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  #1  
Old 11-06-2011, 10:39 AM
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Default The Big Interview (Karl Smith & Kelly Evans)

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  #2  
Old 11-06-2011, 11:49 AM
r108dos r108dos is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

Karl is great. Things aren't sustainable. Kelly did a good job answering him. Keep them on together, or not.
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  #3  
Old 11-06-2011, 12:23 PM
Unit Unit is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

The problem with the firefighting analogy for central banks is that they might be using alcohol instead of water. To pursue the analogies, if the problem is one drug addiction then the path to recovery is detoxification and not appealing to the drug dealer of last resort.
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  #4  
Old 11-06-2011, 01:09 PM
Unit Unit is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

In the debate of fiscal policy vs. monetary policy it seems to me that there is an underlying assumption that the choices between these two policies are "independent" of each other. Maybe Karl knows: how much do economists worry about the correlation between these two policies? How does fiscal policy affect monetary policy and vice versa?
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  #5  
Old 11-06-2011, 01:49 PM
db63 db63 is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

It seems to be Karl is promoting first-year undergraduate nihilism.
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  #6  
Old 11-06-2011, 02:20 PM
karlsmith karlsmith is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

I prefer to think of it as second-semester sophomore nihilism combined with optimal control theory.

No, but the core of the issue is this:

If you think of policy as an infinite horizon problem, then there is always some discount rate that justifies an arbitrary amount of human suffering today, to relieve the probability of human suffering in all future periods.

Traditionally, people speak about policy as if this was the objective function we are maximizing.

Thus questions between suffering today and increasing the long run path of suffering are always value questions. How much do you care about the future?


However, once you accept that this is a finite horizon problem that changes. For some cases there exists no discount rate such that human suffering today can be justified by a lower probability path of human suffering tomorrow.

Doing the "responsible" is thing unambiguously worse for humanity irrespective of your valuation of the future.


I think this is important because its important to realize that some policy decisions to suffer now for the greater good can simply be wrong. Not a question of values or moral, but demonstrably wrong. The world simply does not operate under conditions that would allow that to be the solution to some utility maximization problem.
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  #7  
Old 11-06-2011, 06:29 PM
T.G.G.P T.G.G.P is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

Alright, one of my favorite bloggers. And props to Kelly for responding to Scott Sumner. And now getting into bheads. Journalism has changed a lot.

I'm going to dissent on Lehman. From Scott Sumner's take on market behavior, things were already heading south and Lehman was the result rather than cause of that drop in NGDP. The Fed's failure was in allowing things to get so bad in the first place. If the rest of the economy was receiving helicopter drops while Lehman failed, it would just have been tough to be them.

Karl said if borrowing costs were not a problem, Greece would not have a problem. My impression was that this was true of Italy, but not Greece. So if Italy revalued it's currency, it could resolve its problems through inflation. But Greece is screwed no matter what (though default is probably the better option for them).

Scott Sumner is not a traditionalist, and constantly harps on how low interest rates don't mean "easy money" but often mean money is so tight people expect there to be little growth. Karl's timid statement is no Chuck Norris. Scare the pants off people about losing their savings if they are hoarding cash.

Last edited by T.G.G.P; 11-06-2011 at 07:41 PM..
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  #8  
Old 11-06-2011, 06:42 PM
karlsmith karlsmith is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

People say this - about Greece - but I haven't seen the data to back it up. IMF has them achieving primary balance by 2013. What is the justification for saying they couldn't make it besides the borrowing costs.

I think the difference via Italy is that if Italy was austere enough, in theory it could service is debt at market rates. This is simply not an option for Greece. They cannot service their debt at market rates, so unless the ECB steps in they are toast.
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  #9  
Old 11-06-2011, 07:44 PM
T.G.G.P T.G.G.P is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

Quote:
Originally Posted by karlsmith View Post
People say this - about Greece - but I haven't seen the data to back it up. IMF has them achieving primary balance by 2013. What is the justification for saying they couldn't make it besides the borrowing costs.

I think the difference via Italy is that if Italy was austere enough, in theory it could service is debt at market rates. This is simply not an option for Greece. They cannot service their debt at market rates, so unless the ECB steps in they are toast.
Maybe you're right.

When Karl questioned Kelly about a recent run-up in inflation she mentioned gas & food prices. But that sounds like a shift in relative prices rather than the general price level. The former indicates a possible negative supply shock, the latter would indicate a positive (not meaning good, meaning more than zero) demand shock. Monetary policy targets demand.

I think though that Karl might be too dismissive of the claim that inflation can reduce real GDP. I've heard some say that it's through a tax on capital, but one could also use the classic New Keynesian mechanism of menu costs*. More price changes means more GDP wasted on changing menus. Not the end of the world, but not zero.
*Yes, it's not entirely considered to be the real explanation by Ball & Mankiw, but close enough to explain why prices don't instantly adjust.

Keynesian fiscal policy works by increasing AD/NGDP/inflation. The same as monetary policy, it does not directly target real growth. The difference is the mechanism used (Congress vs the Fed) and the ability to undo policy if it turns out we've overreacted.

Last edited by T.G.G.P; 11-06-2011 at 07:54 PM..
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  #10  
Old 11-06-2011, 08:28 PM
jimM47 jimM47 is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

I'm not sold on the Nominal-GDP-targeting scheme that Ms. Evans and Prof. Smith discuss, but I think there is a a defense of it to be made that comes from a different perspective than Prof. Smith's. I won't claim to be making any case to which Smith didn't allude, or to be saying anything I haven't tried to muddle through here on the forums before, but here goes:

One thing that happens in the bust phase of a business cycle is that there is uncertainty about what the post-recession world will look like — e.g. how much of their incomes will people spend, and on what products, creating what interest rates, etc. That makes investment more risky, because when things shake out, you could find yourself in an investment that doesn't make sense, so everyone starts pulling in their chips. The optimal response, however, should be that some risk-taking activity genuinely comes to a stop — because the loss from the risk of misallocating capital is greater than the loss from letting productive resources go idle — but that other risk-taking activity shifts to different entities.

