Originally Posted By ActionJack (13 AUG 2012 4:20pm)

 

Let me explain it to you! We've seen a parade of examples of how the so-called 'casino capitalism' has harmed everyday Americans, but the truth is, like all gold rushes, there are also many winners. To illustrate that point, rather than offer an abstract example, I provided an anecdote with which I am personally familiar. A fair minded person would focus on the point rather than succumb to baser instincts, and try to create unnecessary controversy. I recognize your reaction was more visceral than scholarly given the emanating wind which raised skirts and exposed 'petticoats of envy'. Denials at this point are useless; the stripes have been shown. Let it go.  I can't see you offering anything at this point that can advance, let alone elevate, this conversation.

 

I'm not sure where you think the envy comes from.  I've enjoyed my share of Carribean vacations -- Eleuthera is nice just after New Years.  At the moment, I prefer to take my four weeks in either Mexico or Europe (London, Amseterdam or more recently Estonia).  I used to do my share of consulting for City of London firms and they pay very well, so I'm not bothered in that regard.  I wouldn't normally offer my vacation plans as a rebuttal -- normally I find that form of argumentation gauche -- but as you've raised it both as a point regarding your brother and as a personal criticism of me, it seems appropriate.

Originally Posted By medck (13 AUG 2012 5:52pm)

Originally Posted By ActionJack (13 AUG 2012 4:20pm)

 

Let me explain it to you! We've seen a parade of examples of how the so-called 'casino capitalism' has harmed everyday Americans, but the truth is, like all gold rushes, there are also many winners. To illustrate that point, rather than offer an abstract example, I provided an anecdote with which I am personally familiar. A fair minded person would focus on the point rather than succumb to baser instincts, and try to create unnecessary controversy. I recognize your reaction was more visceral than scholarly given the emanating wind which raised skirts and exposed 'petticoats of envy'. Denials at this point are useless; the stripes have been shown. Let it go.  I can't see you offering anything at this point that can advance, let alone elevate, this conversation.

 

 

 

I'm not sure where you think the envy comes from.  I've enjoyed my share of Carribean vacations -- Eleuthera is nice just after New Years.  At the moment, I prefer to take my four weeks in either Mexico or Europe (London, Amseterdam or more recently Estonia).  I used to do my share of consulting for City of London firms and they pay very well, so I'm not bothered in that regard.  I wouldn't normally offer my vacation plans as a rebuttal -- normally I find that form of argumentation gauche -- but as you've raised it both as a point regarding your brother and as a personal criticism of me, it seems appropriate.

The very concept in regards to this thread never occurred to me ---- that is until YOU brought it up.  Maybe I'm wrong but it seems somewhat more than just a Freudian slip.  If it isn't part of this discussion, then I don't expect to see it again; I'll certainly not mention it.

I'll accept that you've no reason for envy if you'll accept my explanation as to why I offered by brother's success in the real estate market as an anecdote showing there were winners as well as losers in the mortgage backed bond market crash.  That should put that unnecessary diversion to rest and allow the discussion to return to its original path.  To define that path I'm talking about the interference in the markets which created the housing/mortgage backed securities bubble and the subsequent crash.

Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions. http://en.wikipedia.org/wiki/Moral_hazard

Another diversion?  This is not advancing the conversation; this is delving into tit-for-tat!  I'll not play.

no one except the investors is bearing responsibility for the Madoff disaster and the ratings agencies aren;t on the hook for the AAA mess.

Originally Posted By medck (13 AUG 2012 7:02pm)

no one except the investors is bearing responsibility for the Madoff disaster and the ratings agencies aren;t on the hook for the AAA mess.

Moral hazard is where one party is responsible for the interests of another, but has an incentive to put his or her own interests first: the standard example is a worker with an incentive to shirk on the job. http://www.cato.org/pubs/journal/cj29n1/cj29n1-12.pdf

No, the rating agencies are not on the hook because they had no fiduciary responsibility to the institutional investors.  The reliance upon their work was a government regulation.  The rating agencies' responsibility is implied by the government mandate that institutional investors rely upon their efforts.  Surely you can see the problem with this arrangement?  If not, I give up.  The government is clearly responsible for this; this moral hazard.

No, it is a different matter, not moral hazard.  The credit agency is not implicitly responsible for the monetary risk of an individual's investment nor is the government. They have simply provided an assessment of the risk (however poorly or corruptly made), one that the government in some cases is required of certain asset classes (of which there are a wide range of choices regardless).  This is a lot different from moral hazard.  If you buy a home and the surveyer says that its value looks consistent with other houses in the nieghborhood, the surveyer is not liable for the house being a lemon or a house price collapse.  Jim Cramer saying Bear Stearns was a good stock and you should "buy buy buy" it before it collapsed is not moral hazard.  He is not liable for people who believed him.  Likewise, ratings agencies are not responsible to investors for the tens of thousands of entitites they rate.

