday, but by then it may be too late. Once the global panic sets in, it becomes an avalanche, and it will be too late for a "bailout".
Interestingly, what the markets have been hoping for is not an actual outsay of money, but a willingness to back current credit markets. The collapse could very well have been avoided by just passing the bill without putting out any money. Now it may be impossible to avoid even if the infusion is made.
That's what the strategic petroleum reserve is for. We got 90 days of crude stashed.
Can you tell us exactly what interest group you mean? And exactly what power are they grabbing?
The S&P500 closed today at just over 1100 -- and has not closed that low since 2004. Those investors who have been pushing up the market for nearly four years "in anticipation" of this bailout have been quite prescient.
Nice changing of the subject, Ilya. I am of course familiar with the arguments about the Smoot-Hawley Tariff and the contraction of the money supply. Re-read my first post-- "one of these is not like the others". ONE OF THESE. I.e., the NRA. Not the other issues you mentioned.
I stand by my statement that nobody I am aware of outside the realm of extreme libertarianism advocates your position that the NRA lengthened the Depression (though plenty of people think it was a terrible law).
The NRA's effects didn't end with its expiration in 1935. Industries that had shut down or reduced production couldn't ramp it up again overnight. TMoreover, it was by far the largest and most sweeping New Deal measure, because it eoncmpassed nearly all the nonagricultural economy. The WPA and CCC were minor by comparision. Even after it expired, numerous similar cartel schemes were enacted for other industries, many of which did not expire. I mentioned the AAA (which is with us still, in modified form) in the linked post.
The NRA encompassed approximately 10,000 pages of regulations over its 2 years of operation. That sounds like a lot, but one year's worth of the Federal Register now has over 70,000 pages of regulations. So we are talking about 1/14th the amount of regulatory burden that is currently placed on American business, but we are to believe that imposing these regulations for two years lengthened a global Depression by several years.
The AAA was, of course, a different law which you didn't mention in your post. If you are going to consider the AAA part of the NRA, why not consider the CCC and the WPA and the TVA and Social Security part of the NRA as well? How about considering World War II part of the NRA?
Further, the AAA (another law I am not a great fan of) was an attempt to keep farmers afloat through crop subsidies. It was essentially a system of government transfer payments to farmers. I can see why that wouldn't have any effect on the Depression, but there's no real mechanism by which it would lengthen it.
Finally, as I pointed out in the original post, the New Deal, even "as a whole" did not end the Depression, as there was double digit unemployment up until WWII. Nations such as France and Britain, which did not adopt as sweepingly interventionist policies as the US, recovered faster.
Actually, you might want to connect those two thoughts and think about the fact that Britain and France entered World War II earlier than we did. That might have had something to do with them pulling out of the Depression slightly sooner.
Look, I don't think the New Deal did anything that got us out of the Depression. What it did do was help a lot of people who needed help through a system of experimentation, which is the smart policy in that situation because you can wait until the cows come home for libertarian policies to get us out of a Depression. There really isn't any evidence that anything the Roosevelt Administration was going to do (other than getting us into the war) was going to end the Depression OR lengthen it. The best government could do was help people in the meantime, and a lot of Americans were very glad that FDR did.
The NRA's effects can't be measured by the number of pages of regulations it enacted. Those regulations included cartel schemes for almost the entire nonagricultural economy. It doesn't matter whether that took a lot of pages or not. What matters is that it dropped GDP output and raised unemployment by quite a lot. See the sources cited in my article linked in the original New Deal post.
The AAA was, of course, a different law which you didn't mention in your post. If you are going to consider the AAA part of the NRA, why not consider the CCC and the WPA and the TVA and Social Security part of the NRA as well? How about considering World War II part of the NRA?
I mentioned it in my original New Deal post linked in this one. You challenged not just my NRA claim but my general claim that government policies, including many New Deal ones, heped cause the the Depression and made it longer and deeper. I don't have to prove that every New Deal policy had that effect to sustain my argument.
Further, the AAA (another law I am not a great fan of) was an attempt to keep farmers afloat through crop subsidies. It was essentially a system of government transfer payments to farmers. I can see why that wouldn't have any effect on the Depression, but there's no real mechanism by which it would lengthen it.
