24 Sep 2012

There’s Really Been a Lot of Real Shocks to the Economy

Economics, Federal Reserve, Inflation, Market Monetarism, Shameless Self-Promotion 46 Comments

The venerable von Pepe sends me a good post by Larry White, who isn’t as sure as many of his colleagues that the world economy today is primarily troubled by inadequate demand:

Scott Sumner told us in September 2009 that “the real problem was nominal,” that is, the recession and its high unemployment were primarily due to an unsatisfied excess demand for money (combined with real effects on debt burdens of nominal income being below its previous path)….The price level had not yet adjusted enough to clear the market of unsold goods corresponding to deficient money balances. This was a reasonable – almost inescapable – diagnosis in 2009, when the price level and real income were both falling.

Market Monetarists who have been celebrating the Fed’s recent announcement of open-ended monetary expansion (“QE3′) seem to believe that Sumner’s 2009 diagnosis still applies. But what is the evidence for believing that there is still, three years later, an unsatisfied excess demand for money? Today (September 2012 over September 2011) real income is growing at around 2% per year, and the price index (GDP deflator) is rising at around 2%. If the evidence for thinking that there is still an unsatisfied excess demand for money is simply that we’re having a weak recovery, then as Eli Dourado has pointed out, this is assuming what needs to be proved….

While saluting Sumner 2009, like Dourado I favor an alternative view of 2012: the weak recovery today has more to do with difficulties of real adjustment. The nominal-problems-only diagnosis ignores real malinvestments during the housing boom that have permanently lowered our potential real GDP path. It also ignores the possibility that the “natural” rate of unemployment has been hiked by the extension of unemployment benefits. And it ignores the depressing effect of increased regime uncertainty.

To prefer 5% to the current 4% nominal GDP growth going forward, and a fortiori to ask for a burst of money creation to get us back to the previous 5% bubble path, is to ask for chronically higher monetary expansion and inflation that will do more harm than good.

This is great stuff, but I think even Larry isn’t doing it justice by simply pointing to “regime uncertainty.”

Let’s go back to my June 2009 article, “Why I Expect Serious Stagflation.” Now my critics can rightfully say that I was wrong about the magnitude of consumer price inflation. But let’s look at why I expected stagnation:

I am not going to be foolish and give annual rates of projected real GDP growth; let me simply summarize my view by saying that the economy will be in the toilet for a decade. (Consult another economics PhD for a precise translation of those terms.)

I really don’t understand how even some free-market analysts on CNBC and the like can talk about the recession ending this year, or who speculate that we’ve finally “hit rock bottom.” If they really believe that, then I wonder why they spend so much of their careers praising free markets and blasting socialism? If all of Bush’s and now Obama’s enormous interventions only yield a few quarters of a moderately bad recession, then what’s all the fuss about?

We have all been desensitized to the federal power grabs, because they have been so sudden and so sweeping. The human mind is able to adapt to any new environment fairly quickly.

Let’s think back just one year ago. Remember when plenty of people were worried about the “unjustified” intrusion of the Federal Reserve into the Bear Stearns takeover? Contrast that to today, when the federal government is literally acquiring outright, common-stock ownership in major banks, where the precise accounting mechanism is a conversion of (TARP) “loans” that it forced some of these banks to take, and which the government (as of this writing) refuses to allow to be paid back.

Or how about this one: in the spring of 2008, the Bush administration pushed through a stimulus tax cut that cost a little more than $150 billion. Do you remember that at the time, this was considered a fantastic sum of money? Analysts on CNBC fretted about the impact on the deficit and interest rates.

Well President Obama’s stimulus package was $787 billion; the expected federal deficit this fiscal year is $1.8 trillion. The CBO projects that the federal debt as a share of the economy will doubleover the next decade, from about 41% last year to 82% by 2019.

Beyond the massive shift of resources to the government, though, are the massive intrusions of federal power into various sectors. The feds have already partially nationalized the banking sector (a process started under that “laissez-faire conservative” George Bush); they have taken over one of the biggest insurers in the world (AIG) and two of the Big Three car companies; and they have taken over Fannie and Freddie and now control more than half of US mortgages.

On top of that, they are pushing through a plan to cap carbon-dioxide emissions — which allows the government to control energy markets, and — oh why not? — they are trying to nationalize health care too. Just to make sure investors around the world stay clear of the American economy, the Obama administration has overturned secured-creditor rights in the Chrysler fiasco and has hired 800 new IRS employees to put the screws to wealthy filers with international business operations.