Of the three examples you give, at least two are clearly NOT moral hazard.  The first is the ratings agencies that I discussed already.  The second is Bernie Madoff.  His investors thought he was a reputable person who would make them money.  That is different from thinking that if their investments went bad he would make up their losses from his own pocket.  Even the Freddie Mae example is a bit vague -- you certainly don't mean the shareholders of Fannie Mae as they have seen the value of their investment erased.  It wentr from trading aroun $40 pre-crisis to $0.28 today.  So if you thought the govt guranteed your investment in Fannie Mae you were wrong and lost your money.  Now if you mean that the execs of Fannie Mae thought the govt would keep them in operation regardless of the risks they took, then, yes, the executives were operating with implicit moral hazard.

Now the banks and financial institutions that were bailed out weren't bailed out because they held AAA assets or were regulated.  They were bailed out because of the systemic consequences of their collapse.  This is the too big to fail (TBTF) argument.  That can be moral hazrd -- "I'm too important to the system for the Feds to let my bank/non-bank financial institution fail, therefore I can make riskier investments as I'll reap the gains and the Feds will clean up if it goes bust."  AIG and others fall into this category.  Actually Fannie Mae and Freddie Mac do, too.  The example here they would use is that the Fed allowed Lehman Brothers to fail and this had systemic consequences.

It is *not* moral hazard to think an asset is a safer bet than it actually is -- whether it has a specific rating, whether Bernie Madoff/Warren Buffett/Vanguard is holding the investment, whether Jim Cramer likes it or whether Bill Gates is the chairman, etc.  Thinking someone else holds financial responsibilty for your potential losses is moral hazard.

The distinction can be seen by the answer to this question: "What happens if the investment goes bust?"  It's moral hazard if the answer is "The Feds/Mom&Dad/Person X will cover the loss."  It is not if your answer is "Impossible, it's too good an investment to go bust because Jim Cramer/Bernie Madoff/Standard and Poor's say it is a good investment."

^ Useless semantics argument.  I leave it to the readers but this is the kind of thinking that prevents reform and continues placing tax payers at risk funding every financial crisis.  The bubble was caused by the FED interest rate manupulations.  That was fueled by Congressional arm-twisting of the banks to give the credit unworthy loans they couldn't afford.  Both these government manipulations caused home prices to skyrocket; a shift of the demand curve to address this government finger on the market's scales and an accompanying shift of the supply curve leaving a glut of unsold houses beside a herd of ready forclosures.  All that along with government regulations leading pension funds to slaughter.  It's plain for OPEN eyes to see.

Originally Posted By medck (14 AUG 2012 7:07am)

No, it is a different matter, not moral hazard. ...

Moral Hazard:  Any assumption which relieves one of the need for due diligence is moral hazard.  Example: The FDIC claims that it will insure every depositor’s accounts up to the amount of 250,000 dollars.  It is not possible for the U.S government to make good on such a promise.  If they printed the money it wouldn’t be worth the paper it’s printed on; we’d have runaway inflation so the promise is a false promise in either reality or effect.  What the FDIC’s promise does is creates two reactions.

First is its intended purpose which is to prevent bank runs.  No matter what the bank does or if it becomes pubic knowledge that it is in trouble, its depositors won’t worry and draw out their money (in large numbers at least) because of the FDIC promise.  The second reaction, which is wholly unintended, is that it relieves the depositors of any sense in them for due diligence.  They will not keep tabs on their bank’s actions; read the financial reports or newsletters, nor will they pay any attention to board elections.  The depositors will not care at all what their bank does or doesn’t do because of the false promise by the FDIC.  That’s the result of moral hazard; a reliance on a false assumption.

... With deposit insurance in place, depositors now know that their money is safe. They don’t care any more what risks their bank takes: their only concern is with the interest rate they receive. This takes the pressure off the bad banker who can now take more risks and reduce capital levels safe in the knowledge that depositors won’t run.
http://www.cato.org/pubs/journal/cj29n1/cj29n1-12.pd

Another example:
A key factor here is the “Greenspan Doctrine,” set out in 2002, that the Fed could do nothing to stop asset bubbles from occurring, but would stand by to cushion the fall if they did occur. This effectively promised a partial bailout of bad investments and produced the so-called Greenspan put—an option to sell depreciated assets to the Fed (i.e., yet another moral hazard). [Note: the FED promise is implied]
http://www.cato.org/pubs/journal/cj29n1/cj29n1-12.pdf

The same holds true in the case of the credit rating agencies and the government mandated requirement for institutional investors to rely upon them.  If I buy from the store of my choosing then I bear the risk; I have both the option and the obligatory requirement to do due diligence.  If I’m forced to buy from the ‘company store’, then the company implicitly assumes the risk because I’m neither afforded the opportunity, or the ability to exercise due diligence.

Originally Posted By ActionJack (14 AUG 2012 11:15am)

Moral Hazard:  Any assumption which relieves one of the need for due diligence is moral hazard.  Example: The FDIC claims that it will insure every depositor’s accounts up to the amount of 250,000 dollars.  It is not possible for the U.S government to make good on such a promise.  If they printed the money it wouldn’t be worth the paper it’s printed on; we’d have runaway inflation so the promise is a false promise in either reality or effect.  What the FDIC’s promise does is creates two reactions.

