Paul Krugman is right on bank nationalization and the Austrians don't get it

[Cutten]

Quote from makloda:

According to the free market nughuggers there is ZERO difference between something like WebVan or Worldcom going bust and Lehman, AIG and BAC + a bunch of emerging markets going into unmoderated bankruptcy.

Even in the aftermath of Lehman they still hang on to their "self-cleasing market" thesis. Shouldn't most traders understand that markets tend to swing back and forth between being efficient and non-efficient?

Why does any of that imply that the "self-cleansing market" thesis is wrong? Last time I checked, the first recession in the USA did not last forever - thus the market does "self-cleanse". In fact, the only time we've seen stagnation of 5 years + is where the dead hand of government becomes too powerful e.g. 1930s, 1970s, Japan in the 1990s and so on.

Are you trying to say that bubbles don't eventually burst of their own accord, or that busts don't eventually end and then see recovery, without any government intervention, just by the price mechanism and supply & demand doing their job?

 

[Cutten]

Quote from Daal:

You want banks to fail?Government restructuring is failure. Heres the thing that guys like Jim Rogers dont get it, there is no such thing as a bank bankruptcy! So what kind of failure are you looking for?

The FDIC takes banks over when they are illiquid, inadaquetly run, undercapilized. then they reestructure, clean it up, give some deposits to other banks, sell the clean up bank,etc
This is not called nationalization but its essentially that. If the FDIC took C over and reestructured, then C failed, the austrians had their way, how come they are not happy with this?

But of couse, free market fundamentalists seem to want bankruptcy judges with NO experience with bank failures to do the job just so they have satisfy their inate desires to make their free market heros to be proven right. They also have a view that nationalization=socialism=bad even though this has nothing to do with government running banks

Last time I checked the bankruptcy system was run by government employees the same way the FDIC is

I'm a free marketeer and don't agree with a single characterisation you've made here. You might want to actually ask some free market supporters what they think, rather than making assumptions?

Besides, it's all moot. The banking system is bust, period. The FDIC is insolvent and bust. In many countries, single banks have balance sheets greater than national GDP. The losses are real and will get bigger. Someone must pay those losses. Either it is the taxpayer via bailouts, it is the bank depositors, it is the bondholders & shareholders, or it is currency holders via hyperinflation. Debating whether bankruptcy court, or a special purpose government entity, or the FDIC is best, that's missing the wood for the trees. What matters is that anyone with capital at unsound banks (most of them) is fucked, and probably a lot of people who don't have capital at banks are going to get somewhat fleeced too. You, Krugman, and most people on this thread are going bust or going to take a huge haircut. You think you can stay above water but when the system goes down you won't be prepared. That's the part you and Krugman don't get. Mock all you will, but in the end the Austrians will be the last men standing.

 

[fhl]

 

[Landis82]

Quote from Cutten:

I'm a free marketeer and don't agree with a single characterization you've made here. You might want to actually ask some free market supporters what they think, rather than making assumptions?

That's the part you and Krugman don't get. Mock all you will, but in the end the Austrians will be the last men standing.

What's funny about your last two posts is just how ironic they are . . .

You proclaim yourself as a "free-marketer", but then go on to admit that the free-market is not devoid of distortion and failure, is not "self-regulating" as Greenspan thought, and was most likely not ALL THAT FREE ( or fair ) on the way up to begin with . . . but Krugman doesn't get it.

Too funny.

 

[Daal]

Quote from Cutten:

I'm a free marketeer and don't agree with a single characterisation you've made here. You might want to actually ask some free market supporters what they think, rather than making assumptions?

Besides, it's all moot. The banking system is bust, period. The FDIC is insolvent and bust. In many countries, single banks have balance sheets greater than national GDP. The losses are real and will get bigger. Someone must pay those losses. Either it is the taxpayer via bailouts, it is the bank depositors, it is the bondholders & shareholders, or it is currency holders via hyperinflation. Debating whether bankruptcy court, or a special purpose government entity, or the FDIC is best, that's missing the wood for the trees. What matters is that anyone with capital at unsound banks (most of them) is fucked, and probably a lot of people who don't have capital at banks are going to get somewhat fleeced too. You, Krugman, and most people on this thread are going bust or going to take a huge haircut. You think you can stay above water but when the system goes down you won't be prepared. That's the part you and Krugman don't get. Mock all you will, but in the end the Austrians will be the last men standing.

