Did deregulation cause the economic crisis?

[Francesca R]

I still wouldn't call fractional reserve a conspiracy.

Yes. You do:

Its just that banks would not be pretending they have money in their vaults that isn't there.

Allowing you to withdraw it at any time is pretending it is there.

QED.

 

[SaulOhio]

Yes. You do:QED.

Just an assertion, with nothing to back it up.

How does what I describe fit this definition?:

Definition of "conspiracy", from MSN Encarta:

1. plan to commit illegal act together: a secret plan or agreement between two or more people to commit an illegal or subversive act

2. making of agreement by conspirators: the making of a secret plan or agreement to commit an illegal or subversive act

3. group of conspirators: a group of people planning or agreeing in secret to commit an illegal or subversive act

Exactly how does what I describe meet that definition? There is nothing secret about it, it is not a plan, but an accepted practice, and there is nothing illegal or subversive about it, though I believe it should be illegal.

You simply quote one thing I said, assert that proves its a conspiracy theory, and use that to evade actually talking about the facts of the matter.

 

[Francesca R]

Francesca has been proven wrong repeatedly

Rejected. You have verified my points thus:

Interest rates compensate people primarily for the time value of money, and [for] some measure of expected inflation.

Of course it [debt monetisation] is inflationary - not necessarily of the general price level

And these were my points. And with the first of these in mind it is inconsistent to view inflation as a "tax".

I agree (and you will not be able to find a quote to the contrary) that debt monetisation increases money supply. If demand for money shifts right at the same time, that will be a circumstance in which it does not raise the general price level, as you have agreed it does not necessarily do. So I really don't see why you then take to swapping notes with another poster with similarly wrong-headed notions of a conspiracy to indulge in mutual congratulation about "proving me wrong".

Evidently your world is a dreamworld

But I don't debate her on this forum with any notion that I will sincerely change her mind - that isn't possible. I do it to expose the lies and half-truths of the status quo that she fails to defend, and as an exercise in thought.

As you see, you (unwittingly, hence your abject denial) expose the lies of your own beliefs. Congratulations--for that it is good that you posted.

 

[Francesca R]

How does what I describe fit this definition?

Oh great, definitions.

Pretence

1. insincere or feigned behavior: something done or a way of behaving that is not genuine, but is intended to deceive somebody

---

You simply quote one thing I said, assert that proves its a conspiracy theory, and use that to evade actually talking about the facts of the matter.

The facts of the matter are that banks do not say that all your deposit monies are held in their vault. If that was not a fact, you would be able to produce evidence that they all do say this. Of course you can't--so you're wrong. So either produce it or face the facts.

 

[Meadmaker]

Here's a story from AP.

ttp://www.sfexaminer.com/ap/?c=y&id=947049

Apparently Freddy hired lobbyists to kill legislation which would have held tighter reins on the F&FM's.
Mortgage companies thought the legislation would slow the housing mortgage business down... Dems and Reps,both, killed the legislation.
Ah, the humanity!

This thread got started, in part, because of another thread over in the politics forum discussing whether McCain had tried to stop the collapse of Freddie and Fannie, and was thwarted by evil Democrats.

It was my contention in that thread that McCain did indeed see the problem and was among the people who tried to do something about it, and he was thwarted as much by his own party as by the Democrats. It was my contention that if the Republican leaders of the Senate had wanted Hagel's bill, the one McCain supported, they would have gotten it. This story added weight to my suspicions.

The actual legislative history behind this bill is more complicated even than this story brings out. Democrats had an alternative measure that they supported that would have also put the breaks on Fannie and Freddie, but had some other provisions Republicans didn't like. The two parties managed to do all sorts of maneuvering so that everyone could claim to have supported fixing the problem, but no one actually had to get anything done.

 

[Tippit]

Rejected. You have verified my points thus:And these were my points. And with the first of these in mind it is inconsistent to view inflation as a "tax".

Francesca, I'm starting to doubt you have the intellectual capacity to understand the arguments presented. There are two very, very simple reasons why you are wrong. Here they are, again.

