you’ll laugh, you’ll cry, it’ll change your life


People use it to make matters seem much more clear cut than they are. See also, straw man argument.

Brad DeLong uses this wonderful device.

Q: Why don’t banks, investors, and other financial intermediaries think they are worth very much?

A: Six factors: (a) the housing boom was accompanied by the creation of a lot more assets–principally mortgage-backed securities and their derivatives. As supply and demand dictates, when there is more of something, it is worth less; (b) some of these securities were initially sold at prices that only a fool, thinking a bigger fool would come along to buy them at an even higher price, would ever pay; (c) there is a recession on and so firms have a greater chance of defaulting on their securities; (d) traders working for Wall Street firms are irrationally panicked after having been hammered for a year and a half; (e) those working for Wall Street firms that are now undercapitalized (because they have been hammered for a year and a half) assign a very high cost to risk because it materially increases the chance that their firm will vanish next month; (f) the risk level of these securities is much higher than normal because professional investors no longer trust their own financial models or know how their models compare to the models of other traders.

Q: And economists know how to fix this, right?

A: Well, some economists don’t think we should fix this. Some welcome high unemployment, thinking it’s the best way to get workers out of declining industries and into growth industries. They consider a period of high unemployment a way of convincing people who were previously employed “pounding nails in Nevada” to go do something else — part of the respiration of the capitalist organism, as Josef Schumpeter said. They tend to like the fact that financial asset prices are now low, and condemn attempts to raise them as efforts to keep the feckless financiers who bought them during the boom from suffering their just punishment. Followers of this line of argument — I call them the Marx-Mellon-Hayek-Hoover axis –tend to say things like: “What’s to fix?”

I’m beginning to get a better feel for DeLong, Krugman, et al. They don’t understand about people doing useful things. They also have no taste for trying to understand a different viewpoint, possibly for fear that it will make them weaker, not stronger.

So, getting to DeLong’s actual baloney, I find the error/obfuscation level to be unbearable. Firstly, what the hell is he trying to say by “Marx-Mellon-Hayek-Hoover”? Is he just lumping a bunch of people that he thinks he disagrees with but hasn’t actually studied? Speaking for the more Austrian side of things, it’s not that there isn’t something to fix, what he is saying is both a misunderstanding of what is to be fixed and how. DeLong believes that a system of supporting frivolous spending based on continuous mis-valuing of properties/securities is sustainable and merely needs to be re-inflated. Others would argue that moneys have been seriously diverted by a distortion in the marketplace and that all of the various actors need to work out their own best values based on a more realistic view of the world. People were fooled, and will need to take a little while to be ready to take risks again. Trying to force people to take risks, or worse, to try to trick them into taking more bad risks will not end well.

Also, isn’t that a huge misuse of supply and demand? He’s trying to say that the huge volume of securities reduced their value? Having tons of interest yielding investments makes those investments worth less? Or was he edging into realizing that the demand for more poorly considered investments creates a market for fraud?

Update: I couldn’t let this go past either.

Q: But at least some economists know how to fix this, right?

A: We think so. We recommend four things: (a) The Federal Reserve should purchase Treasury bonds for cash in as large a quantity as needed to push their prices up as high as possible. For if Treasury bonds are expensive, then investors will likely shift some of their demand to mortgage and corporate bonds, push up their prices somewhat; (b) Even after the Federal Reserve has pushed Treasury bond prices as high as they can go, it should keep buying Treasury bonds for cash in the hope that if people’s pockets are full of cash, they will spend more of it, and that extra spending will directly pull people out of joblessness and into employment; (c) The government should run big, even extra-big, deficits so that its spending–like the government’s wave of spending during World War II, like the wave of spending that followed the Reagan tax cuts of 1981, like Silicon Valley’s wave of spending during the late 1990s, like the wave of spending on housing in the 2000s — will also directly pull people out of joblessness and into employment; and (d) The government should undertake additional measures to boost financial asset prices and thus make it easier for those firms that ought to be expanding and hiring to obtain finance on terms that allow them to expand and hire.

The massive failure to see the fed as a part of government and creator of dollars is amazing. Money from the fed is a devaluing of real work. It does not create any worthwhile thing. It might be a large financial tool, but it is not the same as investment of value-created dollars. Firstly, wwII did not end the depression, tax cuts lets real generated wealth continue to operate, silicon valley was private money, and the housing bubble is largely what has caused this crisis. Continuing to screw around with the various financial institutions creates such uncertainty and distortions in the marketplace that even if some large businesses screw up the courage to try something, the odds are that they will have been misled and will have invested badly. How can continually doing massively disruptive things cause any sort of sane investing strategy?


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