One specific way this plays out is in demand for liquidity: on the continuum of financial assets, people move toward holding cash, which doesn't get lent out and can be used instantly, and away from deposits, which do get lent out, and cannot be used instantly. People bear less risk, but the same dollars turn over less frequently. In monetarist terms, velocity (v) decreases. If we lived inside a free-banking model, the banks would notice that the increase in demand for liquidity did not correspond to an increase in utilization of liquidity, and they would interpret this as meaning there was less risk to them in providing a greater amount of liquid assets on the same base of reserves. Therefore, they would increase their balance sheets, effectively increasing the supply of money (m) to mostly offset the decrease in the rate that money is turning over (v). But for good reasons and bad reasons, we don't live in a free-banking system; we live in a Central Banking system in which banks and bank deposits are insured. Because of this, we have to place a ceiling on the balance sheet that private banks can have relative to their base of reserve; which also prevents them from increasing the supply of money (m) in response to a decrease in the rate that money is turning over (v).

In effect, this regulation tells the economy a giant lie — that the relative share of the risk of productive economic activities that can be born by the banks is smaller than it really is — and the economy reacts to this lie by suspending those productive economic activities that it has falsely been told our system does have the capacity to bear the risk of. What any responsible Central Bank is committed to doing, then, is to try to correct this lie by doing to its own balance sheet in real life what the private banks in the model would have done with their balance sheets, such that the Central Bank will drive interest rates down and increase the monetary base (m) in response to decreases in the rate that money is turning over (v). Risk will not be allocated to exactly the same parties that it would have in the model — i.e. not the parties who can most-optimally bear the risk — but we do get the same amount of risk-taking activity.

I would distinguish this correction of the lie told by regulation from a stimulus designed to juice the economy, accomplished with monetary policy. Here we are not just trying to compensate for the risk that should have been shifted, we are also trying to compensate for the risk that is no longer optimal for any party to bear in the present. We are going to bring more demand for consumption and investment into the present by using the printing press to artificially bring down interest rates. In effect, we are telling the economy a lie about the value of time. We are saying to borrowers (and potential borrowers) that the owners (and potential owners) of loanable funds value future consumption more that they really do and value present consumption less than they really do. The problem with this lie, from my perspective, is that the truth is still out there and prone to reassert itself with unpleasant vigor. And when that happens, investors will find they targeted production to the too-far-long-term, and consumers will find that they spent beyond their actual means. Also, there's the whole inflation thing.

The problem with deciding to do one of these things with your monetary policy — correcting for changes in liquidity-preference — and not the other — engaging in demand stimulus — is that there is precious little way to tell them apart at the time when you actually have to make concrete real-world decisions like "by what amount should the Central Bank expand its balance sheet?" And among the people who have the ability to make that guess, you are always going to have people who are tempted by Prof. Smith's Phillips-Curve argument and It-All-Ends-Badly-Either-Way argument, and so want to engage in true demand stimulus. There's just no way you can have a discretionary system them allows the Central Bank to do what (I claim) it should do, without a huge danger of causing the Central Bank to do what (I claim) it shouldn't do.

So as a consequence, there is a constant search for some kind of simple rule that will minimize the amount of policy discretion that the Central Bank is managing. Both the Taylor rule and the Nominal-GDP rule are attempts to do that. The appeal of the latter is that in the equation of exchange, nominal GDP is equal to the supply of money (m) multiplied by its velocity (v); so if you pick a nominal GDP growth target that matches the real rate of growth in the economy, you will get the inverse and roughly proportional relationship between (m) and (v) that you want, while putting a limit on the amount of demand stimulus that can be created. In a sense, then, many of the arguments that Prof. Smith uses to justify a rule that enables the Fed to routinely create as much as 2 or 3% inflation can be denied, but then turned around and used to justify a rule that prevents the Fed from routinely creating much more that 2 or 3% inflation.
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  #11  
Old 11-06-2011, 09:19 PM
Don Zeko Don Zeko is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

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Originally Posted by jimM47 View Post
So as a consequence, there is a constant search for some kind of simple rule that will minimize the amount of policy discretion that the Central Bank is managing.
This, I think, is the central point of the NGDP-targeting scheme. But the problem here is that it's not really a policy solution at all, it's just an argument that the Fed should justify its use of the same policy levers differently. So basically my understanding is that the people on board with this argument think that the Fed isn't living up to its dual mandate to maintain price stability and full employment, so they propose a new way to measure whether or not the fed is meeting the dual mandate so that it will be more obvious when the fed is not, and therefore so that it will be easier to pressure the Fed to change course if it is overly concerned about inflation or overly concerned about employment.

But then the obvious problem here is that the Fed doesn't agree that it's failing to meet its dual mandate. Some combination of Bernanke and a majority of members of the Open Market Committee either think that monetary policy has done all it can, or that further monetary expansion would create unacceptable inflationary pressures, that keeping inflation low is more important than keeping unemployment low, or something like that. And so if they think these things, then they, pretty much by definition, don't think switching to NGDP targeting is a good idea and aren't interested in doing so. So we're back to square one. Assuming that monetary policy can get us out of this mess, we still need to convince the Fed to be more aggressive, either by appointing inflation doves to the open Board of governors seats or by somehow pressuring Bernanke into taking action. Whether you do this by pushing a new theory for for how we should evaluate the Fed's behavior or through some other justification is neither here nor there. The important part is convincing the Fed that it's not doing enough to combat high unemployment.
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  #12  
Old 11-06-2011, 09:34 PM
Diane1976 Diane1976 is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

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Originally Posted by karlsmith View Post
I prefer to think of it as second-semester sophomore nihilism combined with optimal control theory.

