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Thread: Note to Krugman: Greece Proves Keynesian Economics Wrong

  1. #21
    Havakasha is offline
    ECONOMIC VIEW
    How National Belt-Tightening Goes Awry
    By ROBERT J. SHILLER
    Published: May 19, 2012
    http://www.nytimes.com/2012/05/20/bu...view.html?_r=1

    WHY is there such strong political support for fiscal austerity, for government cuts and layoffs, at a time of widespread unemployment?


    Maybe it’s because we have the wrong metaphor stuck in our minds, and it’s framing policy choices in a misleading way.

    Clearly, metaphors and other symbols carry real weight in our thinking, as has been shown by George Lakoff, a cognitive linguist at the University of California, Berkeley, and Mark Johnson, a philosopher at the University of Oregon. In their 1980 book, “Metaphors We Live By,” they argue, “Our ordinary conceptual system, in terms of which we both think and act, is fundamentally metaphorical in nature.”

    Our metaphors are like the icons on our computer screen, little pictures by which we condense complexities into manageable packets to refer to in our decision-making. Our brains may be hard-wired for them.

    Consider our current thinking about taxes and government spending. We seem caught up in a “family belt-tightening” metaphor, in which the nation is a family that has outspent its income and is trying to get back in control. The family must cut profligate spending, save and pay down debts. It’s a powerful thought, of course, because we know that mismanagement of household finances can lead to a family’s ruin.

    But perhaps the most important lesson conveyed by the great economist John Maynard Keynes is that this metaphor, when applied to the national economy, is fundamentally misleading: what is smart for the family is not smart for society as a whole. This idea, sometimes known as the paradox of thrift, is that when we all tighten our belts at once, the economy is so weakened that we end up failing to save more, and instead are all worse off. When that happens, some collective action — government stimulus — is needed.

  2. #22
    SiriuslyLong is offline
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    Quote Originally Posted by SiriuslyLong View Post
    Ron Paul called the housing bubble and subsequent recession in 2003 during a banking committee session. No one listened to him. That's not hilarious, it is sad. Here it is....

    Ron Paul in the House Financial Services Committee, September 10, 2003

    Mr. Chairman, thank you for holding this hearing on the Treasury Department's views regarding government sponsored enterprises (GSEs). I would also like to thank Secretaries Snow and Martinez for taking time out of their busy schedules to appear before the committee.

    I hope this committee spends some time examining the special privileges provided to GSEs by the federal government. According to the Congressional Budget Office, the housing-related GSEs received $13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone. Today, I will introduce the Free Housing Market Enhancement Act, which removes government subsidies from the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the National Home Loan Bank Board.

    One of the major government privileges granted to GSEs is a line of credit with the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion. This explicit promise by the Treasury to bail out GSEs in times of economic difficulty helps the GSEs attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a huge unconstitutional and immoral income transfer from working Americans to holders of GSE debt.

    The Free Housing Market Enhancement Act also repeals the explicit grant of legal authority given to the Federal Reserve to purchase GSE debt. GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetize their debt through the Federal Reserve. This provision gives the GSEs a source of liquidity unavailable to their competitors.

    The connection between the GSEs and the government helps isolate the GSE management from market discipline. This isolation from market discipline is the root cause of the recent reports of mismanagement occurring at Fannie and Freddie. After all, if Fannie and Freddie were not underwritten by the federal government, investors would demand Fannie and Freddie provide assurance that they follow accepted management and accounting practices.

    Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.

    Despite the long-term damage to the economy inflicted by the government's interference in the housing market, the government's policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

    Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.

    No less an authority than Federal Reserve Chairman Alan Greenspan has expressed concern that government subsidies provided to GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac.

    Mr. Chairman, I would like to once again thank the Financial Services Committee for holding this hearing. I would also like to thank Secretaries Snow and Martinez for their presence here today. I hope today's hearing sheds light on how special privileges granted to GSEs distort the housing market and endanger American taxpayers. Congress should act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market. I therefore hope this committee will soon stand up for American taxpayers and investors by acting on my Free Housing Market Enhancement Act.

    Dr. Ron Paul is a Republican member of Congress from Texas.

    http://www.lewrockwell.com/paul/paul128.html

    Hilarious? I think you need to re-evaluate. Many people have been hurt and it could have been prevented had closed minded idiots like yourself listened to individuals like Schiff and Dr. Paul.
    The only incompetence is that of those close minded individuals like you. Reminder, a lot of people were hurt by this. An entire nation went into recession, and the financial sector nearly collapsed. So do you still think Ron Paul was / is incompetent?

  3. #23
    SiriuslyLong is offline
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    Quote Originally Posted by Havakasha View Post
    They have been predictiing hyperinflation for many years and getting it wrong for many years. NO thanks. They are clearly incompetent.
    Hyperinflation aside, this would have saved a lot of suffering for a lot of people democrat and republican alike.

  4. #24
    Havakasha is offline
    I understand you didnt want to comment on Robert Shiller's piece.