If you had read my earlier post or Wickard v. Filburn, for that matter, then you would know that the AAA also imposed quota limits on production. That reduced farm productivity and increased food prices, both of which predictably made the Depression worse.
In my original New Deal post (linked in this one) I cited research showing that the NRA decreased GDP by 6 to 11 percentage points and significantly increased unemployment among unskilled workers. That surely lengthened the Depression and the scholars who produced the data were not "extreme libertarians" or, in fact, libertarians of any kind.
Spent $100 on scratch-off lottery tickets today. Only won $90. Will the government give me back that $10? If not, what's the difference between that and the investments in bad mortgages?
Tom
Just to follow up on Dilan's points, the "government failures" mostly involved the failure of the government to enact the policies we now understand should have been enacted. IOW, the failure was the lack of regulation and/or government intervention in many respects. That doesn't mean the government was successful in all the things it did do; in the euphemism of our day, mistakes were made. But the libertarian claim that government made things worse in the Depression is disingenuous at best and affirmatively misleading at worst. The New Deal was one of this nation's great triumphs.
My challenge was to your mention of the NRA. The NRA was the law you mentioned in your post here, and I said that was not like the Smoot-Hawley tariff or the contraction of the money supply. It occurred much later and only after the American and world economies were in total Depression. There's no way it can be blamed for what happened and therefore it is completely silly to casually list it with the other two things. You keep on knocking down straw men here.
<i>In my original New Deal post (linked in this one) I cited research showing that the NRA decreased GDP by 6 to 11 percentage points and significantly increased unemployment among unskilled workers. That surely lengthened the Depression and the scholars who produced the data were not "extreme libertarians" or, in fact, libertarians of any kind.</i>
Here's what Professor Somin wrote in his paper:
<b>In addition to its importance as an element of New Deal constitutional change, the NIRA has considerable intrinsic interest as a massive public policy disaster. Its attempts at centrally planned price controls and production limits apparently caused a massive six to eleven percent decline in the United States’ real Gross National Product (GNP) in an already deeply depressed economy.</b>
This passage is supported by citation to a single authority, page 146 of a book entitled RECOVERY AND REDISTRIBUTION UNDER THE NIRA, published in 1980 by Michael Weinstein.
Mr. Weinstein does appear to be a somewhat left-wing economist (working on poverty in NYC, coauthoring books with Mort Halperin), and it appears from the context of your article that he was making a left-wing critique of the NRA as helping fat-cats but harming average workers.
Still, that's as deep as I can go not having seen Mr. Weinstein's 28 year old book. I would think, however, that were one going to set about to prove that mainstream, orthodox economic research showed that the NRA cost the economy 6 to 11 percentage points of GDP growth (which is, bear in mind, the equivalent of claiming that not only would there have been no decade-long Depression but for the NRA, but that the American economy would have BOOMED in the mid-to-late-1930's while every other nation's economy remained in the tank), one wouldn't need to look to a book so obscure that it isn't even available on amazon as one's only source for that claim.
What is a toxic loan? Is it a loan where the borrower has ceased making payments? Or is it a loan for which there are no bids or very low bids? Is it a loan on which payment are being made, but for which there are low bids? Is it a bundle of loans for which there are no bids because investors are generally afraid of potential defaults? Is it a loan which has been marked to market, but which is generating all its cash flows?
Toxic loan is a cool term, but what does it mean? Likewise, what is a good loan?
This is a silly question. First, we may very well end up with some good loans. That's why some people think we won't lose much, if any, money on the bailout.* Second, the distinction between good and bad is ephemeral right now because there is no market. In the absence of price signals, it makes no real sense to speak of "good" and "bad". Third, the whole point of Paulson's plan is to pay essentially hold to maturity price for the MBS because otherwise the purchases wouldn't re-capitalize the firms. IOW, if the government paid $0 for a worthless asset (it's FMP, after all), there would be no net effect for the holder of the asset. That would mean we'd fail in the principal goal, which is to unfreeze the credit markets; they are frozen because the assets can't be traded and thus banks can't lend out money in order to balance their books.
