Warren Buffet speaks common sense; alarms most Republicans

[Kuciwalker]

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

That's why it's ridiculous that you've somehow bought into their theory of the recession.

[Asher]

I didn't bring their theory. They must've stolen it from me.

[Kuciwalker]

http://www.themoneyillusion.com/?p=4

and

http://www.themoneyillusion.com/?p=249

are substantially better explanations than I could write myself of how the Fed's poor response to the financial crisis caused the recession.

[Aeson]

The fed has no power to offset shocks to aggregate supply.

It can completely offset shocks to aggregate demand.

No, not completely.

No, you're just clueless.

You still don't get it, which makes it even funnier

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.)

We all know this. Otherwise it wouldn't be funny.

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

And we all made fortunes shorting!

I could say that there will be a recession in the future. I could even be pretty sure about whether it will be in the next year or two. I did so with this one myself. But I don't pretend it's a prediction of any real value. I couldn't have told you what dates to invest off it, or what the Feds or other significant player's reaction would be. To pretend the TIPS spread predicted the recession and how it would turn out is silly.

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.

Just interested if you knew it in real time then, because i don't remember you making these predictions back. (I wasn't around all the time though of course.)

There were some important lessons from the GD of course. One was not to allow investment banks to leverage so much.

1. F&F can't set monetary policy. They can't cause "loose money".

I didn't say F&F set monetary policy. I said "easy money" specifically in regards to F&F. Which will increase borrowing. While there aren't more dollars in such an environment, there is more overall debt.

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?

Gradually tightening instead of waiting till a crash may have been better. I don't pretend I can know for sure what would have happened if they did...

I would have hoped they could discourage leveraging up to ridiculous levels by setting a higher discount rate, as well as limited the amount of truely stupid loans that were being made. (I think they didn't have control over the leverage ratios as said before though, and don't know if it would have worked with F&F doing an end-around.)

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!".

I mentioned how the securities that were backed with these mortgages suffered, and mentioned the institutions which were leveraged on these securities. I mentioned panic/hysteria. I mentioned the incompetence of the Fed and Treasury. I mentioned the cyclical nature of the markets as well. Can you really not read? I mean, disagree with me about the points if you will, but pretending they aren't there is just unbelievably stupid of you.

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"?

To pretend the only effect of the housing bubble (sans Fed action) would be to lay off some construction workers is laughable.

[Aeson]

- 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.

It isn't anti-market. It's anti-you. You do realize that you are not the market, right?

[KrazyHorse]

No, not completely.

Yes, completely.

You still don't get it, which makes it even funnier

You are an idiot.

We all know this. Otherwise it wouldn't be funny.

Make up your mind, you ****.

And we all made fortunes shorting!

Moron. The markets clearly led GDP growth by 1-2 quarters, as even a superficial glance at the data can tell you. With a well-functioning central bank, recessions are unpredictable; any prediction power of recessions that the market has is by definition a failure of the central bank

I could say that there will be a recession in the future. I could even be pretty sure about whether it will be in the next year or two. I did so with this one myself. But I don't pretend it's a prediction of any real value. I couldn't have told you what dates to invest off it, or what the Feds or other significant player's reaction would be. To pretend the TIPS spread predicted the recession and how it would turn out is silly.

No, it isn't, you absolute ******. IF THE TIPS SPREAD HADN'T PREDICTED A RECESSION THEN THERE WOULD HAVE BEEN FREE MONEY AVAILABLE TO YOU ND YOUR ILK. The Fed is not guaranteed to be efficient; only the markets.

Just interested if you knew it in real time then, because i don't remember you making these predictions back. (I wasn't around all the time though of course.)

There were some important lessons from the GD of course. One was not to allow investment banks to leverage so much.

Neither Kuci nor knew very much macro back then. The sad fact is, what both he and I are saying IS THE CONSENSUS VIEW CIRCA 2007. And you obviously STILL know no macro.

Gradually tightening instead of waiting till a crash may have been better. I don't pretend I can know for sure what would have happened if they did...

"Gradually tightening"? Why? Inflation was never above target. Anticipated inflation was never above target.

I would have hoped they could discourage leveraging up to ridiculous levels by setting a higher discount rate, as well as limited the amount of truely stupid loans that were being made. (I think they didn't have control over the leverage ratios as said before though, and don't know if it would have worked with F&F doing an end-around.)

My feeling is that you have not the slightest clue how money and the banking sector interact...

I mentioned how the securities that were backed with these mortgages suffered, and mentioned the institutions which were leveraged on these securities. I mentioned panic/hysteria. I mentioned the incompetence of the Fed and Treasury. I mentioned the cyclical nature of the markets as well. Can you really not read? I mean, disagree with me about the points if you will, but pretending they aren't there is just unbelievably stupid of you.

These are all classic bugaboos of those unable to construct self-consistent theories.