I dont understand what you are trying to say, are you saying my view that C bonds are safe is wrong, or are you implying is morally wrong to take advantage of too big to fail situations?
The reason I support bailing out banks has nothing to do with morality, of course its morally disgusting but the alternative is a level of economic collapse that democracies wont stand. Jim Rogers would bailout citigroup if his two daughters life were on the line, there is a price for everything
And if it turns out that I'm wrong I can afford to lose

My point is Krugman is correct that FDIC taking over banks is right, and private people should take most of the losses unless there is systemic risk, then the government needs to pay. And if you dont think there is systemic risk, then explain why, dont make it about morality since it has nothing to do with morality. If C bankruptcy would cause the end of the world, would be moraly wrong to bail them out?Of course not, an exaggeration but it makes the point

 

[TraderJoe08]

Keynes himself would not call himself a "Keynesian" if he were alive today. He believed gov. should get in then get out.

Due to the "iron triangle" composed of beaucracy, politicians, and other beneficiaries government intervention forms a ratchet effect were leaving the market is near impossible.

Please read the Austrian Theory of the Business Cycle and you will have an eye opening experience.

www.mises.org

 

[Angrycat]

Quote from TraderJoe08:

Keynes himself would not call himself a "Keynesian" if he were alive today. He believed gov. should get in then get out.

Due to the "iron triangle" composed of beaucracy, politicians, and other beneficiaries government intervention forms a ratchet effect were leaving the market is near impossible.

Please read the Austrian Theory of the Business Cycle and you will have an eye opening experience.

www.mises.org

The naivete of Keynes is that he underestimated the self interest of government actors (power is so juicy, why give it up once you have it?). And he virtually ignored the fact that human beings respond to incentives.

 

[Angrycat]

Daal,

Bankruptcy judges don't run banks. Their primary purpose is to maintain integrity of contracts and an orderly liquidation.

I think the example you gave with C is not nationalization but receivership. In other words, the government will not run the bank but dispose of its assets and liabilities in an orderly fashion. The fear is that the bank will be nationalized - i.e. the government will actually be a majority shareholder and run the bank. Ostensibly, as well as it runs the post office.

Hopefully I remember my few law classes enough to make sense and if I don't you'll correct me.

 

[bwolinsky]

Quote from Daal:

You want banks to fail?Government restructuring is failure. Heres the thing that guys like Jim Rogers dont get it, there is no such thing as a bank bankruptcy! So what kind of failure are you looking for?

The FDIC takes banks over when they are illiquid, inadaquetly run, undercapilized. then they reestructure, clean it up, give some deposits to other banks, sell the clean up bank,etc
This is not called nationalization but its essentially that. If the FDIC took C over and reestructured, then C failed, the austrians had their way, how come they are not happy with this?

But of couse, free market fundamentalists seem to want bankruptcy judges with NO experience with bank failures to do the job just so they have satisfy their inate desires to make their free market heros to be proven right. They also have a view that nationalization=socialism=bad even though this has nothing to do with government running banks

Last time I checked the bankruptcy system was run by government employees the same way the FDIC is

Krugman is the only moron that thinks Social Security isn't a ponzi scheme.

 

[Cutten]

Quote from Daal:

I dont understand what you are trying to say, are you saying my view that C bonds are safe is wrong, or are you implying is morally wrong to take advantage of too big to fail situations?
The reason I support bailing out banks has nothing to do with morality, of course its morally disgusting but the alternative is a level of economic collapse that democracies wont stand. Jim Rogers would bailout citigroup if his two daughters life were on the line, there is a price for everything
And if it turns out that I'm wrong I can afford to lose

My point is Krugman is correct that FDIC taking over banks is right, and private people should take most of the losses unless there is systemic risk, then the government needs to pay. And if you dont think there is systemic risk, then explain why, dont make it about morality since it has nothing to do with morality. If C bankruptcy would cause the end of the world, would be moraly wrong to bail them out?Of course not, an exaggeration but it makes the point

My view is that the losses cannot be covered. They are too big. The FDIC cannot afford to bail out the whole banking system.

The world will not end if C, or even the whole banking system, goes bust. Financial sectors have been wiped out before - US, Japan, UK etc. The 2-3 years of pain it would cause are far preferable to the multi-decade stagnation of the 1930s, or 1970s UK, or 1990s Japan.

My other point was that in these times you are not limited to the risk on your positions. There are numerous other risks - your broker going bust, your bank going bust, FDIC getting suspended and so on. Add to that punitive taxation on trading, capricious legislation, class war, capital controls, maybe even passport controls. Austrians, gold bugs, and the tin foil hat brigade are ironically far better prepared for these eventualities than those who mock them (which class of people mostly never saw this bust coming, by the way).