Meltdown

[Todd]

When the economy is booming you can cut back and raise taxes. See Bush I and Clinton.

I'm well aware of Keynesian concepts.  I don't know if I would use Clinton as the best instance as his terms coincided with a huge windfall in revenue that allowed structual defects to go unaddressed.  I would also hesitate to say that policy changes are as neat as you suggest.  Look at the 60s and 70s and the end result there.

[bwv 1080]

the problem with the stimulus was not the quantity, it was the fact that it amounted to political patronage where key interest groups - unions, bank creditors, bankers etc were bailed out without any real restructuring of debts - which is the key issue for recovery.  The money center banks were capitalized in the bond market far more than they were with insured deposits so the bondholders should have been converted to equity with the cap structure below them wiped out - there would have been no need for TARP or any of these other programs.  Secondly, mortgage principal values should have been haircut to approximations of current market values with Franny bondholders taking the bulk of the hit for agency mortgages (i.e. the guarantees on Agency MBS would be made good) and the recapitalized banks and bond holders taking the hit on non-agency MBS.  Its likely, given the costs and market disruptions of foreclosures that the overall costs would have been less.  Then you would have Fed borrowing power able to really do stimulus that was not simply throwing good money after bad

[drogulus]

I'm well aware of Keynesian concepts.  I don't know if I would use Clinton as the best instance as his terms coincided with a huge windfall in revenue that allowed structual defects to go unaddressed.  I would also hesitate to say that policy changes are as neat as you suggest.  Look at the 60s and 70s and the end result there.

     Well, yeah, I'm critical of what happens when booms are mishandled just as I am with busts. I also think the playbook is harder to read in good times when disaster doesn't force you to confront basic issues. When times are good, though, you have latitude for stupidity, or so it seems. But I did say that in my last post. There are errors of confidence as well as errors of pessimism. People have a tendency to project current conditions into the future, so Clintonites mused about what would happen if we actually paid off the debt.

[drogulus]

     Regarding the long term consequences of debt, I favor the view that not having a sufficient debt load is bad for an economy. It's either a symptom of the underlying weakness that makes borrowing difficult and expensive, or it's a sign of poor thinking by decision makers. Debt is handled by growth, and facilitates it. This is what history shows, and policy makers are acting on this principle even if they don't realize what they're doing. The future is built on debt, and the fact that debt is also misused on occasion does not negate the principle that no modern nation can grow without its use.

     I'm philosophically opposed to the idea that only absolute truths are really true. Only models based on probabilities with the possibility of error can guide effective actions. We never know with certainty that what worked before will work again, we just estimate that it will. I estimate that "in the long run" never happens, that there's never a day of reckoning for the sin of borrowing your way to prosperity. I await evidence, not theology, that I'm wrong.

[drogulus]

the problem with the stimulus was not the quantity, it was the fact that it amounted to political patronage where key interest groups - unions, bank creditors, bankers etc were bailed out without any real restructuring of debts - which is the key issue for recovery.  The money center banks were capitalized in the bond market far more than they were with insured deposits so the bondholders should have been converted to equity with the cap structure below them wiped out - there would have been no need for TARP or any of these other programs.  Secondly, mortgage principal values should have been haircut to approximations of current market values with Franny bondholders taking the bulk of the hit for agency mortgages (i.e. the guarantees on Agency MBS would be made good) and the recapitalized banks and bond holders taking the hit on non-agency MBS.  Its likely, given the costs and market disruptions of foreclosures that the overall costs would have been less.  Then you would have Fed borrowing power able to really do stimulus that was not simply throwing good money after bad

      You might be right, though I think size was a big problem, too. I'm taking into consideration that stimulus will be less than optimally designed. It will work anyway, and in fact it did work as predicted. More should have been done about the housing crisis from the standpoint of the suffering borrowers, for one. Also, I don't think bailing out interest groups is bad in itself. The auto bailout was a good idea, for example, and a success by any reasonable measure. I'm not concerned about the fact that it was in addition a bailout of an interest group.

[drogulus]

I'm well aware of Keynesian concepts.  I don't know if I would use Clinton as the best instance as his terms coincided with a huge windfall in revenue that allowed structual defects to go unaddressed.  I would also hesitate to say that policy changes are as neat as you suggest.  Look at the 60s and 70s and the end result there.

      If I don't say why I'm saying these things they won't be understood. I know you understand, but not everyone does.

      About Clinton, I don't care who or what constitutes a best example, whatever that is. Presumably a best example is one so good it never existed, so I'll content myself with real examples, flawed as they are. Furthermore, you may be chastened by the example of '60s overconfidence, but in order to get to overconfidence you first have to pass through confidence. We're on the other side now, pursuing policies that are deeply pessimistic and bound to make matters far worse. Can someone explain to me how a contracting economy trying to balance the budget with declining revenues provides jobs and grows fast enough to pay off debt? Does anybody here know how to play this game?

[Coopmv]

There are a number of things that must be done to address the serious structural problems that have been plaguing the US economy.