First, interest rates have some measure of expected inflation baked in. The problem is, it may not be consistent at all with true inflation (see shadowstats.com, if you haven't already), and more importantly, it only compensates people lucky enough to own capital assets paying a positive real return. If you live paycheck to paycheck, deal in cash, or buy securities that are indexed to some bogus government inflation statistic (eg: TIPS and the CPI), then you suffer a loss of purchasing power. Since the CPI doesn't account for assets, those who don't own existing assets will not keep pace with those who do, and will find it more and more difficult to acquire things like homes and cars. Statistics like the number of minimum wage hours required to purchase the median home exemplify this.

Second, the loss of purchasing power that is assured when the Fed counterfeits money to buy government IOUs is independent of whether the general price level rises or not, because the money supply has been diluted. This is a very simple concept to understand. If monetary excess happens to offset productivity growth and keeps the general price level more or less stable, it still represents an opportunity cost in the form of a loss in purchasing power. Consumers ordinarily would have enjoyed lower prices than they will with the inflation of the money stock. If you are a stockholder in my company and I record a profit but I dilute the shares to offset it, you have still been diluted! I don't know how much more obvious I can make this for you.

Feel free to address either of these points with substance. I won't hold my breath.

 

[Francesca R]

Francesca, I'm starting to doubt you have the intellectual capacity to understand the arguments presented. There are two very, very simple reasons why you are wrong. Here they are, again.

I have a shrinking capacity to entertain your paranoia and conspiracy garbage Tippit. It is potentially useful up to a point on this forum, but not really after you have already been debunked.

First, interest rates have some measure of expected inflation baked in.

We agree. I am not sure if you ever accepted this before quite recently, but to the extent that you now do, congratulations.

The problem is, it may not be consistent at all with true inflation

There is no one "true inflation" experienced by everybody, unless you proposed to centrally fix all prices and outlaw changes in them. If your comment is about lying on the part of the BLS, consider it ignored, and continue to enjoy presenting it to the conspiracy theories forum.

it only compensates people lucky enough to own capital assets paying a positive real return.

Agreed. Hence the increased ability of the public to own claims on capital goods, and participate in interest bearing lending is a good thing, and that can be done with a very small amount of saving, such as USD50.

If you live paycheck to paycheck

If you have no savings then you have no savings to be "looted" (your paranoid designation, not mine)do you? And your purchasing power is a function of your success in growing your employment income in real terms, which some people do and some people don't, but that is rather a different subject.

deal in cash

The cash-on-hand in Jane Public's purse is not immunised against price rises or falls while it is there. If she chooses to keep all her money in her cookie jar instead of the bank then none of it is immunised against price rises (or falls). That is her decision. If she burns it then merchants are not obligated to sell her goods and services for nothing.

or buy securities that are indexed to some bogus government inflation statistic (eg: TIPS and the CPI)

Comments that the BLS is falsifying inflation are ignored.

Thus, your position only holds water if your claim that "US official inflation is a fib" is true. I do not entertain that, and I will not be entering discussion about it with you.

Second, the loss of purchasing power that is assured when the Fed counterfeits money to buy government IOUs is independent of whether the general price level rises or not, because the money supply has been diluted. This is a very simple concept to understand. If monetary excess happens to offset productivity growth and keeps the general price level more or less stable, it still represents an opportunity cost in the form of a loss in purchasing power. Consumers ordinarily would have enjoyed lower prices than they will with the inflation of the money stock.

But the central bank's mandate is not to preside over falls in the general level of prices. Quite the contrary, it would (sensibly) ease monetary policy to prevent that from happening, and society is better off ex-ante if it succeeds. General deflation (a sustained negative year-on-year CPI change) is potentially catastrophic for an economy. For you to be concerned about being "robbed" of the opportunity to buy all your daily needs more cheaply in six months' time, is for you to comprehensively fail to understand the first principles of liquidity trap dynamics.

If you are a stockholder in my company and I record a profit but I dilute the shares to offset it, you have still been diluted!

And as a stockholder I am protected by laws that compel you to act in my interest by not doing that without allowing me pre-emptive rights. But how well would a business run if it was not allowed to ever increase issued share capital?