*Color me skeptical on this.
Cole/Ohanian Paper
Not exactly. The Fed also dropped interest rates sharply in the aftermath of the crash, a maneuver that came to be known as the
"Greenspan Put". This had the effect of supporting asset prices and assisting leveraged investors distressed as a result of their losses. The same pattern of action was repeated in 1994, 1998, 2000 and 2001, in response to collapses large and small, and each time, investors in risky assets generally emerged remarkably intact--less well-off than before the crash, perhaps, but still better off for having invested in the first place.
Now, why on earth would a whole bunch of sterling financial institutions ever have chosen to leverage themselves to the hilt on risky mortgage-based assets over the last few years, practically guaranteeing yet another financial crisis?
Cole's and Ohanian's argument seems to be not that all those thousands of pages of minute regulations of American business authorized by the NRA lengthened the Great Depression, as Ilya argues, but rather that a single provision of the NRA which encouraged collective bargaining (and which was later enacted as part of the Wagner Act) gave workers leverage to bargain up their wages and increased unemployment.
In other words, they are making the standard libertarian / conservative argument against unionization.
That's fine if you are a true believer, I guess, but it's like what was once said about the leading indicators-- it predicts 10 out of the last 1 Great Depressions. In any event, it's consistent with my claim that this is an argument out in fringe libertarian-land.
Finally, is your claim that Cole and Ohanian are in "fringe libertian-land" based on anything except your say so? Let's flip the question around: using Google, how many econ papers can you find specifically stating that the NIRA did not contribute to the length of the Great Depression?
The Cole / Ohanian point about the price fixing is just the unionization argument made from the other end of the transaction. The NRA, and the Wagner Act, exempted collective bargaining activities, which had previously been considered to be a violation of antitrust laws, from antitrust scrutiny. Cole and Ohanian are saying that drove up wages and prices and drove down employment.
That same provision has been in our law ever since, and we have had several recessions. None, however, turned into the Great Depression, and many other societies have far stronger union protections than we do, which sort of suggests that unionization wasn't the problem.
My inference that this is fringe libertarian-land is based on the fact that while unionization's effects on the economy is a complex subject and the discussion of many economists, nobody's talking about it costing us 6 to 11 percent of GDP growth other than the fringe.
Not.
Now, economists might argue differently. But the typical economist knows utterly squat about history.
we haven't even gone through this for 24 hours, and we're making long-term conclusory statements. either this is a pre-emptive defense that is not justified, or completely beyond the field of what is occuring.
Certainly today did not match 1987's market crash. However, the distinct difference between today and 1987 is that there are millions more investors in mutual funds today versus 1987.
Anyone who does any investing knows that buy and sell orders for mutual funds are not processed until the close of market day. Therefore, while today's market decline may not have matched the market crash of 1987, the $700 Billion question is whether tomorrow's market decline will exceed the 1987 market crash since it is probably a safe assumption that millions of panicky investors likely placed sell orders today that were only processed after the market closed today.
Hence, the tsunami wave of sell orders might not actually materialize until tomorrow. Also, it is worth noting that the stock market in 1929 didn't decline 89% in a single day but over about a month.
I have an alternate scenario.
1. We limp along the rest of the year.
2. Obama is elected with expanded Democratic majorities in Congress.
3. Talk immediately begins of "fair trade" and tax increases.
4. Crisis and collapse.
5. Obama is the 21st century's Hoover.
6. Ron Paul clone elected 2012.
and
7. From behind his stone walls in Highland Park (not the stone walls he ought to be behind), You-Know-Who says, "See? Everything was going great... till I left."
8. 60% of the American people will believe You-Know-Who when he says this.
Look at the crudest possible evidence: the economy did not, in fact, improve. Now, it isn't impossible that the economy would have been even worse without the New Deal, but jeez, what are the odds. As it was, the New Deal's immediate aftermath was the worst economic downturn in human history. OK, maybe, maybe, it could have been worse, but the obvious inference, which would take a great deal of evidence to rebut, is that the New Deal did no good and probably did a great deal of harm.
