Using More Government Intervention to Undo Effects of Previous Round
In their conversation regarding income inequality, investing, Austrian economics, and other sundry topics, former business partners Nassim Taleb and Mark Spitznagel had this good exchange:
Nassim Taleb: Mark, your book [The Dao of Capital–RPM] is the only place that understands crashes as natural equalizers. In the context of today’s raging debates on inequality, do you believe that the natural mechanism of bringing equality — or, at the least, the weakening of the privileged — is via crashes?
Mark Spitznagel: …[O]ne can absolutely say logically and empirically that asset-market crashes diminish inequality. They are a natural mechanism for this, and a cathartic response to central banks’ manipulation of interest rates and resulting asset-market inflation, as well as other government bailouts, that so amplify inequality in the first place. So crashes are capitalism’s homeostatic mechanism at work to right a distorted system. We are in this ridiculous situation where utopian government policies meant to lessen inequality are a reaction to the consequences of other government policies — a round trip of market distortion. After we’ve been run over by a car, the assumed best treatment is to back the car over us again.
Spitznagel hits the nail on the head. The alleged experts in academia and the central banks around the world assure us that left to its own devices, capitalism would lead to unconscionable inequality as well as intolerable boom-bust cycles. Yet it is central banks themselves that fuel massive asset bubbles–which accrue as capital gains in the pockets of the elites–that eventually burst and cause a depression.
Then, when at least normal market forces would punish the most reckless of the speculators, these same experts assure us that massive bailouts are necessary, lest “laissez-faire capitalism” implode from its own contradictions.
Then, after the central bank and central government use inflation and taxpayer money to bail out the fat cat investment banks (while letting homeowners go under), we are lectured by the very same experts on how unfair the whole system is, which concentrates gains in the hands of the 1%. This is why, we are told, we need a globally integrated tax on wealth, so that the poor governments can keep tabs on these insidious capitalists and check their insatiable greed.
Points for using “homeostatic,” which has nothing to do with shag carpets.
Yet it is central banks themselves that fuel massive asset bubbles–which accrue as capital gains in the pockets of the elites–that eventually burst and cause a depression.
Running Out of Bubbles by Paul Krugman
After all, the Fed’s ability to manage the economy mainly comes from its ability to create booms and busts in the housing market.
Obviously Krugman was joking with that comment. /s
All market corrections benefit/detriment all economic actors equally. However, I do not think that in an arena of the business cycle and monopoly control over money, that this still represents a truly equalizing effect. That is the whole point of a monopoly in the first place …
Let me make one correction. Market corrections most prominently affect those who are involved in such markets. But sure, if the actual medium of exchange is a monopoly, then those most associated with such monopoly will ultimately benefit at the detriment of those not involved in such a system.
Another example would be enacting strict legislation (Dodd-Frank) to increase lending standards and then to push Freddie/Fanny into lowering lending standards to correct the lack of lending.
That was not directed at you , Joseph. I was responding to the article in general.
Yeah, it’s hard to lose when you have a printing press, I’ll grant you that one. In theory though, the Fed is only holding a temporary position which it will unwind at some stage.
When you consider that every market has buyers and sellers, a big fall in price is great for the buyers, bad for the sellers. What’s more, people might take short positions, use derivatives to make bets on the side, or do things like buying gold in the expectation of a currency crash, or holding currency in the expectation of a credit crunch, etc.
The upshot is you have big winners and losers in any sudden market adjustment. Spitznagel is guessing that on average today’s winners will be tomorrow’s losers, but I think that’s mostly wishful thinking. Someone with a knack for betting on a rising market, could quite conceivably also have a knack for betting on a falling market.
Debating anti-capitalist interventionists on the topic of economies is rather like trying to play chess with a pigeon; it knocks the pieces over, craps on the board, and flies back to its flock to claim victory.
Sounds like you are projecting your own behavior onto your opponents.
No, he’s referring to you.
You wouldn’t make yourself an opponent, and thus there wouldn’t even be any opponents, if only you just stopped advocating for violence against my person and homesteaded and/or traded property.
The human race would be so much better off if all that the free market haters did was defecate on the game of life. Of course, the real harm they do is profoundly more destructive than that. But they do it with the best of intentions and the fanatical self assurance of a psychopath. So who cares if it just makes things worse, it’s their intentions that matter the most, right?
“Yet it is central banks themselves that fuel massive asset bubbles–which accrue as capital gains in the pockets of the elites–that eventually burst and cause a depression.”
Written by a man who sounds like he never heard of tulip mania or America’s asset bubbles in the 19th century when there was no central bank. Or Australia’s massive bubble in the 1880s, when there was no central bank. And the list goes on and on.
“Then, when at least normal market forces would punish the most reckless of the speculators, these same experts assure us that massive bailouts are necessary, lest “laissez-faire capitalism” implode from its own contradictions.”
That is because many other people **not involved** in speculation get severely punished too, e.g., depositors in banks when they become insolvent, people thrown out of work, etc. And even in systems with no central banks, when some asset bubble and its collapse happens, the economy does “implode from its own contradictions” — you just can’t face reality.
That is because many other people **not involved** in speculation get severely punished too, e.g., depositors in banks when they become insolvent, people thrown out of work, etc.
When you entrust your money to those who are lending to those engaged in malinvesting their resources, you’re going to lose with them.
That follows logically.