It is no exaggeration to say that the last time the government expanded this much, this quickly, was under FDR’s New Deal. And we got a decade of misery during that particular experiment. Why would things be different this time?

Let me put it this way: Suppose there had never been a recession. Suppose that for some reason, in the fall of 2008 the Fed took over Fannie Mae, Freddie Mac, and AIG. Then Henry Paulson convinced the free-marketeer George Bush to inject $700 billion into major banks and car companies in order to gain serious leverage over their decisions, even though some of them didn’t want the money. Then a few months later, the incoming president announced a $787 billion package of poorly-designed (from an supply-side POV) tax cuts and pork barrel spending, including a bunch of money going to renewable energy companies that would later go bankrupt.

What would free market economists have said at the time? Would we have said, “Eh, a budget deficit of 10 percent of GDP is a bad idea, but no biggie”?

No, we would have been flipping out, warning of how much damage these obscene and arguably fascist measures would do to the economy. And that would have been with a healthy economy.

So why is it such a shock (no pun intended) that some of us think maybe the US economy isn’t suffering from too much saving in the last few years? Maybe this incredible surge in federal power has something to do with it?

And–if I might be even bolder–maybe all of the crazy things FDR did under the New Deal explain the length of the Great Depression, as opposed to “tight money” (even though the US went off gold in 1933, and we never had a depression as long under the gold standard as we did after we went off it).

46 Responses to “There’s Really Been a Lot of Real Shocks to the Economy”

  1. Adrian Gabriel says:

    Let not the mainstream orthodox statist economists trick you out of reality Prof Murphy. Money supply inflation is still a tax and it is still robbery. One must be skeptical of believing the CPI calculation which is itself also a coercive government tool. See here: http://www.shadowstats.com/alternate_data/inflation-charts

    It’s also difficult to predict what the heck that centra bank will do and their idiotic ways. Who would have expected Bernanke to pay interest on excess reserves. Furthermore, much of the government regulations that are always being passed strongly influence the flow of money into and out of banks. The rigamarole of such regulations is hard to follow, but take a look what TAG did to the deposit ratio by big money holders into banks: http://lfb.org/today/tag-youre-it/

    Overall, it would be smart for anybody to follow and heed yours and Bob Wenzel’s advice. Rothbard had it right, and no matter how much statist mainstream economists want to hide the truth, or overlook it with their unrealistic models and mathematical jargon, reality shows you guys have had the best advice.

  2. Lor d Keynes says:

    Please delete that last comment: something went wrong with the html tags for bold type.

    (1) Why not imagine what would have happened if the Austrian policy advice of doing nothing had been used? We would have had financial system collapse on the scale of the early 1930s and massive depression, instead of a moderate but brief recession.

    When was the last time a large industrial capitalist state tried something akin to Austrian liquidationism? Does Germany 1929-1932 ring any bells for you?

    (2) Many Western states had government intervention on a scale far greater than the US today from 1945-1970s: and these economies boomed. In fact, it was the best period every seen in recent history terms of real per capita GDP growth:

    Average OECD real per capita GDP growth rate estimates and data for various periods over the past three centuries:

    1700–1820 – 0.2%
    1820–1913 – 1.2%
    1919–1940 – 1.9%
    1950–1973 – 4.9%
    1973–1990 – 2.5%
    (Davidson, P. 1999. “Global Employment and Open Economy Macroeconomics,” in J. Deprez and J. T. Harvey (eds), Foundations of International Economics: Post Keynesian Perspectives, Routledge, London and New York. p. 22).

    (3) “And–if I might be even bolder–maybe all of the crazy things FDR did under the New Deal explain the length of the Great Depression, ”

    When FDR came into office the depression – meaning real output collapse – came to an end and significant real output growth and falling unemployment occurred under FDR until he cut fiscal policy in 1937.

    Real US Per Capita GDP
    (in 1990 international Geary-Khamis dollars)
    Year | GDP | Growth rate
    1929 | 6899 | 5.02%
    1930 | 6213 | -9.94%
    1931 | 5691 | -8.40%
    1932 | 4908 | -13.75%
    1933 | 4777 | -2.66%
    1934 | 5114 | 7.05%
    1935 | 5467 | 6.90%
    1936 | 6204 | 13.48%
    1937 | 6430 | 3.64%
    1938 | 6126 | -4.72%
    1939 | 6561 | 7.10%

    By 1937, US real per capita GDP was on the verge of reaching its 1929 level: then the austerity idiots convinced FDR to cut and look what happened.