......Thus questions between suffering today and increasing the long run path of suffering are always value questions. How much do you care about the future?.....
I think this is important because its important to realize that some policy decisions to suffer now for the greater good can simply be wrong. Not a question of values or moral, but demonstrably wrong. The world simply does not operate under conditions that would allow that to be the solution to some utility maximization problem.
All this just made me think of ideologies, communism, socialism, libertarianism, free market worship, all of them. They're all the same. There's always some greater good and be damned the people who have to suffer for it now. If there's a big financial crisis and the theory gets all screwed up, blame the poor Americans who were hoodwinked into buying houses they couldn't afford, or the kids that took out student loans, or, hey, why not the people of Greece. It must have been their fault.
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  #13  
Old 11-06-2011, 09:53 PM
ethansalto ethansalto is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

Kelly Evans has a degree in Business Journalism from Washington & Lee University.

http://topics.wsj.com/person/E/kelly-n-evans/1332
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  #14  
Old 11-06-2011, 09:57 PM
Unit Unit is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

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Originally Posted by Diane1976 View Post
All this just made me think of ideologies, communism, socialism, libertarianism, free market worship, all of them. They're all the same. There's always some greater good and be damned the people who have to suffer for it now. If there's a big financial crisis and the theory gets all screwed up, blame the poor Americans who were hoodwinked into buying houses they couldn't afford, or the kids that took out student loans, or, hey, why not the people of Greece. It must have been their fault.
Agreed. But unfortunately that's the centralized system we are saddled with, and which dumps the responsibility of getting things right on a few rationally bounded officials and tells them to do whatever it takes because in any case "In the long run, we're all dead"....
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  #15  
Old 11-06-2011, 10:02 PM
jimM47 jimM47 is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

Quote:
Originally Posted by karlsmith View Post
People say this - about Greece - but I haven't seen the data to back it up. IMF has them achieving primary balance by 2013. What is the justification for saying they couldn't make it besides the borrowing costs.

I think the difference via Italy is that if Italy was austere enough, in theory it could service is debt at market rates. This is simply not an option for Greece. They cannot service their debt at market rates, so unless the ECB steps in they are toast.
Prof. Smith, you say that the European Central Bank could set the rates for Greek debt merely by announcing a policy — effectively by writing a naked put option on Greek debt with a strike price that values the interest at 2% — without fear of having to actually buy any significant amount of Greek debt. Isn't this basically saying that the difference between the current price of Greek debt and the ECB strike price is made up entirely of the default risk, and specifically, default risk that would be alleviated by reducing the interest-rate burden of Greek debt service?

But what makes you think that most holders of Greek debt wouldn't still be worried enough about Greek debt that, even then, they wouldn't be happy to dump their positions at 2%? You say that Greece is on track to stop piling up deficits in the near term. But Greek policy isn't a free variable — it is a product of the Greek people and the Greek state. Would the Greeks have gotten there without interest rates being what they are? and without that pressure, will those policies stay in place long enough to pay down the Greek debt-load substantially?

Maybe European oversight can force the Greeks to act like they have 40% interest rates even while actually paying 2%, but what is the reason to think, with the certainty a 2% rate implies, that Greece is going to stay under European oversight indefinitely? The Greek people might decide it is ultimately worth it to leave the Euro, and when that happens why bother honoring your debts at parity with the Euro? And if Greece is going to leave the Euro, why not do it sooner, rather that later? If I were holding Greek debt, the fundamentals of whether it makes sense for Greece to be in the Euro over the long term are precisely what I'd be thinking about in assessing the default risk premium I would be demanding.
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  #16  
Old 11-06-2011, 10:21 PM
db63 db63 is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

Quote:
Originally Posted by karlsmith View Post
I prefer to think of it as second-semester sophomore nihilism combined with optimal control theory.

No, but the core of the issue is this:

If you think of policy as an infinite horizon problem, then there is always some discount rate that justifies an arbitrary amount of human suffering today, to relieve the probability of human suffering in all future periods.

Traditionally, people speak about policy as if this was the objective function we are maximizing.

Thus questions between suffering today and increasing the long run path of suffering are always value questions. How much do you care about the future?


However, once you accept that this is a finite horizon problem that changes. For some cases there exists no discount rate such that human suffering today can be justified by a lower probability path of human suffering tomorrow.

Doing the "responsible" is thing unambiguously worse for humanity irrespective of your valuation of the future.


I think this is important because its important to realize that some policy decisions to suffer now for the greater good can simply be wrong. Not a question of values or moral, but demonstrably wrong. The world simply does not operate under conditions that would allow that to be the solution to some utility maximization problem.
That was needlessly snarky. I apologize for the tone, as this was actually an interesting talk.

I think you can remove the social scientific/economics jargon and rephrase your problem in the following way (let me know if I'm wrong): People assume (with regards policy choice) that bearing costs today to put off future suffering is objectively "better" (value judgment) that putting off these costs. (n.b.: I wouldn't say this is actually how people talk about policy, as it seems that the major republican intellectual claim about climate change legislation is that the cost is too high for us to make policy changes that could theoretically effect the future climate.) But, you're saying that in actuality certain costs that we could incur today to make a better tomorrow are not actually worth it because, as Keynes said, in the long run we're all dead.