Beyond that, there is no analogy to the government issuing currency. It appoints a technocratic central bank with a mandate to secure price stability (which does not mean zero percent inflation, but a stable target of low positive price increase) and you do not enjoy the right to second-guess monetary or fiscal policy decisions, or veto individual open market operations, for reasons that are all too obvious. Larger fiscal expansions or retrenchments require legislative approval.

Feel free to address either of these points with substance. I won't hold my breath.

Feel free to address the above with your rampant paranoia but increasingly I will not be addressing any of that, since the reaction is inspires for me is merely amusement, and not much of that.

 

[SaulOhio]

This story added weight to my suspicions.

Specifically, what suspicions?

The actual legislative history behind this bill is more complicated even than this story brings out. Democrats had an alternative measure that they supported that would have also put the breaks on Fannie and Freddie, but had some other provisions Republicans didn't like. The two parties managed to do all sorts of maneuvering so that everyone could claim to have supported fixing the problem, but no one actually had to get anything done.

As I have said, this mess we are in was the result of a bipartisan effort.

 

[Meadmaker]

Specifically, what suspicions?

When I read about the bill, I suspected that the GOP didn't want it all that badly. The parliamentary maneuvering had the look of the sort of bill that everyone wanted to claim credit for, but no one actually wanted to pass.

Reading about the lobbying effort directed at GOP lawmakers strengthened my belief that that is what happened.

 

[Tippit]

Rejected. You have verified my points thus:And these were my points. And with the first of these in mind it is inconsistent to view inflation as a "tax".

That's funny. Apparently you're smarter than Ben Bernanke. Here again is his admission that inflation is a tax:

Ben Bernanke admits "Inflation is a tax"

I'll be sure to let Ben know what you think the next time I see him.

I agree (and you will not be able to find a quote to the contrary) that debt monetisation increases money supply. If demand for money shifts right at the same time, that will be a circumstance in which it does not raise the general price level, as you have agreed it does not necessarily do.

Congratulations, at least part of your Weltanschauung is based in reality. Unfortunately you've no idea what it means. I would point out that half of the so-called skeptics on this forum don't even know this much about the monetary system, just cruise old threads about the Federal Reserve and witness the abject ignorance on display.

So I really don't see why you then take to swapping notes with another poster with similarly wrong-headed notions of a conspiracy to indulge in mutual congratulation about "proving me wrong".

The conspiracy exists because I'm not credulous to believe central bankers don't know the effects of their machinations on the money supply. This isn't some arcane science, they know with complete certainty the effects of what they do, who benefits, and who loses.

 

[Tippit]

I have a shrinking capacity to entertain your paranoia and conspiracy garbage Tippit. It is potentially useful up to a point on this forum, but not really after you have already been debunked.

I certainly don't feel like anything I've said has been debunked. On the contrary, you've managed to laud your expertise over the Federal Reserve chairman Bernanke on the subject of inflation being a tax, make false claims as to how bond holders are compensated for expected inflation (and what about unexpected inflation?), ignore evidence that the CPI is manipulated, ignore the fact that monetary excess is directly responsible for asset bubbles and the present crisis.

I'd say you've struck out miserably.

We agree. I am not sure if you ever accepted this before quite recently, but to the extent that you now do, congratulations.

Bondholders know that bond coupons will often be paid back in debased currency, and is reflective of a premium expressed in the interest rate. I challenge you to find any post where I've said anything remotely contradicting this. Where you're wrong, is in the assumption that this premium amounts to anything more than market speculation, and doesn't guarantee perfect or even adequate compensation for inflation.

If I buy a bond with a CPI-based real return of 1%, how does that compensate me if from that point forward the CPI goes up an unexpected two-hundred basis points? I'm looking at a capital loss on the bond in that case. I am not compensated because while the purchasing power of my coupons and the principal has been reduced, the original terms of the bond remain unchanged.

The only bonds that pretend to compensate for inflation both expected and unexpected are indexed to some measure of inflation. If I buy TIPS then my principal (to which my coupon rate is applied) is adjusted upwards or downwards according to the index. I am compensated to the extent that the index reflects inflation in a meaningful way. I also forgo much of the upside potential found in non-indexed bonds, because an element of risk is removed.