By this measure no insurance company in the world can make good on its promises.  Sure, if every bank failed, the FDIC does not have enough from its premiums to pay off all the depositors, but by the same token if every house insured by an insurance company burnt down or every policyholder of Blue Cross/Blue Shield got cancer they couldn't pay the costs.  And if such events happened we'd have bigger problems than the solvency of the FDIC, the insurance companies or BC/BS.  But they have actuarial tables for setting premiums to take the risks into account.

Every insurance package whether govt run or private entails some risk of moral hazard that the insurer tries to reduce.  First, of course, are the premiums and better rates for "good behaviour" -- not smoking, not drinking, no tickets, etc.  Then the insurer can give you things -- like smoke detectors or subsidized brake-check-ups.  Then there are other things like pressing for legislation on seat-belts, reserve requirements, etc.  The same for bank regulation and the fact of the matter is that there has not been a bank run on a deposit bank insured by the FDIC.  This coupled with prudential regulation has kept bank failures low (lower than the pre-FDIC period) and bank runs non-existent (they were common in the pre-FDIC period).  Hardly a policy failure; indeed, I'd argue it is quite the contrary.

This is not to say that there are not examples of badly designed institutions/incentives.  But they are quite different in general from the incorrect examples you chose.  Of course, you can call it a "semantic" distinction, but I'll take that as an acknowledgement that you were using the wrong concept and examples. 

Originally Posted By medck (14 AUG 2012 2:42pm)

Originally Posted By ActionJack (14 AUG 2012 11:15am)

Moral Hazard:  Any assumption which relieves one of the need for due diligence is moral hazard.  Example: The FDIC claims that it will insure every depositor’s accounts up to the amount of 250,000 dollars.  It is not possible for the U.S government to make good on such a promise.  If they printed the money it wouldn’t be worth the paper it’s printed on; we’d have runaway inflation so the promise is a false promise in either reality or effect.  What the FDIC’s promise does is creates two reactions.

 

By this measure no insurance company in the world can make good on its promises.  Sure, if every bank failed, the FDIC does not have enough from its premiums to pay off all the depositors, but by the same token if every house insured by an insurance company burnt down or every policyholder of Blue Cross/Blue Shield got cancer they couldn't pay the costs.  And if such events happened we'd have bigger problems than the solvency of the FDIC, the insurance companies or BC/BS.  But they have actuarial tables for setting premiums to take the risks into account.

 

Every insurance package whether govt run or private entails some risk of moral hazard that the insurer tries to reduce.  First, of course, are the premiums and better rates for "good behaviour" -- not smoking, not drinking, no tickets, etc.  Then the insurer can give you things -- like smoke detectors or subsidized brake-check-ups.  Then there are other things like pressing for legislation on seat-belts, reserve requirements, etc.  The same for bank regulation and the fact of the matter is that there has not been a bank run on a deposit bank insured by the FDIC.  This coupled with prudential regulation has kept bank failures low (lower than the pre-FDIC period) and bank runs non-existent (they were common in the pre-FDIC period).  Hardly a policy failure; indeed, I'd argue it is quite the contrary.

 

This is not to say that there are not examples of badly designed institutions/incentives.  But they are quite different in general from the incorrect examples you chose.  Of course, you can call it a "semantic" distinction, but I'll take that as an acknowledgement that you were using the wrong concept and examples. 

No s---t!  Try reading the entire source I provide.  Tha author makes a great case of how moral hazard in our financial system is the root cause of continuing bailouts.  That includes FDIC, FED implied actions, limited liability, Congressional actions etc.  Once you've read it I'll know when you directly address it.  Until then I think we've gone as far as we can go because I don't think you can understand my point.  I'm going to assume its my diction but if you still can't understand it phrased differently from someone more accomplished than myself then I'll conclude you just can't or won't understand it and case closed.

http://www.cato.org/pubs/journal/cj29n1/cj29n1-12.pdf

Originally Posted By ActionJack (14 AUG 2012 3:53pm)

Originally Posted By medck (14 AUG 2012 2:42pm)

Originally Posted By ActionJack (14 AUG 2012 11:15am)

Moral Hazard:  Any assumption which relieves one of the need for due diligence is moral hazard.  Example: The FDIC claims that it will insure every depositor’s accounts up to the amount of 250,000 dollars.  It is not possible for the U.S government to make good on such a promise.  If they printed the money it wouldn’t be worth the paper it’s printed on; we’d have runaway inflation so the promise is a false promise in either reality or effect.  What the FDIC’s promise does is creates two reactions.

 

By this measure no insurance company in the world can make good on its promises.  Sure, if every bank failed, the FDIC does not have enough from its premiums to pay off all the depositors, but by the same token if every house insured by an insurance company burnt down or every policyholder of Blue Cross/Blue Shield got cancer they couldn't pay the costs.  And if such events happened we'd have bigger problems than the solvency of the FDIC, the insurance companies or BC/BS.  But they have actuarial tables for setting premiums to take the risks into account.

