Warren Buffet speaks common sense; alarms most Republicans

[Asher]

Asher, you don't even know any macro. At all. None. Why does it strike you as implausible that there is more to the recession than "zomg the house prices fell so all the construction workers lost their jobs"? Don't you wonder in the least bit why this recession has been so much worse than e.g. the one following the Internet bubble?

I'm not going to even bother. Keep believing what you want to believe. But in this thread, the econo-lot crowd reminds me an awful lot of the Jesus Freak crowd with blind faith.

I'm sure you can't see it, and that's kind of the point.

FWIW -- no, the recession hasn't been bad at all. In Canada. Why do you think there's a difference?

Hint: Much of it has to do with **** you're not addressing at all. The BoC essentially follows the Fed in lockstep.

[Asher]

The main thing that alarms me is that a bunch of reasonably intelligent people seem to forget that economics is a study based in theory and flawed models designed to attempt to make sense of the market place.

You do not seem to comprehend that it does not always align with expectations, it does not always align with models, and it does not always follow what the computations say. Sure, many of them do a very good job -- but not always. There's a reason why there's a different theory that's generally accepted that seems to change at regular intervals.

Even then, there's not consensus among economists.

You'd be well served to stop pretending economics is a science and to stop pretending that everything can be perfectly explained with cherry picked models and theories. I'm sure, given the chance, you would have defended Lehman's 33x leverage somehow like Dick Fuld did days before it all came down. Hell, I'm sure you'd defend it now.

[Aeson]

What? How are those distinct things?

They are separate things. One is specifically about unemployment in 2011. The other is the recession over ~ 3 years.

It would not be "fallacious" even if it were wrong (it is, of course, neither). Don't use words you don't understand.

I am saying that there are some fallacies involved in your reasoning.

The Fed enacted a contractionary monetary policy in reaction to the housing bust. The housing bust was a causal factor leading up to the recession but the recession was not a necessary consequence of the bust. The recession was a necessary consequence of the Fed's policy. Had the Fed enacted a different policy the recession would have been mild or nonexistent.

You seem to think the Fed is omnipotent. I do not agree with you on that. The Fed has some power, but to claim they are solely responsible for the health of the economy is ludicrous.

No, but this is apparently an argument against your own literacy.

No, just an argument against the existence of your sense of humor. Here you are talking about how the Fed should loosen the money supply, and could have avoided the recession completely by doing so... yet then you go and say the Fed isn't necessary at all in the interaction between banks and bond markets. It was too delicious to not point out.

Aeson, do you have any kind of model at all explaining how events proceeded from the housing bust through the present day? Or do you just write it off as a mystery that cannot be understood?

To some extent I think that the recession is not possible to fully explain. I don't think it was possible to predict it either. The Fed did what they thought best (Im assuming...), and plenty of people who were arguing for what they were doing back then are now saying the exact opposite. It's a bunch of hindsight without the benefit of reproducible experimentation.

That you think there are models which can fully explain the recession and how the factors involved were all subserviant to this one overriding concern (the Fed) is funny to me.

But since you asked I will give a rough outline of my thoughts on what happened. I'm sure there's lots of stuff I'm leaving out or getting in the wrong order...