The problem, as I see it, is that this is ultimately (as you implied) a question of values. My given values may differ from yours, etc. And the issue of values is a problem that the social sciences, especially economics, cannot solve. That is to say, I don't see how you could ever demonstrably prove something "wrong" (it seems that you are implying there is a level of human suffering that cannot justify sacrifice today for tomorrow. But where you place this line is ultimately arbitrary). I am not trying to be a value relativist, but I am just pointing out that you seem to imply an economic definition to what is ultimately a philosophical problem that the discipline of economics isn't fit to solve. It seems that you would have to accept the academic division of labor here and perhaps turn to other disciplines, likely philosophy, to address the value-issues you're discussing.
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  #17  
Old 11-06-2011, 10:22 PM
badhatharry badhatharry is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

Quote:
Originally Posted by jimM47 View Post

One thing that happens in the bust phase of a business cycle is that there is uncertainty about what the post-recession world will look like — e.g. how much of their incomes will people spend, and on what products, creating what interest rates, etc. That makes investment more risky, because when things shake out, you could find yourself in an investment that doesn't make sense, so everyone starts pulling in their chips. The optimal response, however, should be that some risk-taking activity genuinely comes to a stop — because the loss from the risk of misallocating capital is greater than the loss from letting productive resources go idle — but that other risk-taking activity shifts to different entities.
I always read your posts with great interest and some frustration that I'm only grasping a little of your point. However, upon the second reading of the paragraph above. I have to disagree with your assumption. You seem to be saying that the conditions which exist after a bust phase are substantively different that another type of cycle. But when are times certain? and when are investments not risky? Now I know with these statements you are laying the groundwork for your larger argument but I just don't think you can really characterize situations as neatly as that. Are these based on models of what has happened in the past? or some sort of study of the psychology of human action? It reminds me of the line in The Fight of the Century, where the Hayek guy responds to the Keynes guy who is patting himself on the back for shutting down the depression. He says "All you have is one data point".

But what the hell do I know?
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  #18  
Old 11-06-2011, 11:46 PM
karlsmith karlsmith is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

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Originally Posted by jimM47 View Post
Prof. Smith, you say that the European Central Bank could set the rates for Greek debt merely by announcing a policy — effectively by writing a naked put option on Greek debt with a strike price that values the interest at 2% — without fear of having to actually buy any significant amount of Greek debt. Isn't this basically saying that the difference between the current price of Greek debt and the ECB strike price is made up entirely of the default risk, and specifically, default risk that would be alleviated by reducing the interest-rate burden of Greek debt service?

But what makes you think that most holders of Greek debt wouldn't still be worried enough about Greek debt that, even then, they wouldn't be happy to dump their positions at 2%? You say that Greece is on track to stop piling up deficits in the near term. But Greek policy isn't a free variable — it is a product of the Greek people and the Greek state. Would the Greeks have gotten there without interest rates being what they are? and without that pressure, will those policies stay in place long enough to pay down the Greek debt-load substantially?

Maybe European oversight can force the Greeks to act like they have 40% interest rates even while actually paying 2%, but what is the reason to think, with the certainty a 2% rate implies, that Greece is going to stay under European oversight indefinitely? The Greek people might decide it is ultimately worth it to leave the Euro, and when that happens why bother honoring your debts at parity with the Euro? And if Greece is going to leave the Euro, why not do it sooner, rather that later? If I were holding Greek debt, the fundamentals of whether it makes sense for Greece to be in the Euro over the long term are precisely what I'd be thinking about in assessing the default risk premium I would be demanding.
So the short answer is that as long as the ECB stands ready to buy Greek bonds at parity you don't have to worry about Greece's default. You would only have to worry that the ECB would at some point remove their promise to stand ready.

In practice what the ECB should do is target short term Greek debt of no more than 1 year. This would allow Greece to issue debt with a maturity of one year at low rates. Longer term debt would trade in the secondary market based on the fundamentals you describe.

Each year then the ECB would continue to target the debt as long as Greece continued to make steps towards improving its deficit.

If Greece did not make these steps then at the end of the year the ECB could remove the target sending Greece back into the situation it is in right now.

So they still have pressure on but it prevents a short term crisis.
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  #19  
Old 11-07-2011, 12:37 AM
db63 db63 is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

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That was needlessly snarky. I apologize for the tone, as this was actually an interesting talk.

I think you can remove the social scientific/economics jargon and rephrase your problem in the following way (let me know if I'm wrong): People assume (with regards policy choice) that bearing costs today to put off future suffering is objectively "better" (value judgment) that putting off these costs. (n.b.: I wouldn't say this is actually how people talk about policy, as it seems that the major republican intellectual claim about climate change legislation is that the cost is too high for us to make policy changes that could theoretically effect the future climate.) But, you're saying that in actuality certain costs that we could incur today to make a better tomorrow are not actually worth it because, as Keynes said, in the long run we're all dead.

The problem, as I see it, is that this is ultimately (as you implied) a question of values. My given values may differ from yours, etc. And the issue of values is a problem that the social sciences, especially economics, cannot solve. That is to say, I don't see how you could ever demonstrably prove something "wrong" (it seems that you are implying there is a level of human suffering that cannot justify sacrifice today for tomorrow. But where you place this line is ultimately arbitrary). I am not trying to be a value relativist, but I am just pointing out that you seem to imply an economic definition to what is ultimately a philosophical problem that the discipline of economics isn't fit to solve. It seems that you would have to accept the academic division of labor here and perhaps turn to other disciplines, likely philosophy, to address the value-issues you're discussing.
I was unclear when I said "that was needlessly snarky." I was referring to my first post; Professor Smith's response was not snarky at all, but was polite and put me in my place. Jaron Lanier was right--snarkiness just degrades conversation.
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  #20  
Old 11-07-2011, 01:25 AM
Parallax Parallax is offline
 
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Default I can only applaud Mr. Smith's patience ...

Seriously this is the economics columnist for that paper? Now we know what is wrong with WSJ.