Imagine you were sick, with a disease that had laid you low for months at a time in the past, and a doctor recommended a certain medicine. You took the medicine and instead of getting better, you remained sick for eight more years. Would you just assume the doctor was a quack and the medicine, snake oil? If you got sick again, wouldn't you try something completely different?
Toxic loans I imagine are ARMs on overvalued property. The value of those properties has fallen 20-30%. When the values fell and payments went up, people walked away. Even some flippers were caught in the middle of the rise and fall. How long will it take to get the value back up.
Good loans are probably fixed rate and not based on inflated value, done by some with a little business ethic.
The two were mixed into MBS' and sold to unwary and/or greedy institutions looking to make a better than average return. It seems the problem is separating the two to get an accurate valuation.
You're probably accurate in calling BS.
Tom
There is a huge difference. You have not taken any loss on your transaction. You got a $90 return plus $10 for a total of $100.
There is no reason at all to think the feds will pay any firm the original investment price for any instrument. For example, they may pay 80 for a bond with a face value of 100. That's a loss of 20 for the investor.
If the market stabilizes and performimg loans are bid back up, the feds might sell for 90. That's a profit of 10 for the feds.
A better analogy is you paid $100 for lottery tickets,then sold them to the feds for $80.
Two major problems today are the lack of bids for the MBS plus the requirement that firms use mark to market valuation. If there are no bids, there is no valuation. However, these MBS packages are still making their monthly payments.
Maybe it would have had all the bad effects you believe it would have, but it didn't last long enough to affect anything much.
Anyone who knows anything about the Depression (which would seem to include Angus and not too many other posters around here) will recognize special pleading for what it is.
I think what ground people down in 1930-1939 was the sheer length of misery one had to endure. You could grow from unconscious childhood to manhood never knowing anything else, and many did. That's very unusual, that is arguably what made it Great, and that can very easily be laid at the feet of the New Deal.
Instead, it's clearly talking about both widespread unionization allowing wages to be increased while simultaneously allowing industries to set the price of consumer goods without competition. And on the later point, they're saying that industries were allowed to collude on the prices of goods after NIRA ended since the antitrust laws weren't enforced.
Needless to say, since the NIRA we haven't had a legal regime that legalizes cartels over most industries during a recession to see if there are more data points showing that such an economic system leads to depressions. (And on the labor side, you seem to be forgetting that the Taft-Hartley Act in 1947 pulled back on labor's power so over the last 60 years we have not had the same regime applying to unions as existed in the Great Depression, though again the article is talking about the prices for both labor and goods being cartelized).
Moreover, as I'm sure you know you're trying to mix and match articles. Nothing in the summary of the Cole/Ohanian article talks about a 6 to 11 decrease in GDP. Instead, it talks about a lengthening of the Great Depression. You have not cited any article purporting to show that the NIRA had no impact on the length of the Great Depression.
What the authors are claiming is a "cartel" is nothing more than the market concentration that is permissible under the antitrust exemptions that were included in the Wagner Act and before that the NRA. This is still legal (and Taft-Hartley, which has been seldomly invoked, really hasn't pulled back unionization very much; it has gone down for other reasons, though).
Also, we have had periods of lax antitrust enforcement during the last 60 years, especially after Bork's antitrust book came out and people started rethinking antitrust. So, Reagan presided over a deep recession with the Wagner Act and virtually no antitrust enforcement. Under this model, that should have given us a depression. It didn't.
One other thing about antitrust enforcement outside of the labor exemption. Even if it is a piece of the puzzle, it's a different issue from the NRA. The claim Ilya made was that the NRA lengthened the Depression, not that lax antitrust enforcement did.
Angus -- until humans get to view alternate realities, of course to determine the effect of an actually existing policy you have to make assumptions about what the world would have been like without that policy. Otherwise, the conclusion would be that every single policy had no effect whatsoever. One certainly can attack the particular assumption, but attacking the need to make assumptions only gets one to radical skepticism.
This is exactly right. In fact, the economy had recovered quite a bit by 1937. What then happened was that Roosevelt decided he could risk some tightening and that was a bad decision. Thus, 1938-9 constituted a real setback.
