Graeber's book Debt: The First 5000 Years documents that cycles of debt crisis and subsequent forgiveness is historically normal. And probably necessary. I mean, think about it: What other remedies do we have to winner-takes-all? Progressive taxation? Government largess?
Made me rethink all the bailouts, etc. Especially with the renewed scholarship on Keynesian 2.0 (MMT).
I'd probably be ok with bailouts, jubilees if they were more fair, more bottom up.
Financiers gobbling up all the cheddar, abandoning all their victim's, really pisses me off.
Insult to injury is lack of consequences, acting aggrieved when their malfeasance is examined. Just one example being Jamie Dimon clutching his pearls when Obama Admin merely suggesting the optics of huge bonuses for execs during a meltdown was a bad look.
"I'd probably be ok with bailouts, jubilees if they were more fair, more bottom up..."
I think it is not so much the bailout that bothers me, as the "ok, crisis over, back to normal" that happens immediately afterwards. If it was something like "bailout, then break up into 50 smaller institutions immediately afterwards", I would not be so upset about it.
There are two ways to default. All at once or little by little. I think it is obvious that defaulting little by little is better.
There is a problem though. After the 2008 bailouts the default didn't even happen little by little.
Just look at Japan. You'd think that a real estate bubble that pops would also lead to the slow and steady erosion of debt. You'd expect maybe a 5% inflation rate to get rid of the debt.
Instead, inflation usually goes down after bubbles which means the default wasn't averted but spread over a period that keeps getting longer and longer with lower and lower inflation. Inflation is a soft default on debt but it isn't happening fast enough as inflation approaches 0% which is why I am in favor of negative interest rates.
I associate crashes with bubbles. Because economies are complex adaptive systems (butterfly effect), crashes are inevitable. Knowing this, policy makers do what they can to minimize bubbles, soften crashes. For which their is tremendous pushback (no good dead goes unpunished).
Some of the kibitzing wrt MMT is the distinction between inflation and interest rates. I gather that the anti-Keynesian rhetoric has traditionally focused on inflation (and deficits), and the MMT advocates are arguing that model is too narrow. I have no idea what all that means.
The authors compiled data for 1886 interventions in 20 categories across 138 countries going back to the 13th century. Fabulous work. Looking forward to reading it.
In the meantime, please do yourself a favor and take a look at Figure 6 on page 31, which shows that the number of interventions to rescue financial institutions around the world has been increasing consistently since the 1600's.
As the authors put it in their abstract, "intervention frequencies and sizes suggest that the crisis problem in the financial sector has indeed reached an apex during the post-Bretton Woods era – but that such trends are part of a more deeply entrenched development that saw global intervention frequencies and sizes gradually rise since at least the late 17th century."
And it's not only the frequencies and sizes of interventions that have increased, but also their scope. From the abstract: "The data shows a gradual shift over the past centuries from the traditional interventions of a lender-of-last-resort, suspensions of convertibility, and bank holidays, towards a much more prominent role for capital injections and sweeping guarantees of bank liabilities."
In short, over the course of at least five centuries, the financial system has grown more and more dependent on governmental support.
> In the meantime, please do yourself a favor and take a look at Figure 6 on page 31, which shows that the number of interventions to rescue financial institutions around the world has been increasing consistently since the 1600's.
Is this necessarily a bad thing? I mean that as a genuine question. The number of interventions to rescue people having asthma attacks has probably increased significantly over the same period.
If a financial institution is about to go under isn't it better to have a process by which we can mitigate the pain it causes? To be clear, there is definitely a lot to be desired with the way a lot of bank bailouts have been handled (where Main Street absorbs the downside on behalf of Wall Street) that I think is largely down to politics and "elite" connections but I really don't think the frequency of intervention is an accurate metric by which to judge the effectiveness of the outcome.
I think it's bad from a moral hazard point of view. These institutions increase their exposure to risk. The interventions exacerbate inequality and other issues. These centralized intuitions are resistant to reform. Reform that does happen increase government reliance.