I don't know where to begin, it seems to me that she subscribes to what Krugman called the pain caucus: there can't be an easy way out because people sinned and now is judgement day and the long discredited view that nominal shocks have no real effects. Anyway here are some points I thought were worth mentioning:

1. The government and the Fed have very little control over the long run RGDP growth rate of the economy which for US is 2.75%. If this number goes down then the Fed, as Karl pointed out, can simply lower the NGDP target by an appropriate amount. Moreover the long term RGDP growth rate does not fluctuate wildly, its changes are very slow and due to structural issues beyond most people's influence.

2. Evans's assertion that size does not matter and if NGDP is everything Zimbabwe has done great, is simply ridiculous. Does she know what Zimbabwe's inflation rate actually was? A 5% NGDP target also means that inflation has a ceiling of 5% and that is only in bad times!

3. Evans disputes that we can get to 19 trillion NGDP. Well how does Fed target inflation? The same mechanism can boost NGDP. Fed can print money until the market value of all final goods and services produced within US in one year measured in US dollars is 19.5 trillion dollars. My only explanation is that she really does not understand the difference between NGDP and RGDP ...

It is obvious that Evans did not do her homework, she has not read the arguments for NGDP targeting at all. She is completely in the dark about monetary policy in general (claiming fiscal policy is preferable to monetary policy?!?). Had she read Sumner's blog or his piece in National Affairs she would have known that Sumner actually thinks NGDP targeting is the end of macro and a panacea that will solve all the problems Fed is facing on an ongoing basis.
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  #21  
Old 11-07-2011, 01:51 AM
Don Zeko Don Zeko is offline
 
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Default Re: I can only applaud Mr. Smith's patience ...

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Originally Posted by Parallax View Post
2. Evans's assertion that size does not matter and if NGDP is everything Zimbabwe has done great, is simply ridiculous. Does she know what Zimbabwe's inflation rate actually was? A 5% NGDP target also means that inflation has a ceiling of 5% and that is only in bad times!
I was struck by this too. Evans seemed to be unaware that 5% is a ceiling as well as a floor, so that if inflation starts to get too high then NGDP targeting will prompt the fed to trigger a recession in order to bring inflation down.
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  #22  
Old 11-07-2011, 02:03 AM
jimM47 jimM47 is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

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Originally Posted by badhatharry View Post
However, upon the second reading of the paragraph above. I have to disagree with your assumption. You seem to be saying that the conditions which exist after a bust phase are substantively different that another type of cycle. But when are times certain? and when are investments not risky? Now I know with these statements you are laying the groundwork for your larger argument but I just don't think you can really characterize situations as neatly as that.
Well, observed demand for money/liquidity is certainly cyclical. But that doesn't really answer your objection, which has to do with my causal explanation. The story I tell has the premise that the velocity of money has instable determinants other than the money supply; and, indeed, that proposition is (as wikipedia puts it) "a subject of controversy across and within schools of economic thought." Which is to say you would have plenty of company (e.g. Milton Friedman) in disagreeing with my assumption. So take my "potential defense from a different perspective" as just that: potential, and from a particular perspective.
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Old 11-07-2011, 02:25 AM
jimM47 jimM47 is offline
 
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So the short answer is that as long as the ECB stands ready to buy Greek bonds at parity you don't have to worry about Greece's default. You would only have to worry that the ECB would at some point remove their promise to stand ready.

In practice what the ECB should do is target short term Greek debt of no more than 1 year. This would allow Greece to issue debt with a maturity of one year at low rates. Longer term debt would trade in the secondary market based on the fundamentals you describe.
So, are we still talking about a scenario in which the ECB hopes to set the rate at which newly-issued Greek debt trades without itself being the purchaser of all of said debt?

I would think that the presence of longer term debt instruments, trading in the secondary market at higher yields due to the fundamentals I posit, would prevent private lenders from buying the close-substitute lower-yield newly-issued Greek debt instruments, leaving only the ECB to buy them. Why would I buy a newly issued 1-year Greek note at a yield of 2% when I can go to the secondary market and buy a 2-year note issued one year ago and get a much higher effective yield?
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Old 11-07-2011, 03:51 AM
Sulla the Dictator Sulla the Dictator is offline
 
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Originally Posted by Diane1976 View Post
If there's a big financial crisis and the theory gets all screwed up, blame the poor Americans who were hoodwinked into buying houses they couldn't afford, or the kids that took out student loans, or, hey, why not the people of Greece. It must have been their fault.
I don't understand this way of viewing the world. It assumes that individuals are children, incapable of actually being responsible for their actions. Instead, blame the "system", perpetually.
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Old 11-07-2011, 08:16 AM
bkjazfan bkjazfan is offline
 
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I don't understand this way of viewing the world. It assumes that individuals are children, incapable of actually being responsible for their actions. Instead, blame the "system", perpetually.
Maybe they didn't have an old school, non college educated grandmother like I had who said "don't spend money you don't have."
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Old 11-07-2011, 09:23 AM
Unit Unit is offline
 
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I don't understand this way of viewing the world. It assumes that individuals are children, incapable of actually being responsible for their actions. Instead, blame the "system", perpetually.
In a sense yes, people's knowledge is limited and their rationality is bounded. People overcome this being using prices that should be a feedback loop and a guide. However when prices are distorted people are led astray. If going into debt is all of sudden artificially cheap, because of several interventions into the economy by the institutions, then people are going act a certain way and you can't expect them to understand the whole picture the way we understand it now after the fact.
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Old 11-07-2011, 09:36 AM
miceelf miceelf is offline
 
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Originally Posted by Sulla the Dictator View Post
I don't understand this way of viewing the world. It assumes that individuals are children, incapable of actually being responsible for their actions. Instead, blame the "system", perpetually.
Actually, blame the "system" is kind of the conservative response to things. A CEO engages in fraud or chooses to decimate thousands of jobs. Oh, he's not responsible, it's just "the free market"
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Old 11-07-2011, 11:11 AM
Alexandrite Alexandrite is offline
 
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I prefer to think of it as second-semester sophomore nihilism combined with optimal control theory.

