The Credit Crisis Financial Stocks Short Journal

[ralph00]

BTW, I think you took a cheap shot at the deflationists. The 10 year was sub 2.50% a few days ago, credit continues to contract, the housing market sucks, the economy is flatlining at best and long term gov't paper has outperformed equities this year. They've got nothing to apologize for.

Yes, Helicopter Ben has managed to engineer a big rally in stocks and commodities, but markets aren't stupid. For every uptick in equity prices, the dollar has fallen even more. Bernanke has engineered a massive transfer of wealth, but has created no new real wealth and not one net job.

I don't think anybody truly believes that Bernanke can't be successful (as you define it). Yes, he can print trillions and literally destroy the dollar (although i believe he might be removed from office should he try it). The question should be can he be successful without destroying society as we know it. The answer to that remains no.

 

[Daal]

Quote from ralph00:


I don't think anybody truly believes that Bernanke can't be successful (as you define it).

Actually a lot of people doubt that Fed can create inflation and avoid the Japanese disease. I dont think I'm taking a cheap shot, heck I'M in the deflation camp for the short-run(next year or 2). Its the folks who doubt a committed central bank can create inflation that I'm going after

 

[Daal]

Now the dude claims all the QE hint did was induce traders to swap USTs completely ignoring my point about higher inflation expectations(hence higher cost of holding cash) which increases velocity. If he agrees with this point, then he will have agreed that the Fed can raise M, V and yet they will fail to increase inflation and NGDP. A completely contradictory position

 

[Ghost of Cutten]

QE can only work if wage stickiness exists, if it is offset by money illusion and thus leads to the labour market returning to equilibrium/market-clearing levels, *and* this happens faster than just leaving the market alone, *and* the other costs of inflation are also lower than the benefits of this potentially faster return to normal employment levels, *and* the hit to central bank credibility does not create worse effects for the present and long-term future, *and* it gets withdrawn before going on too long and creating excess inflation when the economy returns to growth.

If any one of these conditions is not fulfilled, then QE almost certainly destroys wealth and makes stagnation or recession worse, not better. Only an arrogant fool could possibly think that they could be blind enough to miss the entire housing bust, and yet perceptive enough to be able to do everything right to fulfil all those conditions above.

 

[Ghost of Cutten]

Quote from Martinghoul:

Well, again we're arguing counterfactuals, which, basically, means we could in theory go back 'n forth in the same vein endlessly. However, let me just point out that there have been cases where not responding to panics ended rather sadly for lots of people involved.

So the dilemma for policy makers is, basically, that of a russian roulette player. The probability of blowing your brains out is very low, but it ain't zero. If you were them, would you play or would you put the gun away?

That's based on assumptions and double standards. How do you know that the present isn't blowing your brains out? Or that the "let the banks fail" wasn't the short-term harsh but long-term necessary response? Maybe even the start of a very long-term economic and political renaissance?

You can't assume that the course taken was correct, and then assume that the course avoided would have been disastrous. Also, don't be short-termist. The question is not whether 2009 would have been worse. The question is whether 2015, 2020, 2025, 2030 would be worse or better under each scenario.

No bailout addict has ever even addressed that question, let alone mounted a credible defense of intervention. Whereas we are already seeing a clear path to long-term stagnation, political corruption, socialisation of the market economy, growing bureaucracy, lower long-term trend growth etc. And we have a prior example in Japan. "The system would have collapsed" is always assumed, with no evidence, to be an argument-ending point. Sorry but it is not self-evident at all - *why* does a collapse of a large number of banks mean that it shouldn't be allowed to happen? What are the *pros* as well as the cons?

It is quite possible to fully understand the downside, and still support it - or even support it more. People with capital, but no risk control, would have been wiped out. Terrible businessmen and a rentier managerial class with no skill or foresight would have been fired or gone bust. Skilled and conservative businessmen with robust risk management would have survived, bargain-hunted, and prospered. True investors would have gotten the bargains of a lifetime. Wealth inequality would have been radically reduced. The cost of goods and services, and especially assets, would have plummeted. 98% of political incumbents would have been voted out of office. What's not to like? Let me guess - you are a banker? All your wealth tied up in bank accounts? Can we say "skin in the game"?