 

Every insurance package whether govt run or private entails some risk of moral hazard that the insurer tries to reduce.  First, of course, are the premiums and better rates for "good behaviour" -- not smoking, not drinking, no tickets, etc.  Then the insurer can give you things -- like smoke detectors or subsidized brake-check-ups.  Then there are other things like pressing for legislation on seat-belts, reserve requirements, etc.  The same for bank regulation and the fact of the matter is that there has not been a bank run on a deposit bank insured by the FDIC.  This coupled with prudential regulation has kept bank failures low (lower than the pre-FDIC period) and bank runs non-existent (they were common in the pre-FDIC period).  Hardly a policy failure; indeed, I'd argue it is quite the contrary.

 

This is not to say that there are not examples of badly designed institutions/incentives.  But they are quite different in general from the incorrect examples you chose.  Of course, you can call it a "semantic" distinction, but I'll take that as an acknowledgement that you were using the wrong concept and examples. 

No s---t!  Try reading the entire source I provide.  Tha author makes a great case of how moral hazard in our financial system is the root cause of continuing bailouts.  That includes FDIC, FED implied actions, limited liability, Congressional actions etc.  Once you've read it I'll know when you directly address it.  Until then I think we've gone as far as we can go because I don't think you can understand my point.  I'm going to assume its my diction but if you still can't understand it phrased differently from someone more accomplished than myself then I'll conclude you just can't or won't understand it and case closed.

http://www.cato.org/pubs/journal/cj29n1/cj29n1-12.pdf

 

Gosh an article from Cato!  Surprise, surprise.  And one that while it includes the words "moral hazard" clearly does not apply them to regulations and does not say govt regulations created moral hazard.  On the contrary, it is quite clear that what he is talking about in terms of moral hazard is due to the operation of the financial system not govt regulation.  His conclusion, is essentially that we need good regulations:

"Measures that rein in moral hazard are to be welcomed and will help to reduce excessive risk-taking;measures that create

or exacerbate moral hazard (such as massive bailouts?) will lead to even more excessive risk-taking and should be avoided. In short, a key yardstick that should be applied to any proposed reform measure is simply this: Does it reduce moral hazard or does it increase it?"

I don't think anyone doubts that moral hazard played an important role in the financial crisis.  However, the regulations requiring reserves of certain levels in banks (but not non-bank financial institutions) were not a creator of moral hazard.  It's like old school buses that had governors on the pedals.  The governor was supposed to keep the speed under 40 mph because drivers liked to drive fast (like financiers like to take risks) and school boards wanted to reduce accidents/injuries/fatalities.  However, drivers discovered they could kick the governor aside when they drove and then kick it back in place when they parked the bus (like ratings agencies giving dodgy ratings).  Now in the AJ view of the world, this is moral hazard created by the school boards.  In reality, it is bad behaviour by bus drivers and their attempts to circumvent rules that would make things safer.  It is not moral hazard.  Bernie Madoff defrauding investors is fraud, not moral hazard.  Being misinformed is not moral hazard.  Evasion and circumvention of rules are not moral hazard.  Passing off the costs of failure to someone else is moral hazard.

RomneyCare and National RomneyCare (a.k.a. ObamaCare) contain an example of this -- the prohibition on discrimination against pre-existing conditions creates a potential moral hazrd situation whereby no one would need to get insurance before getting a serious condition since the insurance companies were obliged to take them on once they got sick.  The solution to that is the individual mandate.  It is also, by the way, the centerpiece of RyanCare -- Paul Ryan's proposed voucher replacement for Medicare -- that would mandate that seniors have health insurance, either a fixed-funded govt plan or a voucher towards private company's premiums.

Originally Posted By medck (15 AUG 2012 7:47am)

 

Gosh an article from Cato!  Surprise, surprise.  And one that while it includes the words "moral hazard" clearly does not apply them to regulations and does not say govt regulations created moral hazard.  ...

 

Well that says it all; not so much over your head as completely invisible --- all because of the authorship!  Well, I've made my point; on to better things.

PS: A final attempt

The entire article is devoted to moral hazard.  Let me break it down:
-Risk Models
-Corporate Accountability
-Corporate Governance
-FED Loose Money Policy
-FED Implied rescue insurance
-FDIC
-Financial Regulations a la 'group think'

The common thread is an over reliance on an insurance/assurance that obviates the need for the necessary due diligence.  That's as far as I can break it down for you.  Hope it helps.

Originally Posted By medck (15 AUG 2012 7:47am)
Gosh an article from Cato!  Surprise, surprise.  And one that while it includes the words "moral hazard" clearly does not apply them to regulations and does not say govt regulations created moral hazard.  On the contrary, it is quite clear that what he is talking about in terms of moral hazard is due to the operation of the financial system not govt regulation.  His conclusion, is essentially that we need good regulations:

 

Doggone; I must admit I missed that.  You fooled me again and enticed me into another game of useless circular blather.  You didn't even attempt to read the piece.  There's no honest conversation going on here; this is more like Obama's surrogates' actions.  You could have least read the author's conclusion rather than invent one.  Here it is in its entirety:

