Bubbles and Economic Potential

[briansd1]

Whenever people hear Krugman they think big government they are are automatically against his ideas.

I love Krugman because he’s a humanist and a pragmatist. He’s got good ideas on how to make the world better. We don’t need to accept that umemployment and deprivation are the only ways out of the credit bubble.

As long as there’s human ingenuity, there will be solutions to our problems.

After all, debts and money are just a human creations and not laws of nature. We should find ways to make them work for us, not against us.

[markmax33]

[quote=pri_dk][quote=briansd1]I think that it depends where the debt is being put to use.[/quote]

Brian brings up a good point about debt and it’s cost (even it it is a little off-subject.)

Since the point of the OP seems to be lost already in this thread, and we’ve already meandered into a Keynesian philosophical debate, I’ll expand on Brian’s point.

It is a common layman’s mistake look at all debt (government, corporate) like household credit-card debt – as if debt was just a reckless spender’s way to pay for today’s stuff with tomorrow’s money.

Not all debt is “bad,” and using debt to finance the right investments can actually lead to a better long-term outcome than not using debt.

The debate comes down to what are the “right” investments – specifically, how do we measure return on investment for government spending? (In other words, when is it spending and when is it investing?)

It’s not an easy thing to do, and there are lots of counter-intuitive situations.

The largest debt the US ever had was during WWII. Now if we take a superficial look at what “investments” were made with that debt, it would seem absurd: We borrowed massive amounts of money, built stuff, and sent that stuff half-way around the world where much of it was destroyed. How could that ever be good for the economy?

The answer, of course, is that all investment choices are relative. Sure, we could have not borrowed anything during WWII and maintained a nice strong balance sheet.

Or we could have borrowed and built stuff here at home – why not give everyone a car instead of sending howitzers to Europe? Wouldn’t that be better for Americans?

Of course the answer is that sending our wealth off to be destroyed during WWII was the best available alternative – by borrowing and spending we averted a disaster that would have likely been far more costly than our debt service.

The question for today’s “crisis:” What would be the cost of doing nothing? If we do borrow, are we getting a good return on relative to the cost of our debt?

What are the choices and what are the outcomes?

There is no single answer. However, we should not let negative perceptions of debt cloud our analysis. The idea that debt is always bad and that more debt is always worse is simply not true.[/quote]

Name a GOV program that has a positive ROI, or could have a precieved ROI even. Here’s a short list that surely aren’t productive:

http://www.chicagotribune.com/features/tribu/sns-pgc-wastebook-2010-pg,0,4199163.photogallery

There are tipping points where GDP exceeds debt and markets lose confidence. You can’t exceed a certain debt to GDP ratio and still have a functioning GOV. If your investments don’t reverse that debt/GDP ratio quick we are heading the way of the PIIGS.

[davelj]

[quote=pri_dk]The idea that debt is always bad and that more debt is always worse is simply not true.[/quote]

I agree with this 100%. But… we are so far in the hole AT THIS POINT that I would argue that almost all INCREMENTAL debt is harmful – again, at this point.

We are the equivalent of a struggling levered firm “gambling for resurrection” (to use an old LBO term) at this point. The first step is to stop gambling.

(But, hey, at least we have a printing press. Of course, to some extent it’s that very printing press that’s gotten us into this mess. Oh, sweet paradox!)

[markmax33]

[quote=briansd1]Whenever people hear Krugman they think big government they are are automatically against his ideas.

I love Krugman because he’s a humanist and a pragmatist. He’s got good ideas on how to make the world better. We don’t need to accept that umemployment and deprivation are the only ways out of the credit bubble.

As long as there’s human ingenuity, there will be solutions to our problems.

After all, debts and money are just a human creations and not laws of nature. We should find ways to make them work for us, not against us.[/quote]

You do that by ending the abuse of overspending…

[Arraya]

“Overspending” is necessaery to keep the growth requirement at acceptable levels. Which is way debt levels of individuals, corporations, municipalities and nations have all skyrocketed over the past few decades from historical norms. It’s systemic.

Though it may be a bit heavy for some, it must be stated; capitalism is reaching its endgame. The growth requirement which capitalism has built into itself is now colliding headlong with the limits of the natural world, which provides all of the raw stock required by industry; coupled with an unpayable mountain of debt. Like an organism undergoing ketosis, the system is beginning to devour itself for sustenance. Governments create imaginary capital to patch over privately created black holes of debt, while financial institutions feast on the accumulated “wealth” of the poorer strata of western society by mechanisms like foreclosure, stagnant wages, increasing tuitions, increasing interest payments, layoffs, and every other conceivable and now commonplace “austerity measure.”