There is no one "true inflation" experienced by everybody, unless you proposed to centrally fix all prices and outlaw changes in them. If your comment is about lying on the part of the BLS, consider it ignored, and continue to enjoy presenting it to the conspiracy theories forum.

Ignored! How very "skeptical" of you to ignore evidence that you may find unpalatable. http://www.shadowstats.com documents a roughly three-hundred basis point discrepancy between the old CPI, and the new CPI-U.

I assure you the BLS knows exactly how much the government saves in entitlements with each CPI basis point reduction.

If you have no savings then you have no savings to be "looted" (your paranoid designation, not mine)do you? And your purchasing power is a function of your success in growing your employment income in real terms, which some people do and some people don't, but that is rather a different subject.

The fact that many have nothing more than the "frictional" cash you refer to in between paychecks and at any time illustrates the starkly regressive and perpetual nature of the tax.

The cash-on-hand in Jane Public's purse is not immunised against price rises or falls while it is there. If she chooses to keep all her money in her cookie jar instead of the bank then none of it is immunised against price rises (or falls). That is her decision. If she burns it then merchants are not obligated to sell her goods and services for nothing.

Translation: You fully endorse this most regressive inflation tax that oddly enough you would deny in the same breath. You also equate holding cash with burning cash.

Pity Jane for not understanding the wealth-destroying effects of compound inflation - but apparently she deserves it.

Comments that the BLS is falsifying inflation are ignored.

Thus, your position only holds water if your claim that "US official inflation is a fib" is true. I do not entertain that, and I will not be entering discussion about it with you.

Is this more "skepticism" on display?

But the central bank's mandate is not to preside over falls in the general level of prices. Quite the contrary, it would (sensibly) ease monetary policy to prevent that from happening, and society is better off ex-ante if it succeeds. General deflation (a sustained negative year-on-year CPI change) is potentially catastrophic for an economy. For you to be concerned about being "robbed" of the opportunity to buy all your daily needs more cheaply in six months' time, is for you to comprehensively fail to understand the first principles of liquidity trap dynamics.

You've failed to demonstrate why stable prices are desirable given changes in productivity. This does not minimize the burden borne by the price system, or contribute to efficient fixed nominal contracts.

You fail to understand that a rate of deflation equal to minus the rate of productivity growth, aka a productivity norm, is a normal and natural occurrence given constant final demand (not necessarily a constant price level).

You do resort to hysteria about liquidity traps, while simultaneously failing to understand that these are brought about by artificially low-interest rates subsidized by central banks in the first place. You also ignore periods of history demonstrative of economic growth and falling prices, such as the post-Civil War era.

Even Milton Friedman admitted:

[T]he price level fell to half its initial level in the course of less than fifteen years and, at the same time, economic growth proceeded at a rapid rate. The one phenomenon was the seedbed of controversy about monetary arrangements that was destined to plague the following decades; the other was a vigorous stage in the continued economic expansion that was destined to raise the United states to the first rank among the nations of the world. And their coincidence casts serious doubts on the validity of the now widely held view that secular price deflation and rapid economic growth are incompatible. (Milton Friedman and Anna J. Schwartz, A Monetary History of the United States 1867–1960, Princeton, N.J.: Princeton University Press, 1971).

And as a stockholder I am protected by laws that compel you to act in my interest by not doing that without allowing me pre-emptive rights. But how well would a business run if it was not allowed to ever increase issued share capital?

If I object to equity-financing of a corporation whose stock I own, I am free to sell the stock. When my currency is debased, I'm compelled to keep at least some of it on hand to facilitate necessary economic transactions and pay income taxes, and more importantly, I have to deal with the political and social ramifications of such a corrupt system, even if I know how to protect myself.

Finally, if fiat money creation isn't the root cause of asset bubbles, what is? All else being equal, how do you have an asset bubble without a corresponding deflation in some other asset class? Is it not clear that the central bank bears ultimate responsibility for this?

