Home › Forums › Financial Markets/Economics › Bubbles and Economic Potential
- This topic has 73 replies, 10 voices, and was last updated 12 years, 10 months ago by
briansd1.
-
AuthorPosts
-
February 13, 2012 at 11:25 PM #737942February 14, 2012 at 8:48 AM #737963
Anonymous
Guest[quote=davelj]Rather than create more debt, and as objectionable as it may sound, I’d prefer going in the other direction and extinguishing debt via [principal reduction en masse][/quote]
Of course this has been discussed here before many times, mostly with a tone of outrage.
As one of those “responsible” types who would not qualify for the free boost to my balance sheet, I really want to find a reason not to like this idea. But I’ll step back and try to be objective.
I agree the idea has merits. Mainly, it eliminates the huge transaction costs of the slow but inevitable foreclosure process. Most of the underwater portion of mortgage debt will ultimately be written off balance sheets anyway, so why not just get it over with?
So I like that part of it. But when I try to evaluate this plan against the alternative of government stimulus, it’s hard to make the comparison.
My first thought is that principal reduction is really just an accounting function. Many homowners’ balance sheets will instantly look better. Banks’ balance sheets will better reflect reality. These changes will allow distressed portions of the economy to be a little more “normal.”
But what about government? What is the government really doing here? They are sending out checks, but only to forgive debt that is already lost. Is there a cost? Where does the money come from – can the government just “print” this money since it isn’t real anyway?
And in what ways is this different from taking on (and monetizing) debt?
Of course the government is on the hook for this debt either way, so it does make sense to just get it over with.
I think the question comes down to whether mortgage forgiveness is enough to get the economy started again. Would these programs be sufficient to improve confidence and ultimately change behavior? (And will it change behavior in a positive way?) Will businesses become more inclined to invest and hire?
The relationship between homeowner’s balance sheets and business investment and hiring is an indirect one at best. It could work, but it is definitely uncharted territory.
February 14, 2012 at 8:55 AM #737961GuestIt doesn’t matter whether Brian, or Krugman, or anybody has callouses on their hands.
What matters are the fundamental parameters: The cost, and the return.
This is the basic question in any financial decision. Everything else is just a distraction.
The cost of debt today is low. That could change in the future, but it is not entirely unpredictable.
The return on investment from infrastructure projects is difficult to measure, but not impossible. There are mountains of data available. Economists are better qualified than construction managers to sift through this data and evaluate the ROI in the big picture. But it’s still an inexact science and you will get different answers from different people.
davelj made a reference up-thread to some studies that show that, in general, ROI on government spending in the past few decades has been negative. I’ve seen these studies referenced before, but never with enough details that I could really tell if the methodology was sound or the sources were unbiased.
It makes sense that today’s infrastructure projects likely have a lower ROI than they did in the 1930s. All the “low hanging fruit,” like dams in the desert, has already been done. It was a no-brainer that the Hoover Dam would have a positive ROI, but it’s not so easy to know if connecting two sections of freeway in an urban area would be worth it. Today’s projects are more complicated, and there are more and better-understood externalities in the cost (yes, these include environmental impact.)
But our infrastructure is a mess. We have bridges that are a century old, our electrical grid is a cluster$%# No doubt there are opportunities for projects with a nice payoff, but only if we pick the right ones and execute then well. Much of the debate comes down to whether government is capable of doing it right.
The cynical answer is “no way.” But if government doesn’t fix this stuff, who will?
February 14, 2012 at 9:01 AM #737964davelj
Participant[quote=pri_dk]
davelj made a reference up-thread to some studies that show that, in general, ROI on government spending in the past few decades has been negative. I’ve seen these studies referenced before, but never with enough details that I could really tell if the methodology was sound or the sources were unbiased.
