Comment 29690

By A Smith (anonymous) | Posted March 24, 2009 at 05:31:31

Ryan >> Wrong. Given the amount of money leveraged into high-risk subprime mortgages that ultimately defaulted, a lot of the money is simply *gone*.

For every winner there is a loser. The people who bought these pieces of paper (CDO's) have simply transferred wealth to those who sold them.

>> You see, investment requires trust, and trust requires oversight. Without oversight investors are afraid to commit their money. Without investment, the economy sputters and slides into recession.

As this housing bubble shows us, investment only really requires greed. It's the reason why people convinced themselves that it was alright for the Nasdaq to go from 1000 to 5000 in four years and also explains tulip mania. When people believe that they can make money, they will invest.

>> What financial regulation does is establish oversight and prevent panics and runs

Bank runs represent failure and are a useful tool to limit the amount of capital that is wasted by bad investors.

>> I doubt there's an investor anywhere on earth who rolls in CDOs and credit default swaps and believes that their money sits in a vault somewhere when they deposit it.

So why do you care then? If these people were sophisticated investors, then let them eat their losses.

>> People with money are sitting on it because they're afraid to invest it. The appropriate government response is to stimulate spending through public investment - preferably in public infrastructure that will pay long-term dividends in higher productivity

The appropriate government response is to let private investors figure out how to invest their own money. Government has no unique insight into what investments produce the highest returns on equity, if they did, they wouldn't work for the government.

Furthermore, any capital the government invests today, takes away from future private investments. The U.S. currently borrows 1.6% of it's GNI. In 1991, during a recession, it saved 4.1% of it's GNI, while in 1998, it saved 6.5% of GNI. In the fifties and sixties, it saved over 10% of GNI. If there is a correlation at all between savings and growth, it is that that a higher savings rate is more favourable..."".

>> responsible financial institutions suffer when people lose confidence in the banking system.

Then they should change their business model to account for this. Become a bank that charges people to store cash in liquid form, but also offer them longer term investments in which they are paid for the use of their money.

>> Demand is what people want to buy with their money. During a financial crisis, people save money rather than spending it. If you cut taxes, they'll just save more of it.

Savings are good, they act as a pool of capital to draw from for future investments. Since good ideas take time to come to fruition, spending all of people's savings today means that truly good ideas won't have the resources they need tomorrow.

>> Stimulating demand through countercyclical spending *does* bring in more workers, specifically those workers being laid off by the private sector.

Paying workers to do unproducitve tasks destroys capital. An extreme example would be to pay people for digging a hole and filling it back up. You're better off just giving people cash to spend at local businesses. At least that way, the businesses that deliver the most value to people will get the most resources to reinvest in new tools and equipment. This still is borrowing form future consumption, but at least it's not as bad as investing in projects that are based on politics rather than the bottom line.

>> Instead of increasing spending, he cut taxes (particularly the top marginal rates), which drove the government deep into recession without spurring demand (since the wealthy beneficiaries of the tax cuts put them into savings

Under Hoover, federal spending went from 2.6B in 1929 to 4.1B in 1931, an increase of 57%. During this same period, GDP fell from 103.6B to 76.5B, a decrease of 26%. Therefore, in percentage terms, federal spending in 1929 accounted for 2.51% of GDP, however, by 1931 it was up to 5.36%. This means that federal spending doubled in two short years. Also, just to be accurate, Hoover didn't cut tax rates, they were dropped to 25% in 1925, under Calvin Coolidge.

Furthermore, under Hoover, net saving as a percentage of gross national income went from 9.6% in 1929 to -7.2% in 1932. If the rich people were saving their money, it didn't show up in the numbers. In fact, this correlation between a reduction in savings (as a percentage of gross national income) and the collapse in GDP, is evidence that Obama should start accumulating a huge surplus and not run a deficit as all the "experts" suggest.

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