    (4) “even though the US went off gold in 1933, and we never had a depression as long under the gold standard as we did after we went off “

    And yet Davis (Davis, J. H. 2006. “An Improved Annual Chronology of U.S. Business Cycles since the 1790s,” Journal of Economic History 66.1: 106) finds that the US had a recession from 1873 to 1875 lasting just less than 3 years – almost as long as the Great Depression.

    In the 1890s, the US suffered a significant double dip recession:

    Real US Per Capita GDP
    Year | GDP | Growth rate
    1892 | 3728 | 7.52%
    1893 | 3478 | -6.70%
    1894 | 3314 | -4.71%
    1895 | 3644 | 9.95%
    1896 | 3504 | -3.84%
    1897 | 3769 | 7.56%
    1898 | 3780 | 0.29%

    Then despite technical growth after 1895 unemployment remained high right down to 1898:
    Year | Unemployment Rate
    1892 | 4.33%
    1893 | 5.51%
    1894 | 7.73%
    1895 | 6.46%
    1896 | 8.19%
    1897 | 7.54%
    1898 | 8.01%
    1899 | 6.20%

    Doesn’t look like the US gold standard allowed rapid recovery from recession to me. The alleged superiority of this era is mostly a fantasy in the minds of Austrians and neoclassicals.

    • marris says:

      (1) I’m not sure Bob is even saying that we should be living in a first-best world of no Fed easing. He’s saying that the federal government’s actions during this period are more about power siezing than about easing.

      (2) Yes, US economic growth from 1950- early 1970s was high, But why was it high? We basically had a lot *fewer* regulations than we have now (minus banking). We also got an export bump rebuilding Europe. Real variable targeting basically died out because it did not seem to work during the 1970s stagflation.

      (3) Whatever FDR’s claim to helping boost economic activity, I don’t think there are many economic arguments that his regulations helped, rather than hinder economic growth. So maybe government spending is not too terrible, but dumb government laws are really bad. It’s the dumb laws that Bob is really attacking in this post.

      (4) You’re citing a recession that was shorter than the Great Depression? Isn’t that Bob’s point? BTW, those 1800s dips don’t just look good in terms of the 1930s. They’re looking pretty good in today’s economy, too.

      • Lord Keynes says:

        “So maybe government spending is not too terrible, but dumb government laws are really bad. “

        So fiscal stimulus works? Quite an admission.

        • Richard Moss says:

          I don’t think stating “government spending is not too terrible” is the same thing as saying that it works.

          marris could just mean that it is not as bad as dumb laws, but still bad.

          • Silas Barta says:

            You beat me to it. Though I shouldn’t be surprised at that kind of thing anymore. We see people like Daniel_Kuehn and Sumner using reasoning like, “Well, our opponents said NGDP targeting isn’t *as* asinine as all the other stuff the Fed wants to do, so they’re on our side now …”

    • Matt Tanous says:

      “When was the last time a large industrial capitalist state tried something akin to Austrian liquidationism? Does Germany 1929-1932 ring any bells for you?”

      Liquidation for only a couple years could not rescue the Germany economy, because there was only a veneer of economy in the first place. It was supported entirely by American credit, and it was the collapse of that credit – and the calling in of the debt – that sunk Germany.

      “Many Western states had government intervention on a scale far greater than the US today from 1945-1970s”

      By what measure?

      “it was the best period every seen in recent history terms of real per capita GDP growth”

      Government is growing, and so “real” (according to government stats) GDP – which includes government spending, automatically assumed to be productive – is growing as well? HOW ‘BOUT THAT?! GDP is a worthless stat for precisely this reason.

      “When FDR came into office the depression – meaning real output collapse – came to an end and significant real output growth and falling unemployment occurred under FDR until he cut fiscal policy in 1937.”

      Going off gold in 1933 allowed the Fed to create another inflationary bubble within the Depression that collapsed when they started to “tighten” money in accordance with current theory about recovery… in 1936-1937. In July 1936, the Federal Reserve Board announced a change in monetary policy: reserve requirements would be hiked as of the following August. In January 1937, the Fed announced another hike in reserve requirements to become effective in March and May 1937.

