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What Economists Still Don’t Get About the 2008 Crisis

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Re: What Economists Still Don’t Get About the 2008 Crisis

#211

Post by pdonis »

adventured wrote: post #187
pdonis wrote: post #63

Earlier quoted context omitted.

> at the same time banks were forced to significantly deleverage, so while the fed was pouring money into the systems, banks were effectively pouring money out of the system. That's not an "argument", it's an observation. Almost all of the QE "new money" was never used by the banks to make loans; it just sat in their accounts at the Fed. Why? Because the banks weren't fools: they knew they had way too little reserves…

> Or money printed to pay ordinary people whose retirement savings had collapsed through no fault of their own. And yes, that would have caused inflation We did exactly that. The Fed orchestrated the greatest ordinary person bailout the world has ever seen: it reinflated the US housing market and salvaged the net worth of the entire middle class in the process. It did cause vast inflation. Just look at the cost of a…

> The Fed orchestrated the greatest ordinary person bailout the world has ever seen: it reinflated the US housing market and salvaged the net worth of the entire middle class in the process.

How the the Fed do this? Certainly not by QE, which did none of these things.

> Just look at the cost of a house in 2012 vs 2018

What did the Fed do during this time? Most of the money printed by QE happened from 2009-2013, and QE was shut down completely in October 2014.

Re: What Economists Still Don’t Get About the 2008 Crisis

#212

Post by wavefunction »

sonnyblarney wrote: post #124
cm2187 wrote: post #52

To me the biggest mystery about the 2008 crisis is why so much QE has resulted in so little inflation. The only convincing arguments I have heard so far is that: 1. at the same time banks were forced to significantly deleverage, so while the fed was pouring money into the systems, banks were effectively pouring money out of the system. 2. inflation happened but it was all concentrated into financial assets, real esta…

" why so much QE has resulted in so little inflation" The most common theory is that this loose equity sloshing around has gone into stocks and bonds. QE is keeping the stock market up.

Combined with QE were stealth reductions in product quantities for the same price, i.e. the "price remained the same for a package of widgets" and yet there were less widgets per package

some of us were paying attention to the shell game

Re: What Economists Still Don’t Get About the 2008 Crisis

#213

Post by Gustomaximus »

nextweek2 wrote: post #152
deadmetheny wrote: post #97

Earlier quoted context omitted.

Reminds me of an amusing story I read somewhere a while back: >It is the month of August; a resort town sits next to the shores of a lake. It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit. >Suddenly, a rich tourist comes to town. He enters the only hotel, lays a 100 dollar bill on the reception counter, and goes to inspect the rooms upst…

It's not that clever, they might be out of debt but they are also out of creditors. Nobody got richer or poorer just balances were settled. That's kind of the point of money.

> they might be out of debt but they are also out of creditors

Or now have access to credit again. Given they were each other's creditors they may not have been willing to extend credit past $100. Now being paid they are likely to offer that same credit again as Thier confidence of being repaid is stenghened.

So this example also shows the requirement for confidence in markets whether the fundamentals support it or not. If one link refused credit it could snowball through the town grinding the flow to a halt.

And to take this full circle, this keeping confidence and flow was the QE program.

Re: What Economists Still Don’t Get About the 2008 Crisis

#214

Post by [deleted] »

barking wrote: post #99
conanbatt wrote: post #39

Earlier quoted context omitted.

This is something that will not work forever. If 100% of investors were passive, they would get fleeced. Passive investing works thanks to active investing. Funny huh?

I think passive investing works, on average, because, on average, companies generate profits and increase in value over time. Active investing loses because transactions have costs in terms of management fees, commission and spread and is how stockbrokers make their money.

[deleted]

Re: What Economists Still Don’t Get About the 2008 Crisis

#215

Post by conanbatt »

barking wrote: post #99
conanbatt wrote: post #39

Earlier quoted context omitted.

This is something that will not work forever. If 100% of investors were passive, they would get fleeced. Passive investing works thanks to active investing. Funny huh?

I think passive investing works, on average, because, on average, companies generate profits and increase in value over time. Active investing loses because transactions have costs in terms of management fees, commission and spread and is how stockbrokers make their money.

If 100% of the stocks were passive invested, then the game for banks would be to list companies as fast as possible, with as high capitalization possible. Who cares if its overvalued? nobody is looking. As soon as a stock is publicly listed it gets bought.