- Loose monetary policy lead to a housing bubble (For clarities sake, I don't just mean the Fed here. Easy money from F&F, as well as increased allowance for leveraging factor in too and are not under the Fed's jurisdiction I don't think.)
- Income and house prices diverged too far, debt ratios too high to be sustainable
- Lending practices and leveraging do not adjust.
- Builders do not restrict supply enough
- Inventories build.
- House prices start declining.
- people start going underwater on their mortgages, and surprise, don't really care to pay back more than they get out of it. (In cases where they actually could.)
- Assets which are backed with mortgages aren't downgraded, or only a bit... for a while.
- then they're priced in all at once. It's pretty scary to watch how fast.
- Lots of stocks are diving.
- Liquidity dries up. The Fed responds. Bear dies, Lehman goes all zombie.
- Some hysteria. The world is ending. Of course this means we rally. Yay for the Fed saving the day! (<---EMH RESPONSE)
- It doesn't last. Surprise... the problems with these securities persists. People can't magically make mortgage payments they can't afford. Who would have thunk it?
- Market takes diving lessons during the summer.
- EMH is so awesome that Polytubies can buy in to S&P at ~750-900 and virtually no one disagrees that it's a good buying opportunity.
- Fed bungles along through this. Opens up the discount window to some walking corpses. Some of them still die.
- Treasury makes some really retarded moves with F&F (IIRC... something about Paulson and F&F was just ludicrous but I forget what).
- BB and Paulson team up to make a really great bailout proposal which they admit is ludicrously retarded as they're releasing it. (Not exact wording, but something like that.)
- Obama and McCain step in with BB&Ps new offering ("now with slightly less suckiness") to show they're the same damn person and we're ****ed either way.
- Bailout fever, we bail out automakers who we're pretty sure won't repay. We don't bail out some financial institutions. We bail out others who might pay. We spend a few trillion in the worst way possible by arguing about how to spend it and then coming up with a plan to spend it later.
- We have some more money out there that no one really knows what it's doing. (Did we ever find out? I mean is BB going to retire somewhere out there on a tropical island built entirely of Franklins?)
- Let's face it, the Fed wasn't responsible for the nature of the bailout. We could have put that trillion into consumers hands back then as I suggested (God forbid... KH and I agreed on that part. This is the real tragedy of the recession. I felt so unclean.)
- It's all very confidence boosting to run around like a chicken with your head cut off.
- The recovery is happening. It's awesome. It means we just do the same old thing only we spend a bit more on stupid **** people wouldn't let us fund if it wasn't for needing to fix the economy.
- Things are slowly recovering contrary to our government's best efforts (not just the Fed).
- The recovery is much along the same lines as many here were predicting it would do 2 1/2 years ago.
- Who knew that our economy could be cyclical? Or that bubbles bursting could lead to recessions?
- Kuci comes in and says this is all because the Fed. the Fed is the only one who screwed up. The Fed is the only one who can print. The Fed is the only one who could have spent. If it weren't for the Fed, unemployed people could still own $600k houses and banks could leverage 30x+ off those mortgages. The Fed should have been omnipotent and omniscient and fixed everyone else's problems with more free money (nevermind that all this free money got us into the mess in the first place). We didn't have a recession, we had THE FED.

I think that's roughly it...

[Aeson]

What? How are those distinct things?

They are separate things. One is specifically about unemployment in 2011. The other is the recession over ~ 3 years.

It would not be "fallacious" even if it were wrong (it is, of course, neither). Don't use words you don't understand.

I am saying that there are some fallacies involved in your reasoning.

The Fed enacted a contractionary monetary policy in reaction to the housing bust. The housing bust was a causal factor leading up to the recession but the recession was not a necessary consequence of the bust. The recession was a necessary consequence of the Fed's policy. Had the Fed enacted a different policy the recession would have been mild or nonexistent.

You seem to think the Fed is omnipotent. I do not agree with you on that. The Fed has some power, but to claim they are solely responsible for the health of the economy is ludicrous.

No, but this is apparently an argument against your own literacy.

No, just an argument against the existence of your sense of humor. Here you are talking about how the Fed should loosen the money supply, and could have avoided the recession completely by doing so... yet then you go and say the Fed isn't necessary at all in the interaction between banks and bond markets. It was too delicious to not point out.

Aeson, do you have any kind of model at all explaining how events proceeded from the housing bust through the present day? Or do you just write it off as a mystery that cannot be understood?

To some extent I think that the recession is not possible to fully explain. I don't think it was possible to predict it either. The Fed did what they thought best (Im assuming...), and plenty of people who were arguing for what they were doing back then are now saying the exact opposite. It's a bunch of hindsight without the benefit of reproducible experimentation.

That you think there are models which can fully explain the recession and how the factors involved were all subserviant to this one overriding concern (the Fed) is funny to me.

But since you asked I will give a rough outline of my thoughts on what happened. I'm sure there's lots of stuff I'm leaving out or getting in the wrong order...