I don't think serious people are advocating for zero interventions. We want a more resilient and fair system by design. Our centralized financial system has made interventions more common and larger in scale. Centralized vs decentralized is a cost/benefit and risk trade off. I personally think we've gone too far in centralizing our financial system.
What do you mean by centralised? The financial system is not centralised. It's regulated and overseen by a central authority, but the financial system itself isn't centralised.
One might argue that if it is the central bank, or the goverment, that underwrites all the risk, then it is that authority who ultimately decides what banks can or cannot do.
And therefore banks are not independent, but subservient, to central authority.
> One might argue that if it is the central bank, or the goverment, that underwrites all the risk
There are basically three groups of people that can shoulder the risk - the bank owners, the government, and people with money in the bank. Ordinarily it's the bank owners that shoulder the risk, because the government requires them to keep a buffer of "reserves" that get eaten through when loans aren't repaid. The government does insure the depositors if the shareholders lose all their money.
You could of course remove those regulations but it seems like you'd still have a moral hazard problem, since the losses of excessive risk-taking still aren't borne by those taking the risks (since they'll be passed to the depositors). Some of these issues seem intrinsic to banking where you're taking risks with other peoples' money almost by definition.
This is basically right, except what you call "reserves" is actually "regulatory capital" (a form of equity). Banks are also required to keep liquid reserves, but the purpose of reserves is different.
True, but you also have to ask if they can actually function without government support in the current environment. The masters of the universe are the walking dead.
> In short, over the course of at least five centuries, the financial system has grown more and more dependent on governmental support.
Governments have become a more and more important part of people's lives. Back in the day your contact with "government" would be the local squire/sheriff.
Nowadays you have general defence by a standing army, coast guard, air traffic control, health inspectors, health care, actual police officers / law enforcement (which only came into being as a standing bureaucracy in the 1800s IIRC).
Is it any surprise that they've grown into financial fields as much as they have in other areas of society? As civil society and civilization has grown bigger and complex so has the infrastructure around it.
My interpretation is that society has been increasingly dependent on the financial system. Who keeps cash anymore? It's almost illegal on many jurisdictions.
It's no longer something you can opt out of, especially since the covid pandemic.
>> In the meantime, please do yourself a favor and take a look at Figure 6 on page 31, which shows that the number of interventions to rescue financial institutions around the world has been increasing consistently since the 1600's.
I'm looking at it. Looks like it is "Absolute # of interventions". Doesn't seem to be per capita.
Do you know if it is? If it is not per capita, that's just a chart of population growth.
The population has increased since 1665, for those of you who didn't know that. Does this tell me anything else?
His hypothesis (23m) is that capital stock is fairly long lasting, so except for (mostly) wars and revolutions (and plagues), there isn't much demand: people want to rebuild after disasters, and so demand for capital goes up. When things are quiet then there's more just sloshing around with not much to do.
The oil shock of 1970s, which caused the most recent spike in the last 40 years (which is tapering), was a fairly unique event for rates.
That interest rates were on downward trend for centuries has already been observed by Adam Smith in “Wealth of Nations” in 1776. He claimed that governments can borrow at 2%, and private borrowers of good repute at 2.5%. Considering that inflation at the time was almost 0%, these were basically real rates, and would today correspond to nominal rates of 4-4.5%. Point here is that in England, rates were already very very low in 18th century.
I would think there has to also be some trend whereby lending to untrusted third parties has actually become cheaper and less risky. As in, creditors have recourse to a court system and police they don't have to personally fund, rather than paying enforcers to find people and break knees. And wages these days are far more stable than hundreds of years ago, so whoever you loaned money to is a lot less likely to suffer drastic life-changing events that leave them unable to pay in a way you didn't anticipate. We also have better data and better predictive models. Insurance is more widespread. Some insurance is directly provided by the government with nearly zero chance of not paying. All of these factors should be expected to make it cheaper to borrow money.
I agree with everything except the courts and police: they don't really do any debt-related enforcement activities anymore.