[/quote]Actually, that’s not what I said. All I said was that from an economy-wide standpoint – that is, inclusive of government, businesses and consumers – additional debt has been yielding incrementally less GDP for a few decades. I have no idea what the ROI on government spending is, specifically. But, on an economy-wide basis, if we’re defining R=GDP growth and I=incremental debt, then yes ROI, in aggregate, has been declining (although not negative, to be clear).
February 14, 2012 at 9:11 AM #737966Participant[quote=pri_dk]
Of course this has been discussed here before many times, mostly with a tone of outrage.
As one of those “responsible” types who would not qualify for the free boost to my balance sheet, I really want to find a reason not to like this idea. But I’ll step back and try to be objective.
[/quote]I wouldn’t qualify either. Frankly, I feel sorry for those that would. I mean, how financially challenged are these folks? Helping these folks – who are at least trying to be responsible – wouldn’t bother me too much at this point. I certainly wouldn’t want to trade places with them.
[quote=pri_dk]
I agree the idea has merits. Mainly, it eliminates the huge transaction costs of the slow but inevitable foreclosure process. Most of the underwater portion of mortgage debt will ultimately be written off balance sheets anyway, so why not just get it over with?[/quote]
Also, recall that a goodly portion of this money would effectively be going to Fannie/Freddie… which we as taxpayers already own! So, there’s a circular reference in this strategy as well.
[quote=pri_dk]
But what about government? What is the government really doing here? They are sending out checks, but only to forgive debt that is already lost. Is there a cost? Where does the money come from – can the government just “print” this money since it isn’t real anyway?[/quote]
Yes, the Federal Reserve can just print the money (in effect). This is one iteration of Bernanke’s “helicopter” strategy.
[quote=pri_dk]
And in what ways is this different from taking on (and monetizing) debt? [/quote]
None, in effect. This would be a “targeted monetization” of consumer debt as opposed to a “general monetization” of government debt, which is what the various QEs are.
[quote=pri_dk]
It could work, but it is definitely uncharted territory.[/quote]Yup, the devil’s in the details… and we just don’t know.
February 14, 2012 at 9:51 AM #737970Arraya
Participant[quote=briansd1]
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. [/quote]
Correct. “Limits to growth” was written in 1972.
http://en.wikipedia.org/wiki/The_Limits_to_GrowthOr as Tainter describes in “The collapse of complex societies” capitalism is a “runway train” due to its growth requirement
http://intersci.ss.uci.edu/wiki/index.php/The_Collapse_of_Complex_SocietiesThis time the collapse is not of an empire but as a world economic system – the capitalist world-system.
The greatest historian alive today, Immanuel Wallerstein.
Can these divisions on the left be overcome in the next five to ten years? I am not sure. But if they are not, I do not believe the world left can win the battle of the next twenty to forty years over what kind of successor system we shall have as the capitalist system collapses definitively.Keep in mind capitalist growth is not the same as development. Though, development will usually fall under the umbrella of growth
[quote=briansd1]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?[/quote]
The are both interrelated. The human abstraction drives the physical world. Limits to energy, specifically oil, restrict growth and hence make the mountain of debt unpayable – the basis of all work is energy. This is not to say there are not other ways to create energy – but the market-system will never push a transition. It will just make things worse.
Also, limits to the natural world does not necessarily imply “not enough”. It means the the parabolic increase in production of critical natural resources will stop or has in many cases. Though, there is a school of thought pushing the old Malthusian overpopulation thesis. Though, that is not even close to what is transpiring.
[quote=briansd1]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?[/quote]
Sure – though society would operate under much different rules and have different, as Marx would put it, social relations.
Sadly, people can easily imagine the “end of the world” but not the end of capitalism
February 14, 2012 at 10:39 AM #737977Allan from Fallbrook
ParticipantPri: Except that I NEVER said a thing about ROI on infrastructure projects. I was making the point that, while the money is undoubtedly well spent, the existing public works system is COMPLETELY INCAPABLE of taking that sort of money in right now and putting it to beneficial use. That is a fact and one that Obama ruefully acknowledged when he made the “shovel-ready” comment.