It is this amalgam of symptoms of collapse that the people of the “first” world are now experiencing. Of course, these first-worlders have lived on the backs of exploited peoples, for generations, all too happy to consume to their heart’s content in a drunken orgy of self-righteous hedonism. (In their defense, the masters of capital did scar these people at birth with the brand of consumption, bombarding them day and night with self defeating advertisements and a ceaseless campaign of pro-authoritarian propaganda.)

Now that the maw of imperial capitalism is fixing itself upon the white people of the first world, now that a future of more luxury and entitlement is not a guarantee, there is a revelation to the true nature of the culture appearing to those willing to see it.

[Anonymous]

[quote=davelj]I agree with this 100%. But… we are so far in the hole AT THIS POINT that I would argue that almost all INCREMENTAL debt is harmful – again, at this point.[/quote]

By ‘harmful,’ do you mean worse than the alternatives?

I think that’s the crux of it. It is very likely that we only have a few crappy alternatives, but which is the least crappy, and why?

Debt service hurts, but the total collapse of established industries hurts also. There’s a very high transaction cost in coming back from zero.

I don’t have the answer. I’ve seen plenty of arguments for both sides. Most don’t have very strong data to support them.

I do see way too many entrenched positions based upon political philosophy.

And people expect their leaders to act. The politician who does nothing won’t last long, even if that is the right thing to do (or the least crappy.)

[Allan from Fallbrook]

[quote=davelj]
We are the equivalent of a struggling levered firm “gambling for resurrection” (to use an old LBO term) at this point. The first step is to stop gambling.

[/quote]

Dave: To use another relevant business term: Death Spiral. There is a considerable lack of understanding as to how debt really works, as evidenced by Brian’s facile remark about the money being cheap now. Yup, it is. But what if that changes? The more debt you have, the larger the debt service when interest rates rise and they inevitably will.

Kind of like Mr. Creosote and the mint in Monty Python’s “Meaning of Life”.

[davelj]

[quote=pri_dk][quote=davelj]I agree with this 100%. But… we are so far in the hole AT THIS POINT that I would argue that almost all INCREMENTAL debt is harmful – again, at this point.[/quote]

By ‘harmful,’ do you mean worse than the alternatives?

I think that’s the crux of it. It is very likely that we only have a few crappy alternatives, but which is the least crappy, and why?
[/quote]

A good question. I don’t have a good answer. But… when you’re in a hole the best interim step is to stop digging.

Rather than create more debt, and as objectionable as it may sound, I’d prefer going in the other direction and extinguishing debt via the Ben Bernanke Helicopter: Just send a “specific use” check to all of the underwater homeowners still current on their mortgage payments such that their LTV drops to 105%. The check would (obviously) vary in size by the amount needed to get the LTV down to 105%. (That’s about a $600 billion aggregate check, by the way.) The check could ONLY be used to reduce the mortgage – not for consumption. Theoretically, this would reduce debt and not lead to inflation, as you still couldn’t borrow against the house (it’s still underwater) and most of the lenders ultimately receiving the funds are in no mood to lend (expanding the money supply). I’m not saying this is a good solution, by the way. I’m just saying it, or something similar to it, might be a least bad one.

Now, here come the folks justifiably complaining about moral hazard and “but I was responsible and you’re rewarding stupidity”, etc etc etc… Let the admonishment rain!!

[sreeb]

The house bubble fueled a housing construction bubble as new construction became very profitable. Home construction is one of the last consumer areas where most of money is spent here so it has a disproportionate effect. This definatly jacked up the GNP. When the bubble burst and construction halted, a big hole was carved out of the GNP.

[EconProf]

This would be an interesting approach, and has several advantages from an efficiency standpoint.
First, the homeowner would likely stay put and keep making payments in the hope that house prices are likely bottoming out this year, and the expense of moving is a huge waste he could now avoid. There are a lot of inherently wasteful things that occur when a foreclosure happens and all parties lose–lenders, forclosed homeowners, neighborhood degradation, to name a few.
Second, house values would more likely stabilize as fewer foreclosures would hit the market. Result–more consumer spending as ALL homeowners have a better personal balance sheet. The economy recovers faster, tax revenues increase, etc., etc.
Much as I hate to see bad behavior rewarded–the moral hazard objection–this is worth considering, providing its only a one-time deal (ah, there’s the rub!)

[scaredyclassic]

Wouldn’t there be bigtime pressure on appraisers to come in as low as possible. I’d gladly pay thrice the regular fee for the appraiser who comes in conservatively superlow.

[briansd1]

[quote=davelj][quote=pri_dk][quote=davelj]I agree with this 100%. But… we are so far in the hole AT THIS POINT that I would argue that almost all INCREMENTAL debt is harmful – again, at this point.[/quote]

By ‘harmful,’ do you mean worse than the alternatives?