      The period of the 1930s, with the crash in 1937, is just another example of malinvestment during an inflationary boom – masked by how bad things were, the malinvestments appeared to be normal recovery. In fact, they were just like the “recovery” of the housing bubble “getting us out of” the tech bubble crash.

      “finds that the US had a recession from 1873 to 1875 lasting just less than 3 years – almost as long as the Great Depression.”

      3 years is “almost as long” as the period from 1929 through 1945? Really?

      • Lord Keynes says:

        “3 years is “almost as long” as the period from 1929 through 1945? Really?”

        The depression did not last from 1929-1945.
        Your assertion is just the sort of nonsense debunked here:


        A “depression” means a severe period of real output collapse (10% or more by a definition used by some economists).

        America’s Great Depression lasted from 1929-1933.

        From 1933-1937 there was real output growth and falling unemployment.

        If you want to define “depression” as period of real output collapse and its aftermath with high unemployment, I can prove that most of the 1870s and 1890s were a depression too.

        • Mike T says:

          Was 1946 a Depression? GDP as a % fell by double-digits.

          • Lord Keynes says:

            The real GDP figures:

            Year | GDP* | Growth Rate
            1944 | $2,035,200 | 8.07%
            1945 | $2,012,400 | -1.12%
            1946 | $1,792,200 | -10.9%
            1947 | $1,776,100 | -0.89%

            1948 | $1,854,200 | 4.39%
            1949 | $1,844,700 | -0.51%
            1950 | $2,006,000 | 8.74%
            * Millions of 2005 dollars

            1945-1947 was a technical depression, yes: but a sui generis one.

            This was the dismantling of the wartime command economy and conversion back to
            a peacetime consumer economy.

            • Richie says:

              You are great with numbers, but nothing else.

            • Dean T. Sandin says:

              So GDP spikes caused by an increase in government spending are “real” but GDP cliffs caused by a decrease in government spending are “sui generis”?

              When people refer to The Great Depression, they aren’t talking about a 4 year period. You’re trying to rewrite history using arbitrary definitions. Or maybe we should believe our grandparents are a bunch of whiners.

            • Tel says:

              This was the dismantling of the wartime command economy and conversion back to a peacetime consumer economy.

              In which case the GDP aggregates are incomparable because they are not measuring the same thing, so any yearly “growth rate” figure is meaningless.

            • Major_Freedom says:

              It is not surprising that GDP figures would fall after the government stops spending as much and thus stops redirecting production to its interests as much, such that what counts towards GDP (government spending) drops.

              Everything takes time.

          • Mike T says:


            “1945-1947 was a technical depression, yes: but a sui generis one.”

            >> In ’46, domestic private investment finally broke ’29 levels for the first time. Unemployment was under 4% despite adding 10 million people into the civilian workforce. And I believe it was the single greatest year of private production up to that point. All while total federal spending was slashed by 2/3. And yet, technically this was a “depression.”

            So, this kind of gets to the larger point. You present a wealth of macroeconomic statistical data, but what real conclusions can you draw? In other words, is there a recession/depression in US history that you would not consider sui generis? Aren’t they all unique?

            “From 1933-1937 there was real output growth and falling unemployment.”
            >> So was 2003-2006, but we all know how that turned out. And I’m not exactly sure there are too many anecdotal stories during the mid/late 30’s that suggest times were good or even at the very least getting better. Unemployment was still high and many were either part-timers or had dropped out altogether. Industrial production in ’36 I believe was still down by about 1/4 of what it was in ’29.

        • Matt Tanous says:

          “From 1933-1937 there was real output growth and falling unemployment.”

          Assuming, of course, that government spending is automatically productive, and employment is all that matters. In other words, assuming that socialism is fantastic. I wonder why, despite the incredibly low unemployment and high real GDP figures, the USSR still collapsed?

        • Matt Tanous says:

          I notice also that you ignored entirely the points about the Germany economy, the criticism of the GDP metric as opposed to a private production metric, and the indicators of the 1933-37 period being a bubble within the bust. Are you conceding those points?

          • Lord Keynes says:

            Your points:

            (1) “Liquidation for only a couple years could not rescue the Germany economy, because there was only a veneer of economy in the first place.”

            Germany on 1929 was the largest and most advanced economy in Europe. It was a manufacturing powerhouse.

            Only a first class ignoramus could write or think that Germany was “only a veneer of economy in the first place” – in 1929.