    Many people from the left were warning about the housing bubble, lack of regulation on wall street. etc.Yes much pain was inflcted on this country and its people. It should and could have definitely been avoided if people listened to Paul Krugman etc.

    Frankly Paul and Schiff have been wrong about too many things to think highly of them. I actually have researched Schiff more than Ron Paul. I do know that Ron Paul says some pretty wacky stuff. Its just a fact that Mr. Schiff has made some outrageously wrong predictions on the economy going back many years. I cant take him seriously. I do have concern that he doesnt hurt people that have followed him into some of his recommended investments.

  5. #25
    SiriuslyLong is offline
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    Quote Originally Posted by Havakasha View Post
    I understand you didnt want to comment on Robert Shiller's piece.

    Many people from the left were warning about the housing bubble, lack of regulation on wall street. etc.Yes much pain was inflcted on this country and its people. It should and could have definitely been avoided if people listened to Paul Krugman etc.

    Frankly Paul and Schiff have been wrong about too many things to think highly of them. I actually have researched Schiff more than Ron Paul. I do know that Ron Paul says some pretty wacky stuff. Its just a fact that Mr. Schiff has made some outrageously wrong predictions on the economy going back many years. I cant take him seriously. I do have concern that he doesnt hurt people that have followed him into some of his recommended investments.
    Go ahead and show us all.... Like I have. Show me Paul Krugman in video or in legislation.............

    I'm from Kansas. Show me all this like I've shown you. Triple dog dare.....

  6. #26
    Havakasha is offline
    I showed you Paul Krugman's columns before and i can show them again if your memory has faltered? I can show you warnings from others on the left, both economists and politicians. Would you like to make a friendly wager that people on the left were calling attention to the bubbles that were being created at the time and were staunchly opposed to Greenspan's policies?

    Remember that the 2nd worst recession in our history was caused by the financial crisis which in turn was caused by derivatives trading which many Democrats were warning about.

  7. #27
    Havakasha is offline
    Obviously the causes of this recession the 2nd worst recession in our history were several or more. Most experts blame it on the financial meltdown. The housing bubble was certainly part of the problem. Any discussion of both of these is going to be by its nature very time consuming and complex.mHowever, i will give it a quick college try and come back for more when i have time.


    This is from Wikidpedia:

    Although an economic bubble is difficult to identify except in hindsight, numerous economic and cultural factors led several economists (especially in late 2004 and early 2005) to argue that a housing bubble existed in the U.S.[14][27][39][40][41][42][43][44] Dean Baker identified the bubble in August 2002, thereafter repeatedly warning of its nature and depth, and the political reasons it was being ignored.[45][46] Prior to that, Robert Prechter wrote about it extensively as did Professor Shiller in his original publication of Irrational Exuberance in the year 2000.


    Dean Baker is a Democrat. Mr. Shiller is as well. Not sure about Robert Prechter.

    In early 2006, President Bush kind of denied the possiblity of a bubble. He said of the U.S. housing boom: "If houses get too expensive, people will stop buying them... Economies should cycle."[53]


    Home price appreciation has been non-uniform to such an extent that some economists, including former Fed Chairman Alan Greenspan (Republican) have argued that United States was not experiencing a nationwide housing bubble per se, but a number of local bubbles.[63]


    Former President Bush Federal Reserve Chairman Alan Greenspan had praised the rise of the subprime mortgage industry and the tools which it uses to assess credit-worthiness in an April 2005 speech.[100] Because of these remarks, as well as his encouragement of the use of adjustable-rate mortgages, Greenspan has been criticized for his role in the rise of the housing bubble and the subsequent problems in the mortgage industry that triggered the economic crisis of 2008.[101][102][103] Concerning the subprime mortgage mess, Greenspan later admitted that "I really didn't get it until very late in 2005 and 2006."[36]
    Last edited by Havakasha; 05-22-2012 at 01:25 AM.

  8. #28
    Havakasha is offline
    http://www.nytimes.com/2005/08/29/op...29krugman.html


    Greenspan and the Bubble

    By PAUL KRUGMAN
    Published: August 29, 2005
    Most of what Alan Greenspan said at last week's conference in his honor made very good sense. But his words of wisdom come too late. He's like a man who suggests leaving the barn door ajar, and then - after the horse is gone - delivers a lecture on the importance of keeping your animals properly locked up.

    Regular readers know that I have never forgiven the Federal Reserve chairman for his role in creating today's budget deficit. In 2001 Mr. Greenspan, a stern fiscal taskmaster during the Clinton years, gave decisive support to the Bush administration's irresponsible tax cuts, urging Congress to reduce the federal government's revenue so that it wouldn't pay off its debt too quickly.

    Since then, federal debt has soared. But as far as I can tell, Mr. Greenspan has never admitted that he gave Congress bad advice. He has, however, gone back to lecturing us about the evils of deficits.

    Now, it seems, he's playing a similar game with regard to the housing bubble.