 

[Francesca R]

Bondholders know that bond coupons will often be paid back in debased currency, and is reflective of a premium expressed in the interest rate. I challenge you to find any post where I've said anything remotely contradicting this. Where you're wrong, is in the assumption that this premium amounts to anything more than market speculation, and doesn't guarantee perfect or even adequate compensation for inflation.

The beauty of capital market pricing is that you get to infer that it is based on rampant paranoia or rational expectation, however you wish. So you can believe what you like in this regard. You could also believe that your local baker is out to get you and is hell bent on doing what he can within the law to see you go un-nourished, because he will withold from you all the bread in his shop--using force if necessary--unless you cave in to his demand that you surrender the cost of a loaf.

If I buy a bond with a CPI-based real return of 1%, how does that compensate me if from that point forward the CPI goes up an unexpected two-hundred basis points?

I don't think you understand real return bonds, because that iswhat the US government compensates you for.

I'm looking at a capital loss on the bond in that case.

Incorrect, unless the real yield (set by the market) rose.

I am not compensated because while the purchasing power of my coupons and the principal has been reduced, the original terms of the bond remain unchanged.

Go read up on inflation-protected bonds. The coupons, not just the principal, are protected against inflation also.

The only bonds that pretend to compensate for inflation both expected and unexpected are indexed to some measure of inflation. If I buy TIPS then my principal (to which my coupon rate is applied) is adjusted upwards or downwards according to the index.

In respect of downwards, there is a floor, which is the CPI level when the bond is issued.

I also forgo much of the upside potential found in non-indexed bonds, because an element of risk is removed.

Yes--quid pro quo. You can't collect a premium for inflation uncertainty at the same time as being protected from it. That would be a free lunch.

Ignored! How very "skeptical" of you to ignore evidence that you may find unpalatable.

I also ignore claims from homepaths that their methods have scientific validity, and people who claim that 9/11 was an inside job, and people who think the moon landing was a hoax, and other peddlers of nonsense.

Translation: You fully endorse this most regressive inflation tax that oddly enough you would deny in the same breath. You also equate holding cash with burning cash.

I recognise that taking savings out of circulation unnecessarily is a choice, and that compensation for expected inflation, and compensation for deferred consumption funnily enough, is not something that anyone will pay you if you do. If you don't need money now, and you lend it, then you will find that people willingly pay you compensation for both of those things, since they can use your cash now and gain from not experiencing either of those issues.

Is this more "skepticism" on display?

See above.

You've failed to demonstrate why stable prices are desirable given changes in productivity. This does not minimize the burden borne by the price system, or contribute to efficient fixed nominal contracts.

This was explained by myself and drkitten on the "More financial pain coming" thread for you and like-minded delusionist FreeThinkr. Since you reacted to it with paranoid denial then, I am not going to waste time now. The thread is available for your perusal here.

 

[Matthew Best]

Mystery Solved!!!

Global Financial Crisis Due to Not Listening to Anonymous Internet Crackpots, Experts Say

WASHINGTON (Reuters) – The breakdown of US credit markets, and the resulting global financial meltdown, could have been avoided if anonymous internet crackpots had only been listened to, former U.S. Federal Reserve Chairman Alan Greenspan told Congress today.

"We were remiss in not guiding our multi-trillion dollar economy according to the gratis advice from pseudonymous chat-room analysts" Greenspan admitted.

Finance ministers from the EU, Australia, Russia and Asia agreed. Speaking at today's global finance summit meeting in Antwerp, German Treasury Secretary Gunther Ausfhahrt told reporters "The shortsighted surge in global demand for U.S. subprime securities by banks, hedge and pension funds supported by unrealistically positive rating designations by credit agencies could have been ameliorated if only we hadn't "marked as read" quite so often."

China's Finance Minister added that "Overuse of the "ignore" feature and repeated scrolling robbed us prudent advice from assorted trolls, gadflies, and energy creatures on how to manage the excess demand from securitizers, and with more prudent subprime mortgage originations, the defaults would have been greatly reduced. Consequently, by not following bickering and C&P barrages from rabid forum spammers, we have dishonored ourselves and brought shame upon our ancestors".