IT would not work. Not poorly, it just wouldn't work at all. This tells me that there is a balance on how much active/passive investment can there be, and at some point they will be balance by some criteria.

Re: What Economists Still Don’t Get About the 2008 Crisis

#216

Post by jganetsk »

cm2187 wrote: post #52

To me the biggest mystery about the 2008 crisis is why so much QE has resulted in so little inflation. The only convincing arguments I have heard so far is that: 1. at the same time banks were forced to significantly deleverage, so while the fed was pouring money into the systems, banks were effectively pouring money out of the system. 2. inflation happened but it was all concentrated into financial assets, real esta…

Great question. The answer is Modern Money Theory.

"Monetary policy doesn’t work. What does work are fiscal adjustments" http://antonisoycasals.blogspot.com/2015/10/monetary-policy-...

The truth is that monetary policy does little. QE just swapped out high-interest treasury securities for low-interest reserves on private bank balance sheets. This flood of reserves drove interest rates so far down that the Fed had to start paying interest-on-reserves just to maintain a floor.

It didn't do much else. The idea that banks are reserve constrained is a widely held misconception. They are not. If anything, they are capital constrained. Adding to the supply of reserves then does not increase lending.

Another widely held misconception is that interest rates and inflation are inversely correlated. They are not. Interest is the price of money, and the price of money impacts the prices of everything else. Lowering interest rates decreases inflation, not increases. This is called neo-Fisherism.

Fiscal policy is what does work. Increase government spending enough and you will get inflation. This should be entirely noncontroversial.

Re: What Economists Still Don’t Get About the 2008 Crisis

#217

Post by captain_perl »

wuliwong wrote: post #159
jaxtellerSoA wrote: post #87

Earlier quoted context omitted.

> To me the biggest mystery about the 2008 crisis is why so much QE has resulted in so little inflation. Inflation doesn't work as simply as you might expect. What people believe is actually a big piece of the puzzle. As proof of this look at the Paul Volcker interest rate hikes, that squashed run-away inflation. While his hikes did eventually work, in the short term they did nothing to combat inflation. Why? Because…

Why does it require people to understand what is happening to increase or reduce price inflation?

Because the economy is people's demand.

Re: What Economists Still Don’t Get About the 2008 Crisis

#218

Post by face_mcgace »

cm2187 wrote: post #52

To me the biggest mystery about the 2008 crisis is why so much QE has resulted in so little inflation. The only convincing arguments I have heard so far is that: 1. at the same time banks were forced to significantly deleverage, so while the fed was pouring money into the systems, banks were effectively pouring money out of the system. 2. inflation happened but it was all concentrated into financial assets, real esta…

Do you have a reference for point 2 that you make? I find that quite fascinating.

Re: What Economists Still Don’t Get About the 2008 Crisis

#219

Post by _Tev »

nickik wrote: post #122
mrob wrote: post #47

Earlier quoted context omitted.

>in some extraordinary cases it would actually make sense to dig holes and fill them How is paying people to dig and fill holes better than just giving them money without requiring the useless activity? Even if "dignity of work" is a real thing, there's no way doing useless work could provide it.

I just wane explain what Keynes was thinking, even while I don't agree. For Keynes it was all about overall spending, Aggregate Demand. If overall Aggregate Demand goes down then you have recession. Then in some cases monetary policy can not raise AD anymore because of the 'liquidity trap' (interest rate at zero). In that case the only way to get out of the AD whole is for government to spend more money that they hav…

Good summary of the argument. I'll just note that this:

> The reason why Keynes was wrong is that the 'liquidity trap' is not a real thing. Second, even if it were real, the government fiscal policy would be unable by itself to raise AD and keep it raised.

... is something many people would disagree with, especially as you provided no data to back it up.

It's of course topic for longer discussion, I am just pointing out where is the disagreement.

Re: What Economists Still Don’t Get About the 2008 Crisis

#220

Post by criddell »

marnett wrote: post #109
criddell wrote: post #41

Earlier quoted context omitted.

> "House prices have fallen, and that's bad for our voters. I hear them, and he doesn't." There are a few things that are absolutely essential to life: housing, clothing, food are among the most basic. If the price of clothing or food increased at the same rate as houusing, people would be rioting.

oddly enough we aren't told that food or clothing are investments.

A house is an investment, housing is an expense. Even when you own your house, the cost of housing can go up.
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