Lessons for the Future
If anything is obvious about the current crisis, it is that the system
of managed state intervention into the financial system has failed dismally:
it is not “free”—that is, unregulated—markets that have failed,
but the statist system within which financial markets and institutions
have been forced to operate. This is not an academic issue or a case of
ideological point scoring. It matters because we need to understand
what went wrong if we are to get future reforms right.My own view is
that the edifice of modern central banking cum financial regulation
cum limited liability needs to be dismantled and 150 years of state
intervention needs to be rolled back, but I have few illusions that this
will happen. Be this as it may, my main message here is to take moral
hazard seriously. Measures that rein in moral hazard are to be welcomed
and will help to reduce excessive risk-taking;measures that create
or exacerbate moral hazard (such as massive bailouts?) will lead to
even more excessive risk-taking and should be avoided. In short, a key
yardstick that should be applied to any proposed reform measure is
simply this: Does it reduce moral hazard or does it increase it?
The bottom line? If someone takes a risk, someone has to bear it.
If I take a risk, then we want to ensure that I be made to bear it. But
if I take a risk at your expense, then that’s moral hazard and that’s
bad. As the late, greatMilton Friedman might have put it: there ain’t
no such thing as a free risk.

The author’s entire point is that what creates moral hazard is regulation that removes accountability.  If the entire financial system had all regulation removed, then everyone involved would have accountability for their actions as well as their inactions.  There would be no insurance or guarantees, nor requirements that removed choice.  Now the author is not advocating that there be no regulations but instead that any regulation must rein in moral hazard which in turn would reduce excessive risk-taking.

Dude, he says although his preference is to remove things like LLC and central banking he realizes that is impractical and that we should have the part I quoted.  And keep in mind, I quoted his conclusion, I did not "invent one", I directly quoted the author of a piece you recommended and I read.  I think "invent" means something different than you think it means.

Washington Post: Obama inconsistent on pace of economic recovery
... even though the Obama stimulus was brilliant and timely, it could not deliver a normal recovery because the financial crisis made that impossible.

To be sure, financial crises have often been associated with slower recoveries; economists Carmen Reinhart and Kenneth Rogoff documented this in their landmark book “This Time Is Different.” But their study of large and small countries around the world cannot be used as a logical explanation for the economic policies advanced by the administration. Here’s why:

The president’s first problem is that the results obtained by Reinhart and Rogoff do not necessarily apply to the United States. Economists who have looked at U.S. recoveries after financial crises have generally found that the recoveries have not been slow.

Michael Bordo of Rutgers University and Joseph Haubrich of the Federal Reserve Bank of Cleveland concluded after an extensive study of recessions in the United States that, contrary to the findings of Reinhart and Rogoff, recessions stemming from financial crises in the United States tended to be followed by faster recoveries. Bordo and Haubrich point out that the 2007-09 recession is actually a negative outlier.

The president’s second problem is that his campaign rhetoric is inconsistent with the analysis of his own economic team. The Obama administration’s economic advisers do not appear to have factored the Reinhart and Rogoff results into their analysis and forecasts, which have repeatedly called for an extremely rapid recovery. ...

http://www.washingtonpost.com/opinions/obama-inconsistent-on-pace-of-economic-recovery/2012/08/14/45533a3c-e627-11e1-936a-b801f1abab19_story.html

Originally Posted By medck (15 AUG 2012 10:37am)

Dude, he says although his preference is to remove things like LLC and central banking he realizes that is impractical and that we should have the part I quoted.  And keep in mind, I quoted his conclusion, I did not "invent one", I directly quoted the author of a piece you recommended and I read.  I think "invent" means something different than you think it means.

 

Another semantics game?  Let me try.  I think "quoted" means something different than you think it means. 

Originally Posted By ActionJack (15 AUG 2012 12:05pm)

Washington Post: Obama inconsistent on pace of economic recovery
... even though the Obama stimulus was brilliant and timely, it could not deliver a normal recovery because the financial crisis made that impossible.

 

To be sure, financial crises have often been associated with slower recoveries; economists Carmen Reinhart and Kenneth Rogoff documented this in their landmark book “This Time Is Different.” But their study of large and small countries around the world cannot be used as a logical explanation for the economic policies advanced by the administration. Here’s why:

 

The president’s first problem is that the results obtained by Reinhart and Rogoff do not necessarily apply to the United States. Economists who have looked at U.S. recoveries after financial crises have generally found that the recoveries have not been slow.

Michael Bordo of Rutgers University and Joseph Haubrich of the Federal Reserve Bank of Cleveland concluded after an extensive study of recessions in the United States that, contrary to the findings of Reinhart and Rogoff, recessions stemming from financial crises in the United States tended to be followed by faster recoveries. Bordo and Haubrich point out that the 2007-09 recession is actually a negative outlier.

 

The president’s second problem is that his campaign rhetoric is inconsistent with the analysis of his own economic team. The Obama administration’s economic advisers do not appear to have factored the Reinhart and Rogoff results into their analysis and forecasts, which have repeatedly called for an extremely rapid recovery. ...

 

http://www.washingtonpost.com/opinions/obama-inconsistent-on-pace-of-economic-recovery/2012/08/14/45533a3c-e627-11e1-936a-b801f1abab19_story.html

More:

... The budget that Obama proposed shortly after taking office included projections of growth in gross domestic product climbing to 4.6 percent this year. Even after these early estimates proved incorrect, the administration continued to forecast high growth, always predicting rapid recovery around the corner. Even today, Obama is implicitly declaring that we are doomed to a slow recovery for five more years — the administration’s estimates call for GDP growth climbing to 4.1 percent in 2015.