Nobody knows how to reflate an economy normally, because it's never been done without a big war to skew everything.
Also, for 40% of the American population (the farmers and farm-related business), the Great Depression began in 1922. So arguments that the New Deal lengthened what would otherwise have been a short, deep recession are -- to be blunt -- either ignorant or insane.
People who think the Coolidge Prosperity was real should go back and read farm state newspapers from Coolidge's and Hoo ver's terms. I have. The bank failures, the business closures, the mortgage foreclosures, the sheriff sales -- all began years before Black Friday.
However, what if he does?
Does anyone besides me see a connection with the Smoot-Hawley Tariff and Obama possibly "renegoitiating" our trade deals.
Does he intend to impose tariffs? I have heard him talk about "punishing" companies who employ people overseas or have manufacturing in other countries.
I confess, I don't really know what exactly he is talking about. But, given the impact of Smoot-Hawley on the Depression, doing anything similar in the current economic climate is very troubling.
Perhaps, I am needlessly concerned?
So you figure that if your car engine is making noise and it won't go over 30 before the engine overheats, then your soluion WELL AFTER the car is in trouble is to pour cold water into the radiator whenever it gets hot, then that's just fine?
The result, of course, is a cracked engine block and soon the thing doesn't run at all.
The depression was so long and so hard specificially because of the actions both Hoover and FDR took to solve it.
In fact the stock market boom of the 1920s was in fact itself caused by the government increasing the money supply. Exactly as they have done since before the internet boom in current times.
Had the FED of 1929 increased the money supply they would have caused a reflation of the bubble, and spreading of that bubble to other sectors of the economy. Which would have increased the level of malinvestment in the economy.
If then FDR had done all the same stupid stuff he did there would have been even more hardship and a longer depression. We were in fact lucky the guy died.
The answer to the problem is not a bailout. The answer is to allow free market prices in interest rates to establish themselves again, to allow the bubbles to deflate, and for the speculators to loose their money.
Otherwise the hardship is going to fall on the little guy and not the big guy. They are setting things up right now to lead to hyperinflation.
Dopes.
That's not the way the strategic petroleum reserve works. It is for the use of the government, especially the military, not for civilian consumers. Further, it is unrefined, so has to be refined into gasoline or aviation fuel to be usable by the government. But if credit fails so will the refineries.
In a complex economy everything depends on everything else. A failure in sone sector can bring everything else down.
Where's the evidence that the cartelization was due to the NRA? Bear in mind that in ANY severe economic downturn, many large firms with capital reserves and economies of scale will survive, while smaller firms are going to fail. There's no reason to think that whatever market consolidation was occurring in the 1930's wasn't due to natural monoplistic forces rather than either the NRA or lax government enforcement of antitrust laws.
Further, it's hard to believe that stricter enforcement of antitrust laws would have necessarily been good for the economy in the Great Depression. (Indeed, the real lesson of the Great Depression is that once we are in one of these situations, NOTHING really works to pull us out except a gigantic worldwide Keynesian stimulus (i.e., World War II).) Large enterprises were just about the only entities left that still had investment capital during the 1930's. Breaking them up would seem like a really bad idea-- and if FDR really did cease enforcing the antitrust laws, that's probably the reason.
In any event, as I noted, lax enforcement of antitrust laws is a different issue from the NRA. Ilya's claim is that the NRA lengthened the Depression. That claim is unsupported.
As far as large firms having an advantage in surviving downturns, do you have any evidence for that? Any survey of bankruptcies during a recession, anything?
As for your second paragraph, I hope you're aware that antitrust law is more than just breaking up large enterprises. If the government is allowing price-fixing on consumer goods, then that hurts consumers.
Lastly, creating codes to govern prices, wages, and work and business rules was the entire point of the NRA. There's a least one article that indeed argue the NRA lengthened the Great Depression. And, of course, you haven't cited a single source claiming otherwise (not to mention that your original claim was that only "extreme libertarians" believed the NRA lengthened the Depression).
I wouldn't use the word ignorant if I were you.