I think that’s the crux of it. It is very likely that we only have a few crappy alternatives, but which is the least crappy, and why?
[/quote]

A good question. I don’t have a good answer. But… when you’re in a hole the best interim step is to stop digging.

Rather than create more debt, and as objectionable as it may sound, I’d prefer going in the other direction and extinguishing debt via the Ben Bernanke Helicopter: Just send a “specific use” check to all of the underwater homeowners still current on their mortgage payments such that their LTV drops to 105%. The check would (obviously) vary in size by the amount needed to get the LTV down to 105%. (That’s about a $600 billion aggregate check, by the way.) The check could ONLY be used to reduce the mortgage – not for consumption. Theoretically, this would reduce debt and not lead to inflation, as you still couldn’t borrow against the house (it’s still underwater) and most of the lenders ultimately receiving the funds are in no mood to lend (expanding the money supply). I’m not saying this is a good solution, by the way. I’m just saying it, or something similar to it, might be a least bad one.

Now, here come the folks justifiably complaining about moral hazard and “but I was responsible and you’re rewarding stupidity”, etc etc etc… Let the admonishment rain!![/quote]

For homeowners who are current, why not simply force banks to automatically modify loans to the prevailing low interest rates? That would incentivize people to stay in their underwater house and provide more disposible income to be spent in the economy.

[briansd1]

[quote=Allan from Fallbrook] as evidenced by Brian’s facile remark about the money being cheap now. Yup, it is. But what if that changes? The more debt you have, the larger the debt service when interest rates rise and they inevitably will.

[/quote]

As pri_dk asked before, what’s the alternative? Mass unemployment and deprivation?

Don’t we have crumbling infrastructure to fix? And aren’t there plenting for workers looking jobs? Seems like to best time to rebuild our house — when labor is plentiful and money is cheap.

Krugman is cool because his solutions are about building the country, not dishing out hardship as a solution to past exuberance.

[briansd1]

[quote=Arraya]”Overspending” is necessaery to keep the growth requirement at acceptable levels. Which is way debt levels of individuals, corporations, municipalities and nations have all skyrocketed over the past few decades from historical norms. It’s systemic.

Though it may be a bit heavy for some, it must be stated; capitalism is reaching its endgame. The growth requirement which capitalism has built into itself is now colliding headlong with the limits of the natural world, which provides all of the raw stock required by industry; coupled with an unpayable mountain of debt. Like an organism undergoing ketosis, the system is beginning to devour itself for sustenance. Governments create imaginary capital to patch over privately created black holes of debt, while financial institutions feast on the accumulated “wealth” of the poorer strata of western society by mechanisms like foreclosure, stagnant wages, increasing tuitions, increasing interest payments, layoffs, and every other conceivable and now commonplace “austerity measure.”

It is this amalgam of symptoms of collapse that the people of the “first” world are now experiencing. Of course, these first-worlders have lived on the backs of exploited peoples, for generations, all too happy to consume to their heart’s content in a drunken orgy of self-righteous hedonism. (In their defense, the masters of capital did scar these people at birth with the brand of consumption, bombarding them day and night with self defeating advertisements and a ceaseless campaign of pro-authoritarian propaganda.)

Now that the maw of imperial capitalism is fixing itself upon the white people of the first world, now that a future of more luxury and entitlement is not a guarantee, there is a revelation to the true nature of the culture appearing to those willing to see it.[/quote]

Arraya, I find your positions interesting but contradictory.

There are so many points, that I don’t know we to begin.

If I understand you well, you’re saying that the “limits of the natural world” ensure that our capitalist system is unsustainable. Perhaps you’re right.

But, surely, if you believe that we have reached the limits of the natural world, you couldn’t be concerned with something as insignificant as the money and debts that humans created?

Money just a way of trading that we conjured up. Can’t some kind of modified system be conjured up that will keep trade and industry moving?

[markmax33]

[quote=briansd1][quote=Allan from Fallbrook] as evidenced by Brian’s facile remark about the money being cheap now. Yup, it is. But what if that changes? The more debt you have, the larger the debt service when interest rates rise and they inevitably will.

[/quote]

As pri_dk asked before, what’s the alternative? Mass unemployment and deprivation?

Don’t we have crumbling infrastructure to fix? And aren’t there plenting for workers looking jobs? Seems like to best time to rebuild our house — when labor is plentiful and money is cheap.

Krugman is cool because his solutions are about building the country, not dishing out hardship as a solution to past exuberance.[/quote]

We cut GOV spending by 60% after WWII and the economy did just fine. Why do you have a perception that the GOV can direct $ in a more efficient way than the private sector? Look at the massive Medicare/Medicad fraud, Farm subsidies, it goes on and on and on. What about taking money from a productive individual redirecting towards that crap helps an infrastructure from crumbling?

[Author]

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