On the other hand I suppose you can cynically note that the police make discriminating between a high credit risk and a low credit risk "easy" by having a (possibly unfair) ultrafilter: "did you spend time in jail"
even so, incarceration makes servicing recurring payments much harder, not to mention bail... So (cynically speaking) it's even better because if you are rich you're likely to have your credit unhurt by going to jail.
That falls under the trivial fact of life being easier if you have access to more money. Surely a lender seeing a history of missing payments is relevant to their business, regardless of the borrowers situation.
> police make discriminating between a high credit risk and a low credit risk "easy" by having a (possibly unfair) ultrafilter: "did you spend time in jail"
The point is it is fair for a lender to use history of not paying on time as a factor in determining riskiness of borrower.
It can be unfair to use the sole fact of having been in jail as a factor in determining riskiness of borrower, but in my experience, no lender checks for that.
"The Bank "never goes broke." If the Bank runs out of money, the Banker may issue as much as needed by writing on any ordinary paper. (in the direction of the arrow) the number of spaces indicated by the dice. After you have completed your play, the turn passes to the left."
"So you think we might have put a few people out of business today. That its all for naught. You've been doing that everyday for almost forty years Sam. And if this is all for naught then so is everything out there. Its just money; its made up. Pieces of paper with pictures on it so we don't have to kill each other just to get something to eat. It's not wrong. And it's certainly no different today than its ever been. 1637, 1797, 1819, 37, 57, 84, 1901, 07, 29, 1937, 1974, 1987-Jesus, didn't that fuck up me up good-92, 97, 2000 and whatever we want to call this. It's all just the same thing over and over; we can't help ourselves. And you and I can't control it, or stop it, or even slow it. Or even ever-so-slightly alter it. We just react. And we make a lot money if we get it right. And we get left by the side of the side of the road if we get it wrong. And there have always been and there always will be the same percentage of winners and losers. Happy foxes and sad sacks. Fat cats and starving dogs in this world. Yeah, there may be more of us today than there's ever been. But the percentages-they stay exactly the same. "
It's not clear that the paper even considers this perspective. Instead it seems to take the position that banking crises naturally evolve, rather than get spawned by policy missteps to correct the previous crisis.
The James Grant that, in 2010, was one of the co-signers of the Open Letter to Bernanke:
> We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.
The same James Grant that, in 2011, thought we should go back to the gold standard to head off the looming debt catastrophe?
> How does America, looking up from the bottom of a $14.3 trillion sinkhole, claw its way out of debt? For starters, says perennial Wall Street bear James Grant, go back to the gold standard.
> In an interview with The Fiscal Times, the editor of investment newsletter Grant’s Interest Rate Observer, says: “No other reform would accomplish so much to hasten the return both of growth and fiscal balance. The reserve currency franchise, which America uniquely possesses, is a kind of global credit card on which the outstanding balance never seems to come due and payable. This country needs a debit card--and the gold standard is that debit card.”
> The James Grant that, in 2010, was one of the co-signers of the Open Letter to Bernanke:
Not sure if you are asking but yes that was him, and you can make a very good argument that those people were correct that QE should have been discontinued back in 2010. Lots of economists thought so at the time and yet here we are 15 years later and that QE is still on going.
At what point do you con sider him to be correct that its time to end QE, unless you think that continuous QE is a good thing?
I mean, like another poster pointed out, like him or not, What he writes get read by some of the most influential people on the planet.
If you are in government monetary policy you read his news letter, if you work for any sort of macro hedge fund you read his news letter. IF you are on the sell side you read his news letter for nothing more than to understand what your clients are thinking about.
You may not like him, but the top people at investment banks, hedge funds and central banks all read(and pay for that privilege) what he has to say.
In finance there are alot of people who have limited success, those who are good tend to have prolonged success and stick around. He's been writing for 4+ decades, in finance where the average career is 7 years or so that like 6 generations of traders who listen to him.