No, but the core of the issue is this:

If you think of policy as an infinite horizon problem, then there is always some discount rate that justifies an arbitrary amount of human suffering today, to relieve the probability of human suffering in all future periods.

Traditionally, people speak about policy as if this was the objective function we are maximizing.

Thus questions between suffering today and increasing the long run path of suffering are always value questions. How much do you care about the future?


However, once you accept that this is a finite horizon problem that changes. For some cases there exists no discount rate such that human suffering today can be justified by a lower probability path of human suffering tomorrow.

Doing the "responsible" is thing unambiguously worse for humanity irrespective of your valuation of the future.


I think this is important because its important to realize that some policy decisions to suffer now for the greater good can simply be wrong. Not a question of values or moral, but demonstrably wrong. The world simply does not operate under conditions that would allow that to be the solution to some utility maximization problem.
The difference between a socialist growth rate of 1% in Greece versus say, a Free Competition growth rate of 5% by merely the end of the century (which many people alive today in Greece should live to see), is the difference between the United States and Sudan today in terms of quality of life. If you would not make the argument for your ancestors in 1920 to adopt such anti-growth methods that would relegate your current living standards to Sudan, if you think there would have been something wrong about your grandparents or great grandparents destroying your future so they could enjoy high government wages and universalwhatevers, then you probably need to rethink your Got-mine-FU attitude towards the future.


There are worse things that can happen than cutting government spending 40% (Your 3% imf target is ridiculous nonsense). The fact is, the Greeks will never reduce their government to a level they can afford unless they take a bit of pain. The idea of buying stuff they can't afford needs to be so ridiculously painful they will never, ever do it again. It needs to hurt so bad, Italy, and Spain, and all the other nations of Europe back off of reckless spending as well.


All punishment is a moral hazard. All punishment is inflicting evil and suffering. Pointing out that this particular instance of punishment is painful isn't going to change the fact that punishment and justice serve purposes that are higher than the moral whims of the moment.
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Old 11-07-2011, 11:42 AM
karlsmith karlsmith is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

"I am just pointing out that you seem to imply an economic definition to what is ultimately a philosophical problem that the discipline of economics isn't fit to solve. It seems that you would have to accept the academic division of labor here and perhaps turn to other disciplines, likely philosophy, to address the value-issues you're discussing"


Lets say that we could do Austerity now and 1 Million Greek people will loose their jobs. But, it will decrease the probability of crisis in which 10 Million people lose their jobs by 1% each year.

That is we are now in a more sustainable place.

Is this a good idea?

You could say well I think society should always look towards the long term and 10 Million jobs lost is a horrible outcome. We need to face Austerity now, not kick the can down the road.



I come back and say, well look, in the back of your mind you are doing an infinite horizon calculation and you can always make this a worthwhile thing to do simply by putting more weight on the future. That is, implicitly saying I have more patience or a lower discount rate. In this case any discount rate of less than 10% will make it worth your while to do this.

So you actually have to be quite impatient not to want to have austerity.


However, if you recognize that this all is going to come to an end sometime then its no longer true. Lets say that there was a 10% chance that the world was going to end each year.

Then in that case no discount rate. Even one of zero would make this idea good because the probability of anyone actually experiencing this bad thing is so low that its never a good idea to make people suffer now for the future.


These are really simplistic numerical examples but I hope the point is that once you recognize that you are dealing with a finite horizon problem you actually have to sit down and do the math. You can't just claim that there is SOME discount rate that makes this a good idea. Or, in other words you can't just claim that "if only people were far-sighted enough" they would think this was a good idea.
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Old 11-07-2011, 11:47 AM
karlsmith karlsmith is offline
 
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All punishment is a moral hazard. All punishment is inflicting evil and suffering. Pointing out that this particular instance of punishment is painful isn't going to change the fact that punishment and justice serve purposes that are higher than the moral whims of the moment.
I am sorry that I am not going to be able to fully engage this but my basic point here is that we really need to do the math on this.

Austerity may or may not be the worst thing that can happen, but Global Financial Crisis is among the worst things that has happened to a Capitalist Economy.

This is what we are potentially facing.

To continue your analogy the optimal level of crime is not zero. It is not a good idea to ramp up your police state to the point where no crime happens because a police state is worse than crime.

Yes, it would be good if the criminals just willingly changed their ways but given that the actual means at your disposal is violence from the state, it is not in your best interest to punish every crime to the point where crime disappears.

I am arguing here that it is not in your best interest to risk Global Financial Crisis to push Greece into closing its gap.

We can argue more about the IMF estimates but this is the basic case.
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Old 11-07-2011, 11:49 AM
karlsmith karlsmith is offline
 
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I would think that the presence of longer term debt instruments, trading in the secondary market at higher yields due to the fundamentals I posit, would prevent private lenders from buying the close-substitute lower-yield newly-issued Greek debt instruments, leaving only the ECB to buy them. Why would I buy a newly issued 1-year Greek note at a yield of 2% when I can go to the secondary market and buy a 2-year note issued one year ago and get a much higher effective yield?
Because one year default risk is zero as the ECB has made a one year commitment to stand by Greek debt. Two year default risk is not zero since the ECB may remove this commitment if Greece doesn't get its act together.
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Old 11-07-2011, 12:02 PM
sugarkang sugarkang is offline
 
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Originally Posted by Diane1976 View Post
All this just made me think of ideologies, communism, socialism, libertarianism, free market worship, all of them. They're all the same. There's always some greater good and be damned the people who have to suffer for it now.
This sounds right. This is the good/evil narrative that people create to make sense of the world and people will create the narratives to fit their ideologies. Sometimes, it's valid to do so. However, Karl's point seemed to be that the morality tale doesn't fit this particular scenario and that the problem is a technical one.