- Loose monetary policy lead to a housing bubble (For clarities sake, I don't just mean the Fed here. Easy money from F&F, as well as increased allowance for leveraging factor in too and are not under the Fed's jurisdiction I don't think.)
- Income and house prices diverged too far, debt ratios too high to be sustainable
- Lending practices and leveraging do not adjust.
- Builders do not restrict supply enough
- Inventories build.
- House prices start declining.
- people start going underwater on their mortgages, and surprise, don't really care to pay back more than they get out of it. (In cases where they actually could.)
- Assets which are backed with mortgages aren't downgraded, or only a bit... for a while.
- then they're priced in all at once. It's pretty scary to watch how fast.
- Lots of stocks are diving.
- Liquidity dries up. The Fed responds. Bear dies, Lehman goes all zombie.
- Some hysteria. The world is ending. Of course this means we rally. Yay for the Fed saving the day! (<---EMH RESPONSE)
- It doesn't last. Surprise... the problems with these securities persists. People can't magically make mortgage payments they can't afford. Who would have thunk it?
- Market takes diving lessons during the summer.
- EMH is so awesome that Polytubies can buy in to S&P at ~750-900 and virtually no one disagrees that it's a good buying opportunity.
- Fed bungles along through this. Opens up the discount window to some walking corpses. Some of them still die.
- Treasury makes some really retarded moves with F&F (IIRC... something about Paulson and F&F was just ludicrous but I forget what).
- BB and Paulson team up to make a really great bailout proposal which they admit is ludicrously retarded as they're releasing it. (Not exact wording, but something like that.)
- Obama and McCain step in with BB&Ps new offering ("now with slightly less suckiness") to show they're the same damn person and we're ****ed either way.
- Bailout fever, we bail out automakers who we're pretty sure won't repay. We don't bail out some financial institutions. We bail out others who might pay. We spend a few trillion in the worst way possible by arguing about how to spend it and then coming up with a plan to spend it later.
- We have some more money out there that no one really knows what it's doing. (Did we ever find out? I mean is BB going to retire somewhere out there on a tropical island built entirely of Franklins?)
- Let's face it, the Fed wasn't responsible for the nature of the bailout. We could have put that trillion into consumers hands back then as I suggested (God forbid... KH and I agreed on that part. This is the real tragedy of the recession. I felt so unclean.)
- It's all very confidence boosting to run around like a chicken with your head cut off.
- The recovery is happening. It's awesome. It means we just do the same old thing only we spend a bit more on stupid **** people wouldn't let us fund if it wasn't for needing to fix the economy.
- Things are slowly recovering contrary to our government's best efforts (not just the Fed).
- The recovery is much along the same lines as many here were predicting it would do 2 1/2 years ago.
- Who knew that our economy could be cyclical? Or that bubbles bursting could lead to recessions?
- Kuci comes in and says this is all because the Fed. the Fed is the only one who screwed up. The Fed is the only one who can print. The Fed is the only one who could have spent. If it weren't for the Fed, unemployed people could still own $600k houses and banks could leverage 30x+ off those mortgages. The Fed should have been omnipotent and omniscient and fixed everyone else's problems with more free money (nevermind that all this free money got us into the mess in the first place). We didn't have a recession, we had THE FED.

I think that's roughly it...

[Asher]

It all comes down to lack of reasonable levels of regulation of the marketplace. It was the domino that started it all.

Not only in mortgages, but also the ridiculous number of convoluted instruments with "good enough" risk models built on top of those flimsy mortgages. It's the kind of **** you get when you get brainiac PhDs thinking math and models can solve all problems. People like David X. Li. Incidentally, he was an actuary. "The world's most influential actuary".

[Aeson]

Why does it strike you as implausible that there is more to the recession than "zomg the house prices fell so all the construction workers lost their jobs"?

Why does it strike you as implausible that there is more to the recession than "zomg the Fed"?

[Asher]

Why does it strike you as implausible that there is more to the recession than "zomg the Fed"?

Because if he looks any closer it may shake his belief in the "market" (as it is described by his theories and models of convenience).

[Kuciwalker]

The main thing that alarms me is that a bunch of reasonably intelligent people seem to forget that economics is a study based in theory and flawed models designed to attempt to make sense of the market place.