So if you are asking if its that James Grant then yes, one of the single most successful and influential people in finance, then yes that guy:)
The same James Grant that predicted the junk bond meltdown, the same James Grant that predicted the dot-com bust, the same James Grant that predicted the housing crash, the same James Grant that predicted the meltdown in Chinese resi...if you have experience in markets, you will learn two things: everyone makes wrong predictions, and you can be wrong now/right later.
Also, you appear (for some reason, have you ever read Grant's?) not to mention any of the numerous calls on individual stocks they have got right. The macro is only part of what they do.
When you are read by pretty much every hedge fund manager in the world, when they will pay $2.5k to come to your conference, and $1.3k/year for a subscription...you are doing something right (also, as someone who studied economic history, his book are first-rate...compare his books to Philip Coggan, a columnist at the Economist who has written books on economic history, it is night and day...Grant's books are academic tier quality, people who work in finance today still read books he wrote three decades ago).
> The same James Grant that predicted the junk bond meltdown, the same James Grant that predicted the dot-com bust, the same James Grant that predicted the housing crash, the same James Grant that predicted the meltdown in Chinese resi..
He's a permabear. When you predict (for possibly years) that things will go down, and then they finally do...
> The macro is only part of what they do.
Macro/monetary is the focus of this discussion.
> When you are read by pretty much every hedge fund manager in the world, when they will pay $2.5k to come to your conference, and $1.3k/year for a subscription...you are doing something right
Robert Kiyosaki (of Rich Dad, Poor Dad) also charges quite a lot and is financially successful. Is he doing something right? :)
He isn't. And the standard of proof in finance for claims is slightly higher than that...he isn't predicting "things will go down", he is making specific predictions that occurred (again, you seem to have these very specific views about someone whose work you have never read...interesting).
No, it isn't. Bank stocks aren't macro. There are macro consequences but Grant's wrote extensively about individual stocks pre-08.
How many hedge fund managers are paying Kiyosaki for resarch? :)
To extend the analogy, wildfires also evolve naturally but can be exacerbated by firefighting policy: extinguishing small fires too much, allowing an accumulation of flammable materials which eventually lead to a much bigger fire.
Fires evolve according to fuel availability, wind, water and so on. They aren't active, intelligent agents commanding vast resources in a constant search for newer and better ways to socialize the losses and privatize the gains.
Have you ever known a fire to intentionally cultivate moral hazard?
It's not just fire, there is an organic component of my analogy: the ever-growing and adaptive forest, which will take any opportunity it can to accumulate biomass.
The difference is that fires predictable, and you can have controlled wildfires. There's no such thing as a controlled financial collapse. I agree that the fed intervened too heavily during the pandemic, but I think that 2008 struck the correct balance of intervention. Several financial institutions went bankrupt and most others lost over 90% of their market cap.
The fact that your money loses value is an inherently good thing. Think about having a coupon for a banana. The store raises the value of the coupon above the cost of the banana because it knows that it doesn't sell all bananas in the store. It has to throw some of them out. If the coupon lost value over time according to the rate that bananas spoil then the value of the coupon would be the same as the cost of the banana.
Just think about how absurd it is that the banana is less valuable than the coupon that gets you a banana. At the end of the day all you get is a banana either way. It's the same with money and labor. If money is more valuable than labor then people hoard it.
That dip centred around 1954 in figure 6 is one of the clearest examples of just how exceptional the experience of the boomer generation is compared to all the rest of human history.
"Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take away from them the power to create money and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money."
Made me rethink all the bailouts, etc. Especially with the renewed scholarship on Keynesian 2.0 (MMT).
I'd probably be ok with bailouts, jubilees if they were more fair, more bottom up.
Financiers gobbling up all the cheddar, abandoning all their victim's, really pisses me off.
Insult to injury is lack of consequences, acting aggrieved when their malfeasance is examined. Just one example being Jamie Dimon clutching his pearls when Obama Admin merely suggesting the optics of huge bonuses for execs during a meltdown was a bad look.