Which is why the remainder of your comment is confusing.

Quote:
If there's a big financial crisis and the theory gets all screwed up, blame the poor Americans who were hoodwinked into buying houses they couldn't afford, or the kids that took out student loans, or, hey, why not the people of Greece. It must have been their fault.
You've made an implicit assumption that debtors are victims being unjustly blamed. There are indeed some Republicans doing so. I've seen Herman Cain tell OWS to "blame yourself." I've seen Rudy Giuliani tell the same people to "get a job." Those stances seem patently ridiculous when people are constantly looking and applying for work, but there aren't any jobs to be had. You can tell someone in the 1960s to get a job when there's plenty of work for everyone. You can't do that to someone who's looking for something that doesn't exist. To that extent, victim blaming is wrong.

However, more fundamentally, one should ask whether these debtors qualify as victims of intentional wrongdoing or of unfortunate circumstance? Did Big Tony bust through their houses, dump a bunch of money on the floor and threaten to break their legs if they didn't pay it back with interest? Your word selection seems to suggest this.
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Old 11-07-2011, 12:16 PM
miceelf miceelf is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

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Originally Posted by sugarkang View Post
You've made an implicit assumption that debtors are victims being unjustly blamed. There are indeed some Republicans doing so. I've seen Herman Cain tell OWS to "blame yourself." I've seen Rudy Giuliani tell the same people to "get a job." Those stances seem patently ridiculous when people are constantly looking and applying for work, but there aren't any jobs to be had. You can tell someone in the 1960s to get a job when there's plenty of work for everyone. You can't do that to someone who's looking for something that doesn't exist. To that extent, victim blaming is wrong.

However, more fundamentally, one should ask whether these debtors qualify as victims of intentional wrongdoing or of unfortunate circumstance? Did Big Tony bust through their houses, dump a bunch of money on the floor and threaten to break their legs if they didn't pay it back with interest? Your word selection seems to suggest this.
I generally agree (I think) with your post. But you agree that there are people unduly blaming those without jobs and with bad loans, and say that it's an implicit assumption that blame is happening. It's happening, and not universally, but I don't think universally was the claim.

As to whether intentional wrongdoing vs. unfortunate circumstances, well, neither option makes the victim blameworthy. As to intentional vs unfortunate, if they are victims of the financial crisis, then it's intentional wrongdoing just not at the direct level of the provider of the loan, but rather the wrongdoing that led to the collapse.
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Old 11-07-2011, 12:42 PM
Alexandrite Alexandrite is offline
 
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Originally Posted by karlsmith View Post
I am sorry that I am not going to be able to fully engage this but my basic point here is that we really need to do the math on this.

Austerity may or may not be the worst thing that can happen, but Global Financial Crisis is among the worst things that has happened to a Capitalist Economy.

This is what we are potentially facing.

To continue your analogy the optimal level of crime is not zero. It is not a good idea to ramp up your police state to the point where no crime happens because a police state is worse than crime.

Yes, it would be good if the criminals just willingly changed their ways but given that the actual means at your disposal is violence from the state, it is not in your best interest to punish every crime to the point where crime disappears.

I am arguing here that it is not in your best interest to risk Global Financial Crisis to push Greece into closing its gap.

We can argue more about the IMF estimates but this is the basic case.
Let's ignore the downside risks, since those are
A: prone to loss aversion and
B: Assumes that the problems Greece faces are outside of their control

The entire planet is prepared to pay the Greeks a ridiculous amount of money if they get their act together and move towards sustainability.

I don't know what the interest rate on Greek Bonds are, but if you - as King of Greece - knew for a fact that the default risk was actually 0, because you were prepared to do anything and everything to pay that money back...

You could make DI money off that. It would be the greatest insider trade in the history of mankind. The fact that the planet is willing to make bets like this is kind of ridiculous. It's so obvious that you'd have to be really stupid to not snap take them up on these bets.


Is there any austerity risk that you can present that is worth the potential money they can make? The fact is, the choice of default for Greeks is in their hands. They can choose to cut government wages, they can choose to cut services, they can choose to adopt more business friendly environment - all of the tradeoffs between the worker and the business, between the environment and business, between the customer and business, whenever a government makes the tradeoff in favor away from industry those are luxuries.

Luxuries that are increasingly becoming evident that the Greeks can't afford. Removing minimum wage laws in Greece might hurt, but when compared to the money they'll make if they don't, it's got to be on the table.

In 20 or 40 years when they're richer they can go back and revisit these trade offs, but the Greeks need to start thinking like the poor nation they are. No one questions that poor nations will make these kind of trade offs, no one questions that China doesn't have Universal Health Care, so why should a nation like Greece, who's long term economy looks much crappier than China's, be thinking they can afford something like that. They need to start thinking, "How can I get Nike to open a factory in Athens", because that's how poor they're getting. They need money, and nothing should be beneath them. If you think this is ridiculous, at current growth rates by the end of the decade, Greece will be below average for global GDP. Below 'developing' nations like Brazil. The rest of the world is catching up fast, and they don't have time for this kind of first world nonsense. What comparative advantage does Greece have compared to Brazil? The poor first world nations rested on their laurels, and they're about to get a massive wake up call.



I also disagree that Global Financial Crisis is among the worst things that has happened to a Capitalist Economy. In Capitalist nations 'crisis' happens every 50-100 years, and usually coincide with great reformations in technology and labor sectors. It's a large painful burning off of wealth-potential along deadend sectors as the workforce transitions from unproductive sectors into new productive ones, but it's always followed by large growth -periods of large recovery that make the misery worth it. It is natural and built in way of redistributing economic resources from unproductive places to more productive ones.