To pretend the only effect of the housing bubble (sans Fed action) would be to lay off some construction workers is laughable.

Residential home construction is only ~1% of the US economy, you twit. THE FED CAN OFFSET ANY MULTIPLIER EFFECTS!

[notyoueither]

I have no idea what this even means. Are you just producing noises that sound appropriate, or do you have a point?

I was under the impression that foreign lenders were not happy with dollars being printed in the US. Perhaps I am wrong, but there is no need to be a pretentious little git.

[KrazyHorse]

Who cares what the Chinese think?

[Asher]

Kim Jong Il

[Aeson]

Yes, completely.

No. There are other factors at play in aggregate demand than just the Fed. For Kuci's statement to be true there could be no other driver of aggregate demand than monetary supply, and that is clearly not the case.

IF THE TIPS SPREAD HADN'T PREDICTED A RECESSION THEN THERE WOULD HAVE BEEN FREE MONEY AVAILABLE TO YOU ND YOUR ILK.

This is untrue if you believe your statements about the Fed. (Unless you have me and my ilk confused with some other ilk I'm not aware of.)

Neither Kuci nor knew very much macro back then.

So hard to admit... you omitted it

The sad fact is, what both he and I are saying IS THE CONSENSUS VIEW CIRCA 2007. And you obviously STILL know no macro.

The consensus view in 2007 was that the economy was doing fine. At least in mainstream channels. I was one of the first, if not the first, here at poly to start talking about the coming recession. And yes, the TIPS spread was some of that. But I would never pretend that that alone can predict when, how far down, and how long a recession will be.

"Gradually tightening"? Why? Inflation was never above target. Anticipated inflation was never above target.

I mentioned the specifics of the portion of the "easy money" that I felt should have been tightened. Less leveraging by financials, and less free money for people who can't afford the houses they are buying. As I said, the Fed didn't have much control over either of those things. (I may be wrong about leveraging, but I thought it was congressional allowance for specific investment banks to lever up to the 30x-40x area.)

This is where pure reliance on monetary policy fails. There are real problems in this world you can't just gloss over with more cash. Glossing over with cash might help for a time, but it just lets the problem grow until it becomes unmanageable.

THE FED CAN OFFSET ANY MULTIPLIER EFFECTS!

Ben didn't do what he said he would in such a situation. Maybe he wasn't allowed to and the Fed doesn't have as much power as you and Kuci think? Or perhaps he just ****ed up. In any case it's very difficult to say just how much of the recession is due to the Fed's reaction, and how much is due to the underlying problems they were trying to address. (Any sane evaluation would admit there were problems in both regards.)

[Kuciwalker]

No. There are other factors at play in aggregate demand than just the Fed. For Kuci's statement to be true there could be no other driver of aggregate demand than monetary supply, and that is clearly not the case.

That is ABSOLUTELY the case. AD is a nominal aggregate. It is completely controllable by varying the money supply.

This is untrue if you believe your statements about the Fed. (Unless you have me and my ilk confused with some other ilk I'm not aware of.)

No.

I mentioned the specifics of the portion of the "easy money" that I felt should have been tightened. Less leveraging by financials, and less free money for people who can't afford the houses they are buying.

THIS IS NOT WHAT EASY MONEY MEANS. THIS IS NOT WHAT EASY MONEY REFERS TO. Easy money can influence the real economy through the credit channel, but that is by no means the only channel.

This is where pure reliance on monetary policy fails. There are real problems in this world you can't just gloss over with more cash. Glossing over with cash might help for a time, but it just lets the problem grow until it becomes unmanageable.

Yes, there are plenty of real problems that the Fed is powerless to fix. We would have had some minor depression in output after the housing bubble burst. The economy, however, is actually really good at reallocating resources and that depression would have been small, temporary, and contained.

We are still well below trend GDP (real and nominal) in 2011 because of the nominal problems that the Fed caused and refuses to fix.

Ben didn't do what he said he would in such a situation. Maybe he wasn't allowed to and the Fed doesn't have as much power as you and Kuci think? Or perhaps he just ****ed up. In any case it's very difficult to say just how much of the recession is due to the Fed's reaction, and how much is due to the underlying problems they were trying to address. (Any sane evaluation would admit there were problems in both regards.)

No, it's really not. The problem of malinvestment in housing was at least an order of magnitude too small to cause 9% unemployment 3 years later.

[notyoueither]

Translation - there is a mirror in the bathroom.

[notyoueither]

Who cares what the Chinese think?

Is it a good thing if people outside the US lose faith in the USD?

[Kuciwalker]

I'll be concerned about that when the world stops desperately seeking dollars and US Treasuries for safety.

[KrazyHorse]

No, it's really not. The problem of malinvestment in housing was at least an order of magnitude too small to cause 9% unemployment 3 years later.

Change in output of housing is ~0.7% of gdp...