Hoover was NOT the laisez-faire president that he has been made out to be. On the eve of the 1929 crash, Hoover, the Great Engineer, was ready with many plans from his "new economic science" of intervention, which he would use immediately to solve any crisis.
After the crash he first tried flooding the system with liquidity. The crash happened on Oct 24, 1929, and Hoover had already made his move by the last week of October flooding the markets with liquidity.
By the end of November 24th he had already set up public works programs through cooperation with the state governor, including FDR, and the Department of Commerce. By Dec 3, Hoover had a bill passed in congress to appropriate a further $400 million for a the Federal Buildings program. Subsidies to ship construction $175 million.
By the end of the year J.M. Clark of Columbia University was rejoicing over Hoovers "great experiment in constructive industrial statesmanship of a promising and novel sort".
Hoover organized corporate heads and labor unions to set wage price floors in the face of a deflation. Exactly the wrong thing to do as it would lead vast unemployment.
The New Deal program of farm subsidies, mostly farm price supports, existed long before FDR got in office. Futures trading had excessive taxes applied.
The Federal Farm Board was established in June 1929 and funded at $500 million. As the depression struck the FFB acted announcing it would lend $150 million to wheat coops for 100% price support. On Nov 25, Hoover met with major farm organizations and they agreed to massive subsidies to themselves.
Farmers responded by increasing wheat production and increasing surplus, thus wasting resources needed elsewhere in the economy.
This all before the end of the next month. This continued and continued. Stupid intervention after stupid intervention making things worse and worse.
When FDR got in office he continued the stupidity, in kind.
That's a myth. Things got worse during the war. Unless you call being placed in front of machine guns "employment". Sure filling in the Grand Canyon will increase the GDP, or dropping bombs, but is that really an improvement?
We came out of the war with an intact infrastructure when most of the rest of the industrial nations were in ruins. That's what made our economy good after the war, no competition.
BTW, Keynesianism was debunked long ago. It's so bad it doesn't even count as a hypothesis let alone a theory.
Well, we now have 14 times as many regulations as we did during the two years when the NRA was in effect, and in the 1970's, we even had wage and price controls. And yet your contention is that there has been no cartelization.
Look, again, it's pretty obvious that in a severe Depression, there's going to be cartelization, because when investment capital is scarce, economies of scale are going to take over. And no, "enforcing codes governing prices, wages, and other rules" does not inherently cause cartelization. The only argument in the paper you pointed to is that the antitrust exemption for collective bargaining caused cartelization, which is simply the familiar libertarian argument that unions are terrible.
If the government is allowing price-fixing on consumer goods, then that hurts consumers.
True enough, but price fixing (two or more enterprises agreeing to charge an artificially high price) is different from cartelization (two or more large enterprises dividing up the market between them). You seem to think they are the same thing, and you also seem to think that a government price control is the same thing as a private cartel. Both those propositions are utterly false.
Lastly, creating codes to govern prices, wages, and work and business rules was the entire point of the NRA.
You give the game away with your reference to "wages, and work and business rules". As I keep saying, all this paper is doing is reciting the familiar libertarian screed against unions. You and the authors think unionization is a cartel.
During the war, not only did we have full employment, but we had employment of women as well. GDP grew steadily, and private investment soared.
Look, libertarians can't stand the idea of big government. So they have to make up stories about how World War II didn't do what everyone knows it did. You might as well believe in Santa Claus.
Libertarianism has nothing useful to say about great Depressions, except, perhaps, arguments about how to avoid getting into them. But once you are in them, the only way out is big government. Sorry, but it's true.
And by the way, while certain parts of Keynesian theory have not held up as well as others, ONLY the extreme libertarian right claims that under no circumstances can large amounts of government spending stimulate the economy.
Also, it's not obvious at all that in a severe Depression there will be cartelization. Is there any economist you can cite to who believes that? Businesses that don't have economies of scale in normal times don't magically get them in the Depression. If the government encourages a groups of business to get together and set the rule for what they sell goods for, wages, and so forth, that is cartelization. Is there any economist who denies this? You seem awfully big on asking for proof for people arguing with you while producing zero yourself.