            As for American credit, the Germans could have rescued their economy at any time from 1930 to 1932 by both monetary and fiscal interventions, instead of wage and price deflation and austerity.

            (2) On government and GDP: the 1950-1970s saw government spending as a percentage of GDP basically stable.

            The GDP figures show significant private sector output growth, despite your ignorant statements.

            (3) Regarding 1933-1937, the ABCT is a false, flawed and worthless theory, so your explanation is also worthless:


            • Major_Freedom says:

              You haven’t shown how ABCT is a “false, flawed and worthless” theory.

              You don’t even understand it, so your claim is also worthless.

    • Lee Waaks says:


      I think the data you presented is interesting and possibly suggestive. However, absent correct economic theory, your data is vulnerable to the post hoc, ergo propter hoc fallacy. As to your theories, I think the multiplier is false; you cannot generate economic growth by destroying value or creating very little value. For example, a friend of mine works at a school that was built during the Great Depression under the auspices of the WPA (there is a plaque near the gym), but I doubt that a school was what folks truly wanted in the midst of a depression. If the construction workers didn’t have value to trade for value, all they really had was pieces of paper. Yes, it’s true you can hand out pieces of paper to generate spending, but somebody is getting ripped off down the line in the short run if they are not really getting any value. There is something strange about a theory that is based on the idea of creating something from almost nothing. My friend’s school, at the time it was built, was basically a tiny pyramid for the local Pharoah. Yes, the school exists now and, therefore, we have the benefit of what was built in the 30s, but I find the value of public educaton to be very dubious. For a more detailed criticism of the multiplier, see James Ahiakpor, “The Myth of the Keynesian Multiplier”.

    • Adrian Gabriel says:

      Lord Keynes, you really are a pathetic goon for government manipulated statistics. A market correction during the Great Depression would have prevented the high unemployment that stayed high during FDR’s government initiatives. Do you see the correlation of government stimulus and how it stalls recovery, take a look at today and the high unemployment. The only recovery ever created by government is a false artificial one. It wasn’t the war that saved the economy, but receding government intervention that did it. Read Murphy’s article on this very topic:


      It’s important you look at the money supply during the Depression and the growth that amounted, Rothbard goes into great detail in his book America’s Great Depression.


      You could even read Murphy’s book on the Austrian critique of the Great Depression: http://en.wikipedia.org/wiki/The_Politically_Incorrect_Guide_to_Capitalism

      Every country that lets the economy be sees a natural recovery quicker than any government policy could have ever given. See Murphy on the 20-12 Depression: http://www.thefreemanonline.org/features/the-depression-youve-never-heard-of-1920-1921/

      You have a lot to learn Lord Keynes, you are barking out bs that shows how you think the capital structure is defined with a big K in the Cobb-Douglas function. Austrians give more credit to the free market than that type of statist central planning you espouse.

      • Richard Moss says:

        Having called LK a goon and a barker of bs, do you think he will now check out your suggested reading list?

        • Lord Keynes says:

          (1) Unemployment fell from 25% to just less than 10% under FDR. Only in the mad world of Austrianism does that not constitute a significant fall.

          (2) The ABCT is a false, flawed and worthless theory:


          (3) Murphy and Rothbard’s interpretation of the Great Depression is wrong:


          (4) “Every country that lets the economy be sees a natural recovery quicker than any government policy could have ever given.”

          Really? So Germany 1930-1932 saw a quick recovery did it? Tell us another fable.

          • Bob Roddis says:

            I’m not sure it’s laughable that LK does not understand economic calculation because it is actually quite sad. Since the ABCT (and almost everything Austrian) is based upon the concepts of economic calculation and miscalculation which LK cannot comprehend, LK is not in a position to state “The ABCT is a false, flawed and worthless theory”

            • Major_Freedom says:

              I’m still laughing…

          • Major_Freedom says:

            (1) Public works employment is not a true recovery.

            (2) You haven’t shown how the ABCT is “false, flawed and worthless.” None of your posts show an understanding of it.

            (3) Just because Hoover’s version of big time spender is not to your liking, it doesn’t mean he wasn’t a big time spender, and it doesn’t mean he was an austerity caricature that cult Keynesians claim him to be.

            (4) Germany 1929-1932 was not a free market recovery.

            • Bob Roddis says:

              Public works employment demonstrates a complete failure to have a true recovery. In a true recovery, the market would generate its own employment opportunities.