    At the conference, Mr. Greenspan didn't say in plain English that house prices are way out of line. But he never says things in plain English.

    What he did say, after emphasizing the recent economic importance of rising house prices, was that "this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent." And he warned that "history has not dealt kindly with the aftermath of protracted periods of low-risk premiums." I believe that translates as "Beware the bursting bubble."

    But as recently as last October Mr. Greenspan dismissed talk of a housing bubble: "While local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely."

    Wait, it gets worse. These days Mr. Greenspan expresses concern about the financial risks created by "the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages." But last year he encouraged families to take on those very risks, touting the advantages of adjustable-rate mortgages and declaring that "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."

    If Mr. Greenspan had said two years ago what he's saying now, people might have borrowed less and bought more wisely. But he didn't, and now it's too late. There are signs that the housing market either has peaked already or soon will. And it will be up to Mr. Greenspan's successor to manage the bubble's aftermath.

    How bad will that aftermath be? The U.S. economy is currently suffering from twin imbalances. On one side, domestic spending is swollen by the housing bubble, which has led both to a huge surge in construction and to high consumer spending, as people extract equity from their homes. On the other side, we have a huge trade deficit, which we cover by selling bonds to foreigners. As I like to say, these days Americans make a living by selling each other houses, paid for with money borrowed from China.

    One way or another, the economy will eventually eliminate both imbalances. But if the process doesn't go smoothly - if, in particular, the housing bubble bursts before the trade deficit shrinks - we're going to have an economic slowdown, and possibly a recession. In fact, a growing number of economists are using the "R" word for 2006.

    And here's where Mr. Greenspan is still saying foolish things. In his closing remarks he suggested that "an end to the housing boom could induce a significant rise in the personal saving rate, a decline in imports and a corresponding improvement in the current account deficit." Translation, I think: the end of the housing bubble will automatically cure the trade deficit, too.

    Sorry, but no. A housing slowdown will lead to the loss of many jobs in construction and service industries but won't have much direct effect on the trade deficit. So those jobs won't be replaced by new jobs elsewhere until and unless something else, like a plunge in the value of the dollar, makes U.S. goods more competitive on world markets, leading to higher exports and lower imports.

    So there's a rough ride ahead for the U.S. economy. And it's partly Mr. Greenspan's fault.

  9. #29
    Havakasha is offline
    http://open.salon.com/blog/jay_allbr...economic_shift
    Krugman has consistently warned of the current economic crisis. On May 27, 2005, Paul Krugman wrote, "In parts of the country there's a speculative fever among people who shouldn't be speculators that seems all too familiar from past bubbles - the shoeshine boys with stock tips in the 1920's, the beer-and-pizza joints showing CNBC, not ESPN, on their TV sets in the 1990's."

    At the time, Krugman asked the question, "what will replace the housing bubble when it bursts?" In issuing his relatively early warning, Krugman cited two telling stats. The National Association of Realtors estimated 23 percent of the homes sold in 2004 were bought as investments and Business Week reported that 31 percent of new mortgages were interest only. Far too many people were buying houses with no intention of living in them, or they were using their houses to stay afloat--two very bad indicators. "One way or another," Krugman warned, "the economy will eventually eliminate both imbalances."

    A few months later, Krugman explained in simplistic terms--a very valuable commodity for a columnist--what drove the housing bubble. "When people become willing to spend more on houses," he wrote, "say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on."

  10. #30
    Havakasha is offline
    http://economicsofcontempt.blogspot....perts-who.html
    Wednesday, July 16, 2008
    The Unofficial List of Pundits/Experts Who Were Wrong on the Housing Bubble
    Posted by Economics of Contempt at 1:15 PM
    The housing bubble has precipitated a severe, and possibly catastprophic, economic crisis, so I thought it would be useful to put together a list of pundits and experts who were dead-wrong on the housing bubble. They were the enablers, and deserve to be held accountable. People also need to know (or be reminded of) which pundits/experts should never be listened to again. But most importantly, I have time to do this kind of thing now.

    The list includes only pundits and (supposed) experts. That means the list doesn't include policymakers such as Alan Greenspan and Ben Bernanke, because however wrong they may have been, policymakers—and especially Fed chairmen—are undeniably constrained in what they can say publicly. I strongly suspect that both Greenspan and Bernanke honestly believed that there was no housing bubble, but alas, we'll never know for sure. The list also doesn't include pundits/experts who were wrong only about the fallout of the collapse of the housing bubble—that is, the extent to which the collapse of the housing bubble would harm the economy.

    Many of the names on the list won't shock anyone, I'm sure. And FWIW, a few of the pundits seemed to deny the existence of the housing bubble simply because Paul Krugman argued that there was a housing bubble, and they absolutely hate Krugman. Unfortunately (for our economy), Krugman was right—again.

    The list is a work in progress (though I've been reasonably thorough in my research), so feel free to suggest other people who should go on the list. So without further ado, here's the list:

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