1. Most tax loopholes for both corporations and weathy individuals (such as interest income from muni bonds with no caps) should be closed.
2. Effective corporate tax rates should be lowered to bring jobs back to the US.  Some small town in Switzerland has been dangling 15% corporate tax and a number of US companies have already relocated there.  When an advanced economy can offer such deal, the outdated US corporate tax system simply cannot compete. 
3. Put an end to that blind faith in free trade - free trade only works when it is fair as well.  China has conned its way into the WTO and is it abiding by the WTO rules?
4. Enforce all US intellectual properties with some serious teeth.
5. Scrutinize and if necessary reject all technology transfer demands from China.  The latter has extracted tons of concessions from the west on technologies ranging from bullet train, telecommunication, you name it.  Supposedly, these acts are not allowed under the WTO agreements.
6. Significantly downsize the federal government.
7. Eliminate all federal regulations that serve no public interests but add burden to small businesses.
8. Any corporate tax incentives must be tied to explicit job creations in the US, not in foreign countries. 

Do I have any hope most of these changes will be adopted?  Not really since the  current political system will not change.  Corporate lobbyists (both US and foreign) control Washington.

[bwv 1080]

There are a number of things that must be done to address the serious structural problems that have been plaguing the US economy.

1. Most tax loopholes for both corporations and weathy individuals (such as interest income from muni bonds with no caps) should be closed.
2. Effective corporate tax rates should be lowered to bring jobs back to the US.  Some small town in Switzerland has been dangling 15% corporate tax and a number of US companies have already relocated there.  When an advanced economy can offer such deal, the outdated US corporate tax system simply cannot compete. 
3. Put an end to that blind faith in free trade - free trade only works when it is fair as well.  China has conned its way into the WTO and is it abiding by the WTO rules?
4. Enforce all US intellectual properties with some serious teeth.
5. Scrutinize and if necessary reject all technology transfer demands from China.  The latter has extracted tons of concessions from the west on technologies ranging from bullet train, telecommunication, you name it.  Supposedly, these acts are not allowed under the WTO agreements.
6. Significantly downsize the federal government.
7. Eliminate all federal regulations that serve no public interests but add burden to small businesses.
8. Any corporate tax incentives must be tied to explicit job creations in the US, not in foreign countries. 

Do I have any hope most of these changes will be adopted?  Not really since the  current political system will not change.  Corporate lobbyists (both US and foreign) control Washington.

why not totally eliminate corporate income taxes?  Every dollar of corporate income becomes a dollar of personal income at some point in the chain.  Along with the elimination of corp income taxes you would be able to get rid of lower rates for dividends and capital gains.  There is some evidence that corporate income tax costs the economy more revenue than it brings in once you account for the costs of compliance. 

[snyprrr]

How are we supposed to pay them money that doesn't exist?






Oh, that's right,... with our grandchildren.

[Coopmv]

As if that stalemate in European debt negotiation is not enough ...

Monster Prediction From BofA: Another US Debt Downgrade Is Coming In Just A Few Weeks

[Coopmv]

I will be as outraged as the ordinary German citizens if we Americans have to help bail out Mexico ...

European Union looks to recapitalize banks
Move comes ahead of Merkel-Sarkozy pre-summit meeting

[Coopmv]

Chanos:  China's hard-landing has already begun
China's bust will be a thousand times worse than Dubai

[snyprrr]

How bout that Corzine, huh?

[Karl Henning]

I worry a little when I see you posting in the Meltdown thread, fella.

[Karl Henning]

BofA sees the light, drops $5/mo debit card fee

[Coopmv]

When Greece stops melting down, the stock markets world wide start melting up and vice-versa.  There is no hope for Greece ...   

[Coopmv]

What is gonna to happen next?  Are we expecting an Italian meltdown?

[snyprrr]

When Greece stops melting down, the stock markets world wide start melting up and vice-versa.  There is no hope for Greece ...   

How about Iceland though? They rejected the bailout and threw the crooked politicians and bankers out, no?

[Coopmv]

How about Iceland though? They rejected the bailout and threw the crooked politicians and bankers out, no?

Iceland so far has been the only Nordic country that has gotten into trouble, the rest of Scandinavia is doing just fine.  Finland may have some exposure to the trouble Nokia, its biggest private-sector employer, is currently experiencing due to how pathetically poor the company has been managed over the past few years.  Most of the Nordic countries and countries such as Holland and Germany are doing just fine and that is why they have refused to offer Greece bailout after bailout.  Most of the Mediterranean countries are in serious trouble due to their Club Med mentality - they want to live a good life on borrowed money.  It was a big mistake to have accepted Greece into the EU, period.

[North Star]

Iceland so far has been the only Nordic country that has gotten into trouble, the rest of Scandinavia is doing just fine.  Finland may have some exposure to the trouble Nokia, its biggest private-sector employer, is currently experiencing due to how pathetically poor the company has been managed over the past few years.  Most of the Nordic countries and countries such as Holland and Germany are doing just fine and that is why they have refused to offer Greece bailout after bailout.  Most of the Mediterranean countries are in serious trouble due to their Club Med mentality - they want to live a good life on borrowed money.  It was a big mistake to have accepted Greece into the EU, period.

Accepting Italy seems to have been a lot bigger mistake. If Italy goes down, we're in real trouble.