          • Adrian Gabriel says:

            Lord Keynes, where are you getting you statistics buddy? Unemployment was very hugh during the despression, and got much worse after FDR implemented his policies. Read here:


            Furthermore, you seem to not understand that Austrians are not blaming a certain sector of the economy for credit expansion, but the very system of fractional reserve banking. A distortion of the money supply will cause the entrepreneur to be misled and an oversupply in certain sectors will ensure. You are very numb when it comes to capital theory. Take a look at this graph and tell me where the heck government fits in:


            This figure is a basic tenet to Austrian Capital Theory and the movement of money from 1st order to consumer goods. Where the heck are you getting all your fantasy ideas of blaming banks and things. Rothbard and Mises make it clear that a distortion of the money supply is what confuses the entrepreneur and create malinvestment. This can come from the government’s interventions or fractional reserve banking and the central banking. Read on young statist, you are looking very foolish.

  3. Maurizio says:

    maybe the US economy isn’t suffering from too much saving in the last few years? Maybe this incredible surge in federal power has something to do with it?

    May I ask you how you explain the crisis in Europe then? Was there also a “surge of federal power” ? Shouldn’t a good explanation for the crisis apply to Europe as well?

    • skylien says:

      It’s a bit different in Europe. However there is a huge surge of federal power as well in Europe.

      Look at that chart and the article:

      • Tel says:

        I checked your chart against the chart I linked to below, and the idea is remarkably similar. I wonder who thought of it first?

        • skylien says:

          I don’t know who came up with this first, but I hear this story repeatedly since a few years. I guess it is just obvious?

    • Tel says:

      The Eurozone crisis is about markets behaving like markets again. Since 1999, when the euro was launched, markets have systematically mispriced sovereign debt by assuming that all Eurozone countries were equally credit worthy. Markets thus lost their self-corrective character: when countries borrow heavily, they are punished through higher bond yields. But when all countries borrow at the same rate, there is no penalty for profligacy. Our current crisis is a result of markets trying to price debt properly again.


      I think Nick got it right on this one. The surge of power in Europe happened while no one was looking and now the markets are battling to assert realistic prices again. When enough market momentum insists that prices must move then you either shrug and go with it, or you bust yourself holding back the tide, but either way it moves.

      • skylien says:

        I disagree though that market pricing in the year 2000 was wrong. Markets rightly assumed that in case of troubles politicians will dump any non-bailout contract and will bail each other out, at least the banks who bought the stuff in the first place, and dumping any loss onto the taxpayers. That is exactly what is happening. So to buy in 1998-2001 a ten year Greek bond was a great investment.

        The only real country which is known for tight money policies that could spoil this is Germany, which can be outvoted easily by all other countries in trouble…

        Of course the 2008 crisis came as a shock nevertheless for bond buyers. Still the initial reaction of the market to the introduction to the EUR seems to be perfectly reasonable. They did what they always do: Front run political stupidity and contemporary central bank behavior.

        • skylien says:

          *…introduction of the EUR..*

        • Tel says:

          I thought Greece had already defaulted on private holders of sovereign debt. They ones they can afford to bully at any rate. It’s only time before they default on the rest IMHO. Even the tax collectors are on strike now.

          • skylien says:

            Right, this is the reason why I said that in 2000 it was demonstrably a right assessment, even to the point of March 2002 (10 years before the pseudo “default”; I say pseudo because the debt for Greece was infact increased not decreased with this “default”, they wrote off 100 billion EUR in exchange of 130 billion of new debt owned by EU tax-payers now).
            I have not said it was smart to do it in 2006 or 2007 for that matter. Of course the crisis (especially severety and speed) in Greece came quite as a suprise for this byuers.

            “How did you go bankrupt?”
            Two ways. Gradually, then suddenly.”

            • Tel says:

              Well if you are going to put it like that, then someone how bought in 2006 or 2007 was also pricing it correctly, but only if they also sold those on to another sucker a few years later.

              By the same principle, anyone who gets out at the right time must have priced it correctly, because they made it out. Thus the market always prices everything correctly.

              Perhaps it would be better to say, that the bond market price was not a true indicator of Greek default risk. Would that make thing clearer? Of course the reason it was not a true indicator was that information had been systematically hidden. No one really knew what the crash situation would look like, nor when it would hit. No one knows right now how to unwind this, given that Greece is further than ever from being able to balance a budget.