There are worse things than the pain of the moment, and that's getting locked into deadend directions. You end up in anemic go-nowhere economies that ultimately are overshadowed by the faster growth of their neighbors. How much richer could Japan have been today if they had chosen 20 years ago to let their failures flush through their system?
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Old 11-07-2011, 12:42 PM
Sulla the Dictator Sulla the Dictator is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

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Originally Posted by miceelf View Post
Actually, blame the "system" is kind of the conservative response to things. A CEO engages in fraud or chooses to decimate thousands of jobs. Oh, he's not responsible, it's just "the free market"
Sorry; fraud is not considered a valid market tool by Conservatives. Maybe you're confusing us with some sort of cartoon the Daily Show had on.
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Old 11-07-2011, 12:51 PM
Sulla the Dictator Sulla the Dictator is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

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Originally Posted by Unit View Post
In a sense yes, people's knowledge is limited and their rationality is bounded.

People overcome this being using prices that should be a feedback loop and a guide.
That is true in a clean, consumer market in a more retail sense. But is it the case when it comes to contracts? I don't think so. The presumption for minimal standards of responsibility is that people read what they signed. If we accept that as a given, then we know that they knew the kind of financial risk they were running.

Quote:
However when prices are distorted people are led astray. If going into debt is all of sudden artificially cheap, because of several interventions into the economy by the institutions, then people are going act a certain way and you can't expect them to understand the whole picture the way we understand it now after the fact.
But it seems to me that the emphasis here is in the wrong place. Is it actually artificially cheap? Interest rates were much higher than today, the difference was short term gimmick programs which mitigated the actual expense; but the balloon on these arrangements was always obvious, and the payments weren't actually low at all, compared to now. They weren't all that low compared to the 1990s either, when lower prices balanced out higher rates. The biggest difference driving people's behavior, the distortion, is the potential for appreciation.

Now, if vast swaths of these people are actually little different than speculators, at what point do we assign responsibility to them for the fallout of their investment?
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Old 11-07-2011, 12:57 PM
sugarkang sugarkang is offline
 
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As to intentional vs unfortunate, if they are victims of the financial crisis, then it's intentional wrongdoing just not at the direct level of the provider of the loan, but rather the wrongdoing that led to the collapse.
I agree. Although, we might disagree on the definition of "wrongdoing." I've said this before, but the most egregious things are legal, not illegal.
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Old 11-07-2011, 01:02 PM
Don Zeko Don Zeko is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

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I agree. Although, we might disagree on the definition of "wrongdoing." I've said this before, but the most egregious things are legal, not illegal.
Much like Congress, the real crime is the stuff that's perfectly legal. On this subject, apparently Jack Abramoff is out of jail and possibly writing a memoir.

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In the interview, Abramoff gives away some of the tricks of his former trade. The big one? Dangle a job, he told Lesley Stahl. “When we would become friendly with an office and they were important to us, and the chief of staff was a competent person, I would say or my staff would say to him or her at some point, ‘You know, when you’re done working on the Hill, we’d very much like you to consider coming to work for us.’ Now the moment I said that to them or any of our staff said that to ’em, that was it. We owned them. And what does that mean? Every request from our office, every request of our clients, everything that we want, they’re gonna do. And not only that, they’re gonna think of things we can’t think of to do.”

Abramoff had softer methods, too. “I spent over a million dollars a year on tickets to sporting events and concerts and whatnot at all the venues,” he says. “I had two people on my staff whose virtual full-time job was booking tickets. We were Ticketmaster for these guys.”

Once the key staffers or legislators were bought, the trick was getting clients what they wanted without attracting attention. “So what we did was we crafted language that was so obscure, so confusing, so uninformative, but so precise.” The following line of text, for instance, quietly won Abramoff’s Native American clients a casino license: “Public law 100-89 is amended by striking section 207 (101 stat. 668, 672).”
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Old 11-07-2011, 01:12 PM
miceelf miceelf is offline
 
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Default Re: The Big Interview (Karl Smith & Kelly Evans)

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Sorry; fraud is not considered a valid market tool by Conservatives.
It sure is, as long as it isn't technically against the law. Any law toward truth in advertising among banks, or to have the actual credit card agreements spelled out in normal, understandable language, is met by howls of "socialism! tyranny!" by conservatives. With regard to banking and credit, a great deal of the current republican enterprise is geared toward keeping as much fraud and opacity legal as possible.
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Old 11-07-2011, 02:17 PM
Sulla the Dictator Sulla the Dictator is offline
 
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It sure is, as long as it isn't technically against the law.
Ok, so you mean Conservatives favor fraud as long as it isn't fraud.

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Any law toward truth in advertising among banks, or to have the actual credit card agreements spelled out in normal, understandable language, is met by howls of "socialism! tyranny!" by conservatives.
What did you have in mind? I'm an avid reader of National Review and the Weekly Standard, and don't recall anyone arguing against disclosure. There have been proposals that have been opposed which may contain elements of disclosure, but as I'm sure you know, these were not the reasons Conservatives opposed them.

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With regard to banking and credit, a great deal of the current republican enterprise is geared toward keeping as much fraud and opacity legal as possible.
If you don't mind, perhaps we can establish a baseline understanding here. How much of the current debt burden Americans face is actually due to fraud and opacity, do you think? Do you believe that people didn't understand what adjustable interest rates were? Do you believe that people who see the rates on their cards jump from 7.9% to 23% have within themselves the ability to understand that increase, and to take action from there? Perhaps to cancel the card, and pay off what they owe?

And certainly you can't be arguing that the mortgage mess has much if anything to do with fraud or opacity.
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