You do not seem to comprehend that it does not always align with expectations, it does not always align with models, and it does not always follow what the computations say. Sure, many of them do a very good job -- but not always. There's a reason why there's a different theory that's generally accepted that seems to change at regular intervals.

Even then, there's not consensus among economists.

You'd be well served to stop pretending economics is a science and to stop pretending that everything can be perfectly explained with cherry picked models and theories. I'm sure, given the chance, you would have defended Lehman's 33x leverage somehow like Dick Fuld did days before it all came down. Hell, I'm sure you'd defend it now.

This is all nice and wonderful-sounding except for the part where you never actually try to explain the things happening in the real world. You just offer the occasional vague policy prescription based on your own prejudice.

These flawed models are openly superior to no model at all.

[Asher]

This is all nice and wonderful-sounding except for the part where you never actually try to explain the things happening in the real world. You just offer the occasional vague policy prescription based on your own prejudice.

These flawed models are openly superior to no model at all.

Oh, undoubtedly. I understand their necessity in your field and KH's, you can't operate without them. That doesn't mean you need blind faith.

That's why I don't work in that field, and actively avoid finserv in general. I feel dirty working there.

Incidentally they came a-knockin' today looking for a position to fill in NYC.

[Kuciwalker]

Because if he looks any closer it may shake his belief in the "market" (as it is described by his theories and models of convenience).

The hilarious part about this is that your theory of the recession (such as you have provided one at all) is far more based on the idea of efficient and frictionless markets than mine, which is explicitly and necessarily the consequence of market imperfections. If you knew the first thing about macro you would recognize this.

[Kuciwalker]

Seriously, how does Asher manage to somehow turn his own pop Austrian macro into "Kuci you have far too much faith in the market!" ?

[Asher]

The hilarious part about this is that your theory of the recession (such as you have provided one at all) is far more based on the idea of efficient and frictionless markets than mine, which is explicitly and necessarily the consequence of market imperfections. If you knew the first thing about macro you would recognize this.

If you think this is "hilarious" you need to step away from the books for a bit.

It's pretty simple to do a causal analysis in retrospect.

[Asher]

Seriously, how does Asher manage to somehow turn his own pop Austrian macro into "Kuci you have far too much faith in the market!" ?

I'm not even going to pretend to know what Austrian macro is. I'm not an economics nerd, because I find economics to be the 2nd most dull thing on this earth after philosophy. What makes it somewhat worse is it frequently masquerades as a science and people treat it as such.

I don't think you have too much faith in the market. You have too much faith in your tidy models of the market. These are very distinct things.

[Asher]

Reading wiki on Austrian economics, I wouldn't say I'm one of them.

[Kuciwalker]

You seem to think the Fed is omnipotent. I do not agree with you on that. The Fed has some power, but to claim they are solely responsible for the health of the economy is ludicrous.

The only reason I "seem" to think that is because you're totally clueless. The fed has no power to offset shocks to aggregate supply. It can completely offset shocks to aggregate demand. The Fed cannot control real variables (e.g. RGDP) except on a limited, temporary basis; the Fed has absolute power to put NGDP pretty much anywhere it wants.

No, just an argument against the existence of your sense of humor. Here you are talking about how the Fed should loosen the money supply, and could have avoided the recession completely by doing so... yet then you go and say the Fed isn't necessary at all in the interaction between banks and bond markets. It was too delicious to not point out.

No, you're just clueless.

The fed isn't necessary for a bank to go out and sell a US government bond to some other private party. Duh.

The fed is necessary when you want to manage the total quantity of money. (Unless you let the fiscal authority finance its activities through money-printing.)

To some extent I think that the recession is not possible to fully explain. I don't think it was possible to predict it either.

The markets absolutely saw the recession coming. TIPS spreads collapsed and the yield curve inverted well in advance of the actual recession.

The Fed did what they thought best (Im assuming...), and plenty of people who were arguing for what they were doing back then are now saying the exact opposite. It's a bunch of hindsight without the benefit of reproducible experimentation.

The fed ignored the most important episode in macroeconomics ever, the Great Depression, and repeated many of the same mistakes that were committed then. And the fed's mistakes were observable in real time, through market prices.