              • skylien says:

                It depends. I would say someone who bought only to sell it to another sucker (being aware that this was unsustainable, but just taking advantage of short term value changes of the bonds) was correct, absolutely.

                For someone with a buy and hold strategy of course not. So no it is not always correct what the market is pricing. A bond flipper who is aware of the unsustainability could not abuse this if the market pricing overall wasn’t wrong.

                Yet also it should not come as a surprise if markets misprice things if they (at least large players) can count on being bailed out, don’t you think? So it might even make sense for buy and hold guy.

                Today markets don’t assert the credit worthiness and risk profile solely due to fundamentals, of course they factor in political intervention in case of possible losses. That is what they learned the last 30 years. Dump risk and losses on the public, because the public is even “willing” to take it.

                A bail out and ZIRP mentality leads necessarily to markets that misprice creditworthiness and risk.

              • skylien says:

                The best part of it is that since markets obviously start to misprice things seemingly intentionally, you can put the blame on them to argue for even more intervention. How convenient.

                You cannot expect that the market doesn’t react and adapt to political intervention. Yet this is exactly what the macro models assume as Nick Rowe told us (No financial markets in them).

                I wasn’t exaggerating when I wrote that I am horrified to hear that.

            • skylien says:

              Also I might add. Greece would probably have become bankrupt already in 2009 if politicians and the ECB had not intervened. And all along they assured us that Greece will never default! Only mid 2011 they started to speak about a haircut for private investors, starting with 30% soon gone up to 50%, in March 2012 it were 80%…

              What I am wondering is who really suffered this haircut? Who really made a loss with it? Greek pension funds and their customers for sure, but any customers/investors outside of Greece? Look at this link which shows exposure to Greek debt mid 2011 per country and bank.


              Are there actual customers of German, French or Belgium banks that really made a loss? Or is this private haircut that those banks suffered already (again) transferred to the public the taxpayer with policies like LTRO 1 and 2 ?

              So I am not even sure if it was such a bad idea to buy Greek debt in 2006 for banks like Dexia, Commerz bank and BPCE. And I am not sure how private this default (except for Greeks) really was. I would appreciate any answer that can bring some light into this issue.

  4. Anon says:

    Utter crazy talk. “Does not match the evidence” would be a good summary — even your statement about the gold standard is *wrong* (google “Long Depression” if you wanna know).

    Perhaps the fact that your inflation prediction was completely wrong should have led you to revise your model of how the economy works. It clearly didn’t. You still have time to get a clue.

    Hint: the economy collapsed because of rampant banking fraud (read Bill Black) which was enabled by deregulation (Gramm-Leach-Billey). The cause and effect can be traced directly, step for step. These problems *haven’t been fixed at all*. So yeah, there were some real shocks, but you’ve got the *wrong ones*. In fact, the exact opposite of the right ones.

    • marris says:

      > The cause and effect can be traced directly, step for step.

      Aren’t you exaggerating just a tiny bit? Where is your flow chart?

    • Mike T says:

      “even your statement about the gold standard is *wrong* (google “Long Depression” if you wanna know).”

      >> What is wrong about his statement regarding the gold standard? The period where the US was on the classical gold standard was from 1879-1913. The so-called “Long Depression” occurred during the early/mid 1870’s and Rothbard debunks this: http://archive.mises.org/13120/krugman-and-the-long-depression-myth/

      “the economy collapsed because of rampant banking fraud (read Bill Black) which was enabled by deregulation (Gramm-Leach-Billey). The cause and effect can be traced directly, step for step.”

      >> GLB only repealed 2 of 34 provisions in Glass-Steagall (I believe). You’re probably referring to the one provision preventing commercial and investment banks from operating under a single holding company that was repealed. Ok, then how come all the institutions that failed or were on the verge of failure were not one of these institutions? In fact, those banks that were capitalized best to weather the storm and either bought or were negotiating to buy one or more of the failing institutions were both commercial/investment banks (JP, BofA, Wells Fargo, Citi)? I think we’d be better off with more boutique style banking institutions, but I think this whole GLB dereg charge is a bit overblown. Not to mention, commercial banks were always allowed to invest/trade securities (including derivatives), but were just not able to underwrite/deal them. I would think the TBTF precedent established with Long Term Capital Management played a bigger role in the Wall St Casino of the early/mid 00’s in combination with Fed and government policy helping steer excessive cheap capital into housing.

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