So, yes, pri, it actually does matter whether or not Krugman or anyone else has calluses on their hands, because it indicates a real-world understanding of how things actually get built, instead of a cloistered, academic “understanding” and one driven by models and inputs.
In theory, you can drop untold billions into infrastructure projects (and, yes, we sorely need to revamp our infrastructure). In reality, not so much. The system by which projects are designed, engineered and let simply doesn’t work that way, again, as Obama found out the hard way.
That was my point and it had zilch to do with ROI. Again, read what is written and respond. In other words, come correct.
February 14, 2012 at 12:35 PM #737985briansd1
Guest[quote=Allan from Fallbrook] the existing public works system is COMPLETELY INCAPABLE of taking that sort of money in right now and putting it to beneficial use. [/quote]
That’s a different argument, Allan.
We can reform the public works system.
By beef is with ideological rigid right-wingers who claim that government, any government, is incapable. Not true.
February 14, 2012 at 12:39 PM #737988scaredyclassic
ParticipantWhile I acknowledge there are limits, I think America can produce 300 million ponies, although I’m not sure what the equine gestation period is, still, we are going to need shovels at the ready for the poop.
February 14, 2012 at 1:56 PM #738000Participant[quote=briansd1][quote=Allan from Fallbrook] the existing public works system is COMPLETELY INCAPABLE of taking that sort of money in right now and putting it to beneficial use. [/quote]
That’s a different argument, Allan.
We can reform the public works system.
By beef is with ideological rigid right-wingers who claim that government, any government, is incapable. Not true.[/quote]
Brian: Uh, NO, that’s NOT a different argument, Bunkie, and, NO, the public works system does NOT need to be reformed (which proves how truly little you do know about it).
That is THE salient element to the argument. What you’re essentially saying is that a 12oz glass can be REFORMED into a 48oz glass, and thus handle the extra water being poured into it. My argument is that you’ll need four 12oz glasses to handle the extra capacity and that, until you have them, all that extra water will simply sit idle. Different things entirely.
You, however, enjoy the “academic” nature of the discussion without ever realizing how things work in the real world. The existing public works system doesn’t need reform, it needs to gear up to handle the extra money and best determine it’s allocation. This all takes time, NOT reform, and that’s what you and Krugman have no clue about. Nope, far simpler to keep it academic and just dump the money in there and hope for the best. Well, as the old man used to say, Hope is not a plan.
Like I said, inform yourself before coming up with specious, fact-free arguments. And stop playing the right-wing straw man game. Anyone who argues that government is not competent at this point as regards infrastructure spending is entirely CORRECT. As Obama himself admitted, “Those shovel-ready projects weren’t all that shovel-ready”. Could not have said it better myself. Obama and Co., like you, had no idea how things work in the real world of public works construction and thus got blindsided by reality.
February 14, 2012 at 2:15 PM #738003Guest[quote=Allan from Fallbrook]The existing public works system doesn’t need reform, it needs to gear up to handle the extra money and best determine it’s allocation. This all takes time, NOT reform, and that’s what you and Krugman have no clue about. [/quote]
Are you saying that, with the right determination to do so, we can’t gear up quickly? So it’s not worth doing?
What about the American work ethic and can-do mentality that can move mountains?
I have more faith in America than you do.
February 14, 2012 at 2:56 PM #738007Participant[quote=briansd1][quote=Allan from Fallbrook]The existing public works system doesn’t need reform, it needs to gear up to handle the extra money and best determine it’s allocation. This all takes time, NOT reform, and that’s what you and Krugman have no clue about. [/quote]
Are you saying that, with the right determination to do so, we can’t gear up quickly? So it’s not worth doing?
What about the American work ethic and can-do mentality that can move mountains?