These high-growth forecasts are not just academic. Those on Obama’s economic team can justify the president’s proposed tax increases only if they are willing to assert that growth will be so high that we can afford the drag associated with higher marginal tax rates. The economic team’s forecasts at least provide some internal consistency, but the president’s campaign rhetoric is inconsistent with his staff’s analysis.

Finally, the administration’s previous policies are questionable if one accepts that Reinhart and Rogoff are correct and that we are destined for a protracted recovery.
http://www.washingtonpost.com/opinions/obama-inconsistent-on-pace-of-economic-recovery/2012/08/14/45533a3c-e627-11e1-936a-b801f1abab19_story.html

Originally Posted By ActionJack (15 AUG 2012 12:08pm)

Another semantics game?  Let me try.  I think "quoted" means something different than you think it means. 

 

If "quoted" means putting the words that the author used verbatim into my post and including them in quotation marks to indicate they are quoted then that's what I did.  If you think it means something different you're welcome to your error, although it is worth pointing out the fact that you cut&pasted THE EXACT SAME WORDS that I quoted into your post.  It's clear you have a deficient understanding of both "moral hazard" and "invented", so let's add "quoted" to the list.

More:

... A Keynesian stimulus like the one the Obama administration advanced in 2009 would be appropriate if a recession were expected to be short and deep, followed by a quick and robust recovery. Such a stimulus has three stages: the initial short increase in GDP from the spending, a subsequent phase of approximately equal reductions in GDP after the stimulus runs out, and then an additional reduction in GDP when higher borrowing or taxes are needed to pay for the stimulus. If you expect a recession to be long and drawn out, a Keynesian stimulus is likely to be ineffective, because the hangover from the second two stages could easily push the economy back into recession. In such a world, policies that stimulate long-run growth such as fiscal consolidation and tax reform are clearly preferable to a Keynesian stimulus.

Thus the administration’s economics suggest mistakes of diagnosis or cure, or both. If the Obama administration believes that the Reinhart and Rogoff analysis is correct, then the White House should concede that it was mistaken when it proposed a stimulus that would boost growth for only a short time, and it should stop calling for marginal hikes in tax rates.

http://www.washingtonpost.com/opinions/obama-inconsistent-on-pace-of-economic-recovery/2012/08/14/45533a3c-e627-11e1-936a-b801f1abab19_story.html

Originally Posted By ActionJack (11 AUG 2012 11:49am)

I have to ask, do you understand any of these terms to which you apply adjectives intended to incite emotions so other readers immediately buy into your paranoia?  Here's a site that may help you clear away those phantoms you see so you don't need those useless adjectives.

 

Welcome to CNBC Explains

... where we dissect the complicated economics of our world — everything from stocks and corporate balance sheets, to international trade and government policy.
http://www.cnbc.com/id/41585735/site/14081545/

 

 

Absolutely! And while you're at it, bring in the BIS and others who are warning of this "paranoia," not to mention those who were warning of the 2008 crash and were ignored.

Phantoms. Yeah, right.

Originally Posted By ActionJack (15 AUG 2012 3:34pm)

More:

... A Keynesian stimulus like the one the Obama administration advanced in 2009 would be appropriate if a recession were expected to be short and deep, followed by a quick and robust recovery. Such a stimulus has three stages: the initial short increase in GDP from the spending, a subsequent phase of approximately equal reductions in GDP after the stimulus runs out, and then an additional reduction in GDP when higher borrowing or taxes are needed to pay for the stimulus. If you expect a recession to be long and drawn out, a Keynesian stimulus is likely to be ineffective, because the hangover from the second two stages could easily push the economy back into recession. In such a world, policies that stimulate long-run growth such as fiscal consolidation and tax reform are clearly preferable to a Keynesian stimulus.

Thus the administration’s economics suggest mistakes of diagnosis or cure, or both. If the Obama administration believes that the Reinhart and Rogoff analysis is correct, then the White House should concede that it was mistaken when it proposed a stimulus that would boost growth for only a short time, and it should stop calling for marginal hikes in tax rates.

http://www.washingtonpost.com/opinions/obama-inconsistent-on-pace-of-economic-recovery/2012/08/14/45533a3c-e627-11e1-936a-b801f1abab19_story.html

There are two aspects to consider. The first is Keynesian stimulus, and the second is between $600 trillion to over a quadrillion in unregulated derivatives, which makes that stimulus look like chump change:

"Derivatives: The $600 Trillion Time Bomb That's Set to Explode"

http://moneymorning.com/2011/10/12/derivatives-the-600-trillion-time-bomb-thats-set-to-explode/

"Big Risk: $1.2 Quadrillion Derivatives Market Dwarfs World GDP"

http://www.dailyfinance.com/2010/06/09/risk-quadrillion-derivatives-market-gdp/

And forget about that useless counter-argument about notional value, unless one assumes that everyone else will be happy to accept losses. Or that the government doesn't essentially work for the financial elite.  Or that the financial elite essentially controls the global economy:

"Revealed – the capitalist network that runs the world"

http://www.newscientist.com/article/mg21228354.500-revealed--the-capitalist-network-that-runs-the-world.html

But as I said before, it's all derivatives straight to the bottom, as most of total money supply has no value, and what has are precious metals which mostly have no practical value. Those are your phantoms.