 

[The Atheist]

You can put this down under "case closed", by the looks of it.

Direct from the horse's mouth, Alan Greenspan:

"Yes, I found a flaw," Greenspan said in response to grilling from the House Committee on Oversight and Government Reform. "That is precisely the reason I was shocked because I'd been going for 40 years or more with very considerable evidence that it was working exceptionally well."

 

[The Atheist]

Consequently, by not following bickering and C&P barrages from rabid forum spammers, we have dishonored ourselves and brought shame upon our ancestors".

Right, that's it - I have to kill my kids now.

If they hadn't been bugging me, I'd have beaten you by 2-3 minutes with that.


&^%%$*(*!

 

[ZenFountain]

Interesting footnote here for those who believe Fannie and Freddie were a major factor in the cause of this crisis:

In 2005, the Senate Banking Committee, then under Republican control, adopted a strong reform bill, introduced by Republican Sens. Elizabeth Dole, John Sununu and Chuck Hagel, and supported by then chairman Richard Shelby. The bill prohibited the GSEs from holding portfolios, and gave their regulator prudential authority (such as setting capital requirements) roughly equivalent to a bank regulator. In light of the current financial crisis, this bill was probably the most important piece of financial regulation before Congress in 2005 and 2006. All the Republicans on the Committee supported the bill, and all the Democrats voted against it. Mr. McCain endorsed the legislation in a speech on the Senate floor. Mr. Obama, like all other Democrats, remained silent.

What this legislation would have done:

• Create an independent world class regulator to oversee the safety and soundness of the housing enterprises;

• Focus Fannie Mae’s and Freddie Mac’s $1.4 trillion portfolios back on their housing mission: to promote affordable housing;

• Give the new regulator the authority to close down a failing GSE and protect against a taxpayer bailout;

• Give the new regulator greater discretion in raising capital standards to protect against insolvency;

• Give the new regulator approval power over new programs and activities proposed by a GSE to hold GSEs to their Congressionally chartered mission;

• Gives the regulator greater authority to limit lucrative severance packages or “golden parachutes” of executives who are removed for cause;

• Require the annual audits of Fannie Mae’s and Freddie Mac’s affordable housing programs to ensure that these programs support and strengthen the enterprises’ affordable housing mission;

• Strengthens Fannie Mae’s and Freddie Mac’s affordable housing goals;

• Require Fannie Mae and Freddie Mac to improve their financial disclosure;

• Not raise the conforming loan limits; and

• End presidential appointments to the board of directors of Fannie Mae and Freddie Mac, and require all Federal Home Loan Bank directors to be elected by Federal Home Loan Bank members.

--------------------

We've heard this before, but here's the kicker:

Chuck Hagel: Retiring as promised after two terms
Elizabeth Dole: In a dead heat for reelection
John Sununu: Down badly in the polls for his reelection bid

I find it ironic that the three senators who made an effort to prevent calamity at Freddie and Fannie might all be gone in 2009 with the Democrats who blocked it hailed as the victors. Guess that's politics.

 

[dudalb]

The fact is both Dems and Repubs are to blame for this fiasco.
The GOP is catching the heat becuase the Party in control of the White House, rightly or wrongly, always catches the heat when the economy goes south. And I don't see that changing much.

 

[Meadmaker]

We've heard this before, but here's the kicker:

Chuck Hagel: Retiring as promised after two terms
Elizabeth Dole: In a dead heat for reelection
John Sununu: Down badly in the polls for his r eelection bid

I find it ironic that the three senators who made an effort to prevent calamity at Freddie and Fannie might all be gone in 2009 with the Democrats who blocked it hailed as the victors. Guess that's politics.

No, politics is far more complicated than that. This bill was accompanied by a similar, although slightly different, bill, in the House of Representatives. That bill got out of its House committee on a bipartisan vote. Meanwhile, over in the Senate, Democrats on the committee introduced ammendments to the Hagel bill that would have made it similar to the House bill. Every Democrat supported it. Every Republican opposed it.

Despite getting out of committee in both houses, neither bill was ever voted on by the complete House or Senate.