Written by a man who sounds like he never heard of tulip mania …
The Truth About Tulipmania
“Written by a man who sounds like he never heard of tulip mania or America’s asset bubbles in the 19th century when there was no central bank. Or Australia’s massive bubble in the 1880s, when there was no central bank. And the list goes on and on.”
Seriously?? For someone who constantly critiques Austrian economics you’d think you would at least be aware that the Austrians have plenty of literature discussing bubbles without a central bank. Hopefully, this is just a hole in your understanding of AE and you’re not being initially misleading.
Note the words “by a man **who sounds like**”. I would in fact assume he has heard of these things, but that only underscores how shoddy and absurd his attempts are to blame central banks for asset bubbles, as if you can never have an asset bubble without a central bank.
Written by someone who sounds like he never heard of affirming the consequent.
What are you talking about? You should be embarrassed to write things like that. All Austrians are aware that bubbles can occur without central banks. They’ve written books on the subject. I can’t believe you honestly don’t realize that Austrians use ABCT to explain asset bubbles even when there was no central bank. It has to be the case that you are just being intentionally misleading by acting like Austrians don’t have answers to these type of situations you bring up. Hopefully, I’m wrong and you are just ignorant of all the literature on pre-central bank bubbles written be Austrians, but I’m pretty sure you are not ignorant in this regards.
LK knows all about this. We’ve been over this 27 times before.
http://socialdemocracy21stcentury.blogspot.com/2013/03/the-classical-gold-standard-era-was-myth.html
So I guess the next time someone claims Hitler was a mass murderer, that you would chastise them for saying something “as if” only Hitler murdered people.
LK, when you have to include “as if” in your statements, then it’s likely you’re being inaccurate. If the guy said ONLY central banks cause bubbles, THEN you could rightly claim what you did, you know, “as if” you were not setting up straw men.
“Written by a man who sounds like he never heard of tulip mania or America’s asset bubbles in the 19th century when there was no central bank. Or Australia’s massive bubble in the 1880s, when there was no central bank. And the list goes on and on.”
Totally wrong. Murphy did NOT say “every single bubble in the history of the world was caused by central banks”. Neither he denied that there could be a bubble without a central bank. Even under your “institutionalist” way of thinking you should know that Bob is referring to an economy under a central bank.
Yeah, I’ve disagreed with most of what LK has posted on this site, but this is just utterly embarrassing for him. Especially, considering how much he writes about Austrian economics. It’s totally bizarre for him to act like Austrians have no response for assets bubbles that were created without a central bank.
“after the central bank and central government use inflation and taxpayer money to bail out the fat cat investment banks”
You can protect depositors without bailing out “fat cat investment banks”. E.g., what Sweden did in the early 1990s during its banking troubles, or what could have been done in the normal method by which the FDIC deals with insolvent US banks: allowing deposits to be guaranteed by the government, but then the banks are liquidated, shareholders wiped out, senior management fired, assets than sold off to pay for the losses. Whatever is left over goes to the bondholders.
LK, are you aware of what you are saying. That means that too big to fail banks are wiped out. So you are not for too big to fail policies? Against lowering interest rates? You are “only” for taxpayers paying for their own deposits?
And what does it help if this COULD be done if it isn’t done. Then you should actually support Mark Spitznagel in what he is saying and only add that you would still guarantee deposits.
BTW: I want to look into the sweden housing’s crisis a little deeper. Yet I don’t find that much information. Do you know a good source?
Also I couldn’t find interest rates set by swedens riskbank before 1994.. Do you know where I can find those?
Thanks in advance!
That’s pretty much the Walter Bagehot dictum.
Bagehot recommended penalty high interest rates, but any cost that discourages the use of the “last resort” facility would be equivalent in effect.
The problem with firing senior management is that they have protective contracts, and you end up paying them more to get rid of them than it costs to keep them. Only by running the bank all the way to bankruptcy court can you break those contracts. Professional managers are far more dangerous than people realize, almost as dangerous as public servants. Managers with active ownership interests are best, then they can get wiped out along with the other shareholders.
As you well know, modern central banks don’t follow Walter Bagehot, they lend at low interest rates on poor collateral and have made themselves lenders of first resort, but only available to the select few. The worst of all arrangements (unless you are one of those select few).
Bob, really… Who takes those hacks that are only allowed to air their opinion on the National Review serious anyway… Almost as bad as Saez 2004.
All data point to the theory that more power to the technocratic elite is good for everyone.
Sounds right to me.
Eduardo,
It is Gods plan don’t you know. Statist interpretation of Romans 13 says we are all just puppets who should willfully and gleefully be governed (micro managed) cradle to grave. Never mind all the other Bible pooy about personal relationship with Christ, Holy Spirit and the perfect law of liberty…
Austrian business cycle theory puts all the blame on fractional reserve banking. The central bank merely is enforcing the reserve requirement and “easy money” means they are lax on enforcing the reserve requirement. Without a central bank and govt intervention, there is easier credit, not tighter credit. You have to abolish fractional reserve banking entirely using govt intervention to achieve the Austrian school’s ideal of a fixed amount of money in the economy and “healthy deflation.” Healthy deflation however increases wealth inequality. The “end the Fed” nonsense is merely a way of duping the unwashed into opposing policies that drive up their real wage and drive down corporate profits.
“Without a central bank and govt intervention, there is easier credit, not tighter credit.”
Think you meant to say the exact opposite.
“The “end the Fed” nonsense is merely a way of duping the unwashed into opposing policies that drive up their real wage and drive down corporate profits.”
Nevermind. You’re just wrong.