- Loose monetary policy lead to a housing bubble (For clarities sake, I don't just mean the Fed here. Easy money from F&F, as well as increased allowance for leveraging factor in too and are not under the Fed's jurisdiction I don't think.)

1. F&F can't set monetary policy. They can't cause "loose money". Only the fed can, because only the fed can control the size of the monetary base.
2. The fed did not have a loose monetary policy in the decade before the housing crash. It kept NDGP growing just around trend.
3. The housing "bubble" was in large part the inevitable result of the Internet bubble. The capital has to go somewhere. The only way the fed could keep that capital out of the housing market would be to push the economy into a recession. The US had some productive capacity; much of that was directed into constructing houses, and in the end we built more than people actually wanted. Where in that story would the fed tightening monetary policy produce a better allocation of resources?

- Income and house prices diverged too far, debt ratios too high to be sustainable
- Lending practices and leveraging do not adjust.
- Builders do not restrict supply enough
- Inventories build.
- House prices start declining.
- people start going underwater on their mortgages, and surprise, don't really care to pay back more than they get out of it. (In cases where they actually could.)
- Assets which are backed with mortgages aren't downgraded, or only a bit... for a while.
- then they're priced in all at once. It's pretty scary to watch how fast.
- Lots of stocks are diving.
- Liquidity dries up. The Fed responds. Bear dies, Lehman goes all zombie.
- Some hysteria. The world is ending. Of course this means we rally. Yay for the Fed saving the day! (<---EMH RESPONSE)
- It doesn't last. Surprise... the problems with these securities persists. People can't magically make mortgage payments they can't afford. Who would have thunk it?
- Market takes diving lessons during the summer.
- EMH is so awesome that Polytubies can buy in to S&P at ~750-900 and virtually no one disagrees that it's a good buying opportunity.
- Fed bungles along through this. Opens up the discount window to some walking corpses. Some of them still die.
- Treasury makes some really retarded moves with F&F (IIRC... something about Paulson and F&F was just ludicrous but I forget what).
- BB and Paulson team up to make a really great bailout proposal which they admit is ludicrously retarded as they're releasing it. (Not exact wording, but something like that.)
- Obama and McCain step in with BB&Ps new offering ("now with slightly less suckiness") to show they're the same damn person and we're ****ed either way.
- Bailout fever, we bail out automakers who we're pretty sure won't repay. We don't bail out some financial institutions. We bail out others who might pay. We spend a few trillion in the worst way possible by arguing about how to spend it and then coming up with a plan to spend it later.
- We have some more money out there that no one really knows what it's doing. (Did we ever find out? I mean is BB going to retire somewhere out there on a tropical island built entirely of Franklins?)
- Let's face it, the Fed wasn't responsible for the nature of the bailout. We could have put that trillion into consumers hands back then as I suggested (God forbid... KH and I agreed on that part. This is the real tragedy of the recession. I felt so unclean.)
- It's all very confidence boosting to run around like a chicken with your head cut off.
- The recovery is happening. It's awesome. It means we just do the same old thing only we spend a bit more on stupid **** people wouldn't let us fund if it wasn't for needing to fix the economy.
- Things are slowly recovering contrary to our government's best efforts (not just the Fed).
- The recovery is much along the same lines as many here were predicting it would do 2 1/2 years ago.

None of this explains 9% unemployment in 2011. Your whole story is basically "we built too many houses, lots of assets dropped in value, ???, recession!". What possible mechanism takes us from "well, we had to lay off some construction workers" to "almost every industry in the country sees major job losses"?

- Kuci comes in and says this is all because the Fed. the Fed is the only one who screwed up. The Fed is the only one who can print. The Fed is the only one who could have spent. If it weren't for the Fed, unemployed people could still own $600k houses and banks could leverage 30x+ off those mortgages. The Fed should have been omnipotent and omniscient and fixed everyone else's problems with more free money (nevermind that all this free money got us into the mess in the first place). We didn't have a recession, we had THE FED.

Seriously, how do people keep turning pop Austrian macro into anti-market rants? It's surreal.