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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

#241

Post by pas »

pdonis wrote: post #231
sjg007 wrote: post #226

Earlier quoted context omitted.

Which frees up other money for other things.

What other money?

It allowed them to create more money. Fractional reserve requirement is something like 1/20, no? But usually the capital (bank company equity) requirements (like Basel III) were the harder to meet, so who knows how much new money banks created. (Actually it can be easily looked up, and not much, because inflation did not jump.)

Usually QE allowed banks to roll over mark-to-market assets that turned into garbage into sane cash to satisfy solvency and liquidity requirements. And of course this led to price stability.

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

#242

Post by pas »

jganetsk wrote: post #216
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…

> Lowering interest rates decreases inflation, not increases.

This is very much context dependent. But since there's enough brave money chasing after even marginally sane investment opportunities, it's not surprising that the interest rate level is not effective.

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

#243

Post by pas »

Symmetry wrote: post #132
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…

I think that the Fed's Interest on Reserves (IOR) policy explains the situation pretty well. Back in 2008 when everything was collapsing the most recent inflation data the Fed had showed that inflation was running above target due to oil prices. This wasn't true, inflation had actually nose-dived, but it takes months for the Fed to process all the numbers to figure out what the inflation rate was. In order to inject…

Could you link the corrected inflation stats?

Also, link something about the Fed going before Congress with regards to the interest on reserves? (I think the Fed can do this without Congressional approval. It always had this power.)

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

#244

Post by pas »

marcosdumay wrote: post #194
repsilat wrote: post #174

Earlier quoted context omitted.

In economics terms I guess this means, - Economists say "MV = PQ", and QE adds to "M", so shouldn't "P" or "Q" go up? - But the marginal dollar of added "M" had ~zero "V", so that didn't happen. ("I guess" because I've never taken any macroeconomics and can't pretend to understand it...)

Money parked in bounds has zero V. On stocks the V is nonzero, but it will depend on how much of it actually leaves the exchange, instead of just passing from hand to hand there.

Money parked in bonds?

When a bond is initially offered someone pays money for it, and the offering party gets the cash, and buys things with it.

That equation is independent of the form of money. Bonds can switch hands easily. Of course, if it turns out that the bond is junk, then it becomes hard to sell, so that slows down V indeed. (Which means the economy takes a moment to think when a lot of things turn out to be shit instead of gold. Credit becomes thin, etc.)

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

#245

Post by pas »

jaxtellerSoA wrote: post #87
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…

> 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…

Also, QE helped the banks, and banks were not started to offer lower interest rate loans to consumers. (Nor have they decreased other costs of accessing money - such as credit card fees etc.) So no inflation happened.

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

#246

Post by pas »

dnautics wrote: post #199
daniel-cussen wrote: post #54

Earlier quoted context omitted.

To me, the problem with Debt is that while it indicts compound interest as harshly as it deserves, for all its hidden downstream consequences, it does not propose a real alternative to it. He proposes just not paying debts, but this means nobody accumulates capital, even literal seeds. It is as though he proposed the alternative to sugar be starvation. While those are both equally invalid choices, and are arguably th…

to be fair (and possibly to graber's discredit for not identifying this), we kind of do have a rolling debt jubilee in that events fall off your credit rating every seven years and you can declare bankruptcy. Also, a lot of the systemic problem with our debt system (like incrementally stealing value from the labor class) derive from its centralized nature; it's been about 150 or so years since decentralized debt econ…

How does the debt system steal from the labor class?

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

#247

Post by pdonis »

pas wrote: post #240
pdonis wrote: post #211

Earlier quoted context omitted.

> 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 Q…

QE bought a lot of long term junk-ish bonds (full of "AAA housing"), no? QE was the bridge between the two sides of the chasm, hence it's not visible on the graph. We see a rapid fall, a smooth bottom and a nice rise, but it could have been simply a big crash at the bottom and nothing for a decade.

> QE bought a lot of long term junk-ish bonds (full of "AAA housing"), no?

No. QE bought T-bills in order to exchange them for increases in the banks' account balances at the Fed.

TARP funds bought junk-ish bonds back in 2008-2009, but all that did was make banks and financial institutions not go bankrupt from being forced to make subprime mortgages for several decades due to the federal government's policy to "encourage" home ownership.

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