That's why production and consumption of resources have to keep increasing to prop up those phantoms. Otherwise....

Originally Posted By ralfy (16 AUG 2012 10:36pm)
 

There are two aspects to consider. The first is Keynesian stimulus, and the second is between $600 trillion to over a quadrillion in unregulated derivatives, which makes that stimulus look like chump change:

 

"Derivatives: The $600 Trillion Time Bomb That's Set to Explode"

 

http://moneymorning.com/2011/10/12/derivatives-the-600-trillion-time-bomb-thats-set-to-explode/

 

"Big Risk: $1.2 Quadrillion Derivatives Market Dwarfs World GDP"

 

http://www.dailyfinance.com/2010/06/09/risk-quadrillion-derivatives-market-gdp/

 

And forget about that useless counter-argument about notional value, unless one assumes that everyone else will be happy to accept losses. Or that the government doesn't essentially work for the financial elite.  Or that the financial elite essentially controls the global economy:

 

But as I said before, it's all derivatives straight to the bottom, as most of total money supply has no value, and what has are precious metals which mostly have no practical value. Those are your phantoms.

 

That's why production and consumption of resources have to keep increasing to prop up those phantoms. Otherwise....

 

I’m not understanding the above concern.  The link says U.S. banks loaned billions yet bet trillions on the same debt?  How so?  CDS are generally at most 2 percent of the debt insured per year.  As time goes on and the bet looks less likely to pay off the banks would liquidate the position.  Great news for the insurer.

And how are the U.S. banks’ exposure equaling trillions if the debt they’re betting against is in billions?  From the above info it looks like the U.S. banks’ biggest exposure is the actual amount they have loaned which means a catastrophic failure would be predicated on default of the EU; seems unlikely.

What derivative exposure of the banks is the root of concern? Cayne, the former CEO of Bear Sterns made himself a legend by buying up New York City bonds at a discount when it looked like the city would default.  He held them and the city eventually paid them off in full.  Perhaps these derivatives are just CDOs, which are bonds within bonds, and the banks are holding them and still receiving the interest payments.  At present, those bond issues may be out of money but if the interest payments keep getting paid and the banks hold the bonds until maturity, which I’m sure was not the intended play because they were created and packaged for trade, then the bonds may indeed pay in full without catastrophic loss, or no financial loss at all.  If the derivatives are shorts, or swaps couldn’t they easily just liquidate their position?

I’m having a problem understanding the time bomb nature of the crisis the author is describing.  The credit default play against the EURO debt is being diminished by government interference.  It is just that kind of government intervention which probably doomed John Corzine and MF Global so it’s hard for me to imagine that U.S. banks would be holding big positions in the CDS market betting against EURO banks.  They know very well the hand and glove relationship between banks and governments.

Originally Posted By ActionJack (17 AUG 2012 6:31am)

I’m not understanding the above concern.  The link says U.S. banks loaned billions yet bet trillions on the same debt?  How so?  CDS are generally at most 2 percent of the debt insured per year.  As time goes on and the bet looks less likely to pay off the banks would liquidate the position.  Great news for the insurer.

It's part of derivatives. And banks don't necessarily do that, which is why the amount reached hundreds of trillions of dollars. See the BIS report for details.

And how are the U.S. banks’ exposure equaling trillions if the debt they’re betting against is in billions?  From the above info it looks like the U.S. banks’ biggest exposure is the actual amount they have loaned which means a catastrophic failure would be predicated on default of the EU; seems unlikely.

 

"Details Of The $291 Trillion In Derivatives To Which American Taxpayers Are Exposed"

http://seekingalpha.com/article/503761-details-of-the-291-trillion-in-derivatives-to-which-american-taxpayers-are-exposed

 

What derivative exposure of the banks is the root of concern? Cayne, the former CEO of Bear Sterns made himself a legend by buying up New York City bonds at a discount when it looked like the city would default.  He held them and the city eventually paid them off in full.  Perhaps these derivatives are just CDOs, which are bonds within bonds, and the banks are holding them and still receiving the interest payments.  At present, those bond issues may be out of money but if the interest payments keep getting paid and the banks hold the bonds until maturity, which I’m sure was not the intended play because they were created and packaged for trade, then the bonds may indeed pay in full without catastrophic loss, or no financial loss at all.  If the derivatives are shorts, or swaps couldn’t they easily just liquidate their position?

 

Good to see you trying to answer your own questions. Now, we're beginning to realize that more than just "Keynesian printing" that's involved. And so much for "sound money" claims.

 

I’m having a problem understanding the time bomb nature of the crisis the author is describing.  The credit default play against the EURO debt is being diminished by government interference.  It is just that kind of government intervention which probably doomed John Corzine and MF Global so it’s hard for me to imagine that U.S. banks would be holding big positions in the CDS market betting against EURO banks.  They know very well the hand and glove relationship between banks and governments.