People who do not profiteer from hidden inflation got screwed by the bailout. People who saw the writing on the wall got screwed by the bailout. The taxpayer got screwed by the bailout. Responsibility got screwed by the bailout. The banks benefited from the bailout. The irresponsible did. The political class did. The Fed especially did. It's pretty clear what is going on here.

 

[Ghost of Cutten]

Quote from Daal:

Hussman claims QE wont be effective because monetary policy is impotent due the zero bound
http://www.hussmanfunds.com/wmc/wmc101025.htm

I believe he couldn't be more wrong. He is looking at the wrong data, instead of monetary base he needs to look at M2
http://www.econbrowser.com/archives/2006/05/m2_and_inflatio.html

If one doubts the fed can be effective in boosting nominal incomes and prices just image what would happen in a massive helicopter drop of cash scenario. Its just not plausible that people would decrease their spending by proportionally same exact amount that was printed. And the fed can easily create a helicopter scenario by large purchase of assets from primary dealers

Depends what you mean by "effective". Zimbabwe, after all, boosted nominal prices and incomes, so did the Weimar Republic.

What is of interest to people is *real* incomes and prices, not nominal.

 

[Ghost of Cutten]

Quote from Daal:


If the enforcing the rule of law means the collapse of the financial system and decimation of living standards then its not on the interest of society to follow it.

Why not? You are assuming that living standards and crash avoidance are the highest moral values in society. Maybe a few bankers think that, but most people don't. There are things like ethical standards, honesty, integrity, justice, freedom etc.

200 years ago living standards were diabolical compared to today, yet the world population did not spontaneously commit suicide over it. In fact, people gladly fought and died for intangible causes like liberty and self-determination. If the only purpose in life nowadays is to avoid single-digit falls in living standards, or losses on bank securities, then we are all fucked in a far more serious way than anything the financial world can throw at us.

 

[Martinghoul]

Quote from Ghost of Cutten:
That's based on assumptions and double standards. How do you know that the present isn't blowing your brains out? Or that the "let the banks fail" wasn't the short-term harsh but long-term necessary response? Maybe even the start of a very long-term economic and political renaissance? ...

I prefer to call these "counterfactuals", but yes, I agree with much of what you've said. There's, ultimately, no way of knowing a priori which course of action is optimal. Hence, there's no point having an argument about it, which is what I said in my previous post. These are all views and opinions.

 

[Daal]

Quote from Ghost of Cutten:

QE can only work if wage stickiness exists, if it is offset by money illusion and thus leads to the labour market returning to equilibrium/market-clearing levels, *and* this happens faster than just leaving the market alone, *and* the other costs of inflation are also lower than the benefits of this potentially faster return to normal employment levels, *and* the hit to central bank credibility does not create worse effects for the present and long-term future, *and* it gets withdrawn before going on too long and creating excess inflation when the economy returns to growth.

If any one of these conditions is not fulfilled, then QE almost certainly destroys wealth and makes stagnation or recession worse, not better. Only an arrogant fool could possibly think that they could be blind enough to miss the entire housing bust, and yet perceptive enough to be able to do everything right to fulfil all those conditions above.

Whether QE will create real wealth compared to doing nothing is a different debate. I happen to believe the answer is yes but thats not even what I'm arguing. I'm going after that people who claim the Japanese scenario(flat NGDP, deflation or zeroish inflation) is inevitable and there is nothing the Fed can do. That is a silly claim that is made by surprisingly smart people from time to time

 

[Daal]

Quote from Ghost of Cutten:

Why not? You are assuming that living standards and crash avoidance are the highest moral values in society. Maybe a few bankers think that, but most people don't. There are things like ethical standards, honesty, integrity, justice, freedom etc.

200 years ago living standards were diabolical compared to today, yet the world population did not spontaneously commit suicide over it. In fact, people gladly fought and died for intangible causes like liberty and self-determination. If the only purpose in life nowadays is to avoid single-digit falls in living standards, or losses on bank securities, then we are all fucked in a far more serious way than anything the financial world can throw at us.

I'm assuming that most people given a choice between a 30's style decline in real GDP and saving bankers by breaking the law would choose the latter. Now maybe you disagree with the assumptions in the comparison(That the world faces a 1930's collapse if the financial system goes) but that is the scenario in my mind when I made the statement

There are not a lot of things that are worth a massive collapse in living standards that the entire society has to bear, I suspect very few people disagree with that