True enough, but price fixing (two or more enterprises agreeing to charge an artificially high price) is different from cartelization (two or more large enterprises dividing up the market between them).
That certainly isn't the only definition of cartelization; OPEC is a cartel and it sets prices by limiting supply, rather than dividing up markets. Moreover, dividing up markets can have the same effect as price fixing if the division causes the enterprises to be insulated from competition.
You seem to think they are the same thing, and you also seem to think that a government price control is the same thing as a private cartel. Both those propositions are utterly false.
Err, where did I say they were the same thing; most times, the two will be separate. In the NRA, however, the two were being combined since you had the government participating and encouraging the development of codes within industries.
As far as unions go, I'm sure it's easier for you to caricature people that argue against you rather than actually respond to their arguments, but that's neither what I nor the Cole and Ohanian are saying (so far as I can tell from the summary of their paper). You could have no unions whatsoever, but if the government mandated / encouraged a large increase in wages and prices for consumer goods you'd have the economic problems Cole &Ohanian claim were caused by the NRA.
Finally, one last time, do you have a cite to any paper or book by an economist arguing that the NRA did not lengthen the Depression?
Now you are going against the great Milton Friedman, who repeatedly said the number of pages in the Federal Register was an EXCELLENT measure of how regulated the economy was.
Also, it's not obvious at all that in a severe Depression there will be cartelization.
Fewer suppliers = more natural monopolies and it's easier to form a cartel. Plus less government resources for antitrust enforcement.
In the NRA, however, the two were being combined since you had the government participating and encouraging the development of codes within industries.
The government still does that now.
Finally, one last time, do you have a cite to any paper or book by an economist arguing that the NRA did not lengthen the Depression?
You are shifting the burden of proof. Since mainstream economists aren't out to trash the New Deal, they don't spend a lot of time worrying about a law that was quickly found unconstitutional and had little macroeconomic effect. It's only the libertarians who have this obsession.
Okay ...
Fewer suppliers = more natural monopolies and it's easier to form a cartel. Plus less government resources for antitrust enforcement.
Again, do you have any evidence for this at all? Is there a single study, paper, any source you can provide purporting to show that there's more cartelization (or less antitrust enforcement) in times of economic distress? I fail to see how a depression can create natural monopolies; why would a Depression either create huge fixed costs or change marginal cost curves?
The government still does that now.
Is your claim really that anything like the codes created by the NIRA still exist today, or that a conjunction of cartels and the governments sets the prices for goods and labor as well as work rules in the US today? Can you cite anyone who agrees with that view?
You are shifting the burden of proof. Since mainstream economists aren't out to trash the New Deal, they don't spend a lot of time worrying about a law that was quickly found unconstitutional and had little macroeconomic effect. It's only the libertarians who have this obsession
So in other words, you have no support you're willing to cite for your propositions?
The government still sets work rules in many industries through various regulatory agencies and prices in quite a few (especially if you include the indirect increases in prices that result from regulatory burdens and liability rules). Indeed, again, libertarian economists like Milton Friedman have spent their careers complaining about this. Yes, we no longer have the NRA in all of its glory, but we have a huge administrative state which does the same thing piecemeal. That's why the regulatory stat is important-- we have FOURTEEN TIMES as many federal regulations as FDR imposed through the NRA, and those regulations are driving up prices, reducing the number of suppliers, and imposing all sorts of rules (including work rules) on American business.
It's really funny that I'm a liberal mostly at peace with the American regulatory state and I have to point this out to you.
What is missing is any sort of uniqueness claim about why the NRA, as opposed to the mammoth regulatory state we have now, or Richard Nixon's wage and price controls, or the Wagner Act's antitrust exemption, would specifically lengthen a recession and turn it into a Depression. There's just no evidence of this in the sources you or Ilya have cited.
Finally, I do not have the burden of proof here. All I ever set out to show was that no serious economists believe that the NRA lengthened the Depression. So no, I don't have to turn around and do your research for you. Why don't you find out whatever mainstream economists say about the Depression yourself? It's not hard to find.