 

The amount spent by government is obviously not enough, and won't be enough.

The last sentence is spot-on and very much supports my point, except that it's less than a "hand and glove relationship" but more like the latter working for the former.

Originally Posted By ralfy (9 SEP 2012 11:18am)

Originally Posted By ActionJack (17 AUG 2012 6:31am)

I’m not understanding the above concern.  The link says U.S. banks loaned billions yet bet trillions on the same debt?  How so?  CDS are generally at most 2 percent of the debt insured per year.  As time goes on and the bet looks less likely to pay off the banks would liquidate the position.  Great news for the insurer.

 

It's part of derivatives. And banks don't necessarily do that, which is why the amount reached hundreds of trillions of dollars. See the BIS report for details.

 

And how are the U.S. banks’ exposure equaling trillions if the debt they’re betting against is in billions?  From the above info it looks like the U.S. banks’ biggest exposure is the actual amount they have loaned which means a catastrophic failure would be predicated on default of the EU; seems unlikely.

 

 

"Details Of The $291 Trillion In Derivatives To Which American Taxpayers Are Exposed"

 

http://seekingalpha.com/article/503761-details-of-the-291-trillion-in-derivatives-to-which-american-taxpayers-are-exposed

 

 

What derivative exposure of the banks is the root of concern? Cayne, the former CEO of Bear Sterns made himself a legend by buying up New York City bonds at a discount when it looked like the city would default.  He held them and the city eventually paid them off in full.  Perhaps these derivatives are just CDOs, which are bonds within bonds, and the banks are holding them and still receiving the interest payments.  At present, those bond issues may be out of money but if the interest payments keep getting paid and the banks hold the bonds until maturity, which I’m sure was not the intended play because they were created and packaged for trade, then the bonds may indeed pay in full without catastrophic loss, or no financial loss at all.  If the derivatives are shorts, or swaps couldn’t they easily just liquidate their position?

 

 

Good to see you trying to answer your own questions. Now, we're beginning to realize that more than just "Keynesian printing" that's involved. And so much for "sound money" claims.

 

 

I’m having a problem understanding the time bomb nature of the crisis the author is describing.  The credit default play against the EURO debt is being diminished by government interference.  It is just that kind of government intervention which probably doomed John Corzine and MF Global so it’s hard for me to imagine that U.S. banks would be holding big positions in the CDS market betting against EURO banks.  They know very well the hand and glove relationship between banks and governments.

 

 

The amount spent by government is obviously not enough, and won't be enough.

 

The last sentence is spot-on and very much supports my point, except that it's less than a "hand and glove relationship" but more like the latter working for the former.

 

 

 

You couldn't answer a single question could you?  You really don't understand derivatives at all.  Think; basically derivatives are insurance for the debt; they can't total more than the debt AND they won't ever equal the debt because when the tide turns against the insurer he will call back in his derivative.  For a detailed breakdown on how derivatives work and caught Wall St. flat-footed read Michael Lewis' The Big Short

What needs to be understood here when it comes to derivatives is that the driving force is not "Wall St. greed", but unfunded liabilities.  There exists a deluge of promises that demand dollars and it's in the form of pension funds and promised health care.  This is particularly true in many municipalities.  One example is CALPERS which has predicated its promised obligations on a 7.5 percent return when they average 2 percent on government bonds.  They depend on the Bain Capitals of the world, and those derivatives manufactured on Wall St. to get that 7.5 percent return.  Also, it must be understood that many of those derivatives are not speculatory instruments like CDS (credit default swaps) which bet on bond/loan failures but are CDOs based on the interest payments on debt.  That's mortgage debt, credit card debt, etc.  Most debtors pay their bills and they also pay interest with those bills.  The only way for union pension funds, especially public sector pension funds, to afford the lavish retirements and heath care promises is to depend on receiving that interest from the country's huge debt.  There's no other way to do it because the unions are not funding the pensions with union collections which they instead squander on union perks and politician's payola.

Secondly, all that debt cannot go bad at once and if it did do you really think the insurance derivatives would pay off on that bet?  Did GM pay off all their debtors?  Heck no!  So Ralfy you're panicking for no reason.  Think about the regular insurance companies, especially the mutual insurance companies whose members are legally liable for the companies obligations.  Can a catastrophe occur which swamps the insurance companies' ability to pay?  It could happen but it is so unlikely and if it did, there would be a lot of people waiting an enternity for a payoff that would never come.  What sunk the Wall St. banks was their continuing to create CDOs, and bonds on debt they couldn't sell to investors and instead hold the instruments on their own books.  It was the leverage of 30:1, and 40:1 ratio of assets to debt that caused their demise.

You don't want to see derivatives disappear nor should you.  If it makes sense for someone to take their million dollar inheritance and invest it in bonds to live off the interest, then it makes sense for municipalities to invest in 100 million dollar CDOs, which is just a collection of thousand dollar bonds, to pay the ridiculous pension obligations they've made a promise to pay which they can't get from the tax payers.

Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis by John Taylor

http://www.amazon.com/Getting-Off-Track-Interventions-ebook/dp/B0024NLN66/ref=pd_sim_kstore_1