I have more faith in America than you do.[/quote]
Brian: Nice try, but no cigar. Again, specious and fact-free in both content and approach. Dude, I do government work every day and I understand how the system works. You clearly do not. It doesn’t have shit to do with determination or “can-do” spirit (and believe me, I know about and have both). It also has dick to do with faith in America, of which I have plenty.
What it has to do with is a system that is in place to ensure that money is correctly spent in the best public interest by those qualified to do the best possible work for that money. I know you enjoy your magical thinking and buy into Obama’s lie that we have excess construction workers just lying around waiting for work (we do, but they are the WRONG kind of construction workers, meaning you don’t take a former residential construction drywall taper from Lake Elsinore and put him to work doing a heavy civil bridge retrofit in Minnesota), but the reality is far different from clicking your special little red shoes and saying “Go, America, and let’s do this!”.
Nope. You have to be qualified, you have to understand FAR and CFR (go look ’em up) and prevailing wage and certified payroll and Davis-Bacon and how to manage a SureTrak or Primavera P3 CPM schedule and on and on and on. Residential construction is a walk in the park compared to Commercial Class-A, which is pretty easy when compared with public works compliance.
Again, you open your mouth and come up with simplistic and quite ignorant little bon mots that have nothing to do with how Civil/Heavy Civil/Structural public works projects and programs are done in the US. Hope is NOT a plan, nor is invoking that can-do bullshit, which has nothing to do with nothing.
Like I said, educate yourself on the process and the system before opining. You’ll save yourself some significant embarrassment. Too bad Biden and Obama didn’t, huh?
I am all for WAY more public works infrastructure programs and have openly advocated for same on this board for years. Don’t twist my words or meaning. Just because you’re ignorant on how things are built, don’t try to turn this around and make it out to be that I’m somehow un-American. Far from it.
February 14, 2012 at 3:14 PM #738013Guest[quote=Allan from Fallbrook] It doesn’t have shit to do with determination or “can-do” spirit (and believe me, I know about and have both). It also has dick to do with faith in America, of which I have plenty.
[/quote][quote=Allan from Fallbrook] don’t try to turn this around and make it out to be that I’m somehow un-American. Far from it.[/quote]
You know that I’m not always serious, right?
So Morning in America, can do attitude, and faith in America, don’t count for shit when dealing with serious problems? I hear you.
February 14, 2012 at 3:16 PM #738012Guest[quote=Allan from Fallbrook]Pri: Except that I NEVER said a thing about ROI on infrastructure projects. I was making the point that, while the money is undoubtedly well spent, the existing public works system is COMPLETELY INCAPABLE of taking that sort of money in right now and putting it to beneficial use.[/quote]
I’m confused by the above.
Are ‘beneficial use’ and ROI different? Isn’t return a measure of ‘benefit?’ (And how is something that is ‘well spent’ not ‘beneficial?’)
ROI is just a basic, objective mathematical estimate as to whether an endeavor is ‘worth it’ relative to the costs. Of course there are always assumptions and estimates that go into those calculations, but that’s true with any nontrivial financial decision.
It comes down to this: Do the math. If the ROI meets the threshold (and there are no alternatives with better ROI), then it’s a good course of action.
Allan, you seem to be suggesting we are in a state where no public project will have a positive, or acceptable ROI. (Or else you are using some other, unstated, method to evaluate merit.)
February 14, 2012 at 3:31 PM #738016markmax33
Guest[quote=briansd1][quote=Allan from Fallbrook] the existing public works system is COMPLETELY INCAPABLE of taking that sort of money in right now and putting it to beneficial use. [/quote]
That’s a different argument, Allan.
We can reform the public works system.
By beef is with ideological rigid right-wingers who claim that government, any government, is incapable. Not true.[/quote]
Brian – I challenge you to make a list of GOV programs with a possible positive ROI. I will list 10 that are complete wastes that are 10X the size.
-
AuthorPosts
- You must be logged in to reply to this topic.