ECB Wants "Bad Bank" Too
It seems that we are not the only one contemplating insanity. The European Central Bank seems to be infected with the same poor judgement as the Federal Reserve.
ECB Drawing Up 'Bad Bank' Guidelines
DAVOS, Switzerland -- The European Central Bank is drawing up guidelines for European governments that are considering so-called "bad banks" to house banks' toxic assets. The ECB is also working on guidelines for European governments that plan to guarantee toxic assets remaining on banks' books, another form of bank bailout.
Why would the European Union citizens want to be using their tax dollars to guarantee "toxic" assets. Doesn't this just sound stupid? They don't need a "Bad Bank" and neither do we. Even talking about implementing such a think is a waste of time and money. Actually implementing it will just squander billions (and potentially trillions) in taxpayer money.
German Finance Minister Peer Steinbrueck told a German daily newspaper Thursday the government would not set up a centralized bad bank, but indicated the government is considering the idea that banks could set up their own individual entities to house toxic assets.
Such banks, Mr. Steinbrueck told the daily Berliner Zeitung, could then use part of the German government's EUR 500 billion banking-sector rescue plan to shore up their remaining sound business.
Sounds to me like Europe could benefit from instituting a 100% reserve policy for its banks too. How come no one realizes that this is the main root of the entire problem. All of the other solutions are just patches that will result in the same problems down the road as we have already seen!
Regarding Mr. Steinbrueck's statement, I would say that there are probably not to many pieces that "remain sound" in these businesses. Most of them are probably insolvent and were involved in insane lending practices. These businesses need to fail and let others replace them.
Europe, America, and the rest of the world needs to stop the banking ponzi scheme and return to sound banking. Until then, everything else is just patching the dam.
Keynesianism Now Being Tested For the First Time?
I came across a recent story at NPR discussing how Obama Gives Keynes His First Real-World Test. The argument is that we are about to see the first test of Keynes's 73-year-old theory. Let's take a look.
Keynes, a British economist who died more than 60 years ago, inspired President Barack Obama's plan to save the U.S. economy with a massive round of government spending. The British economist published his big theory, the one underpinning most of what Obama intends to do, in 1936.By the 1980s, many believed Keynes' ideas were utterly discredited. But he is the man who came up with the then-radical notion that a government can pull a country out of a deep recession by spending a lot.
Many would argue that Keynes' 73-year-old theory is being tested, right now, for the very first time.
For readers who may be unfamiliar with the Keynesian ideals, John Maynard Keynes came up with the idea that governments could manipulate interest rates and the supply of money to keep the economy at its maximum capacity. During recessionary times he argued that the government could spend more and more to get the country back on its feet, and he was a large advocate for fiat currencies.
I think it should be pretty obvious that the current times that we are in cannot be the first time that the keynesian theory has been tested. Governments have been trying to spend their way out of recessions since the Great Depression, and so far it has never worked.
All last year the government was spending and spending and "stabilizing" things everywhere you looked. Yet we are still seeing accelerating layoffs and unemployment, the economy is not showing signs of recovering, and the government just wants to do more of the same.
"I've read the general theory five times," says Tyler Cowen, an economist at George Mason University. "The first time I read it, I was maybe 18." Cowen has been reading Keynes' book again, this time writing notes and conducting a discussion on his blog, Marginal Revolution.Cowen says Keynes corrected what he saw as a fundamental error in the economics that had come before. Classical economics teaches that if there's a downturn, the economy will eventually sort itself out. If people aren't buying enough, prices will drop to a point where people start spending.
Keynes' radical insight was to look out the window in the 1930s and see that sometimes things don't right themselves. The economy goes into a downward spiral. The usual dynamic of supply and demand breaks down.
When there is a downturn, the economy will sort itself out. This is how economies developed before central banks and keynesian ideas. If they couldn't, then we would not have developed to the point that we are at today. Thinking otherwise is simply silly. "If people aren't buying enough, prices will drop to a point where people start spending." This is exactly what I have been arguing for in this blog. The government needs to get out of the way and let this happen.
"A failure of effective demand is what he called it," says Alan Blinder, a Princeton economist who served as economic adviser to President Bill Clinton. Basically, people aren't spending enough money, either because they don't have any or because they got laid off or are afraid they're about to get laid off.
If people aren't spending enough money, there's no way for the economy to automatically adjust. During the Great Depression, no one had figured out how to get people spending again. Then came Keynes.
"The Keynesian prescription is if all else fails, the government can spend the money," Blinder says. Normally, in a free-market economy, the public doesn't look to the government to prop up spending. "But Keynes' idea, which was revolutionary at the time, is if the private sector won't do it, then the public sector can do it as a fill-in stopgap," Blinder adds.
To me this is just crazy talk. The government should not be able to spend money from nothing -- and they can't. As I have said before the government can't create new real wealth, they just steal wealth from other market participants and redirect it to less-desirable causes. The causes are less desirable because people in the market are not carrying them out on their own, which means there is either a lack of demand for it, or it does not provide a benefit that people are willing ta pay for. If people don't want it and are not willing to pay for it, why should the government take money from us to pay for it and give it to us anyway.
Like lots of fellow Keynesians, Blinder says Keynes' theory played out in the 1930s, with government spending pulling America out of the Depression. That's become the standard line in school textbooks. But Keynesians say it wasn't so simple as President Franklin Delano Roosevelt getting inspired by Keynes and spending his way out of the crisis.
Yes, Roosevelt expanded government spending, with an alphabet soup of programs. But he never spent as much money as Keynes said he should have. He also did all sorts of things that Keynes opposed, like raising taxes and trying to balance the budget. Keynes said those steps would cancel out any positive effect from spending.
Emphasis Added
Keynes opposed raising taxes, which I am also an advocate for. I oppose it because I think governments should spend less and thus need less taxes for funding. Keynes on the other hand, seemed to oppose balancing of the federal budget, which is complete craziness to me. Why would balancing the budget be bad? Keyne's opposed the raising of taxes because he thought it cancelled out any "positive" effect from government spending. This is because it would help balance the budget. In Keyne's mind, the defecit is what would revive the economy because people would be getting more money and keeping it, rather than paying it back in taxes. This seems good at first until you realize that every new dollar they are getting is just worth less, so the real wealth is not increasing, nor is the purchasing power. All that is increasing is the public debt.
Crack for Politicians
One way the economy is not like a watch is that you can repair a watch without politicians. Politicians took the Keynesian message that government spending can be good and ran with it. They paid for the war on poverty and the war in Vietnam. They sent a man to the moon. All the while, they piled up the federal budget deficit, convinced that Keynes gave them a free pass.
Prescribing Keynesianism to some politicians is like prescribing crack to a coke addict. In the 1970s, the patient hit rock bottom. The U.S. had high unemployment, and the Keynesian solution stopped working. The national government spent and spent, but unemployment only got worse. Then came inflation, something Keynesians had no answer for.
I think this article hit the nail on the head with this section. The reason Keynesianism is, and has been, so big is because politicians can promise all of these things that people want, and just print new money to foot the bills. It essentially gives the politicians an unlimited check book with which to provide false answers to their constituents.
"Then came inflation, something Keynesians had no answer for." And I think that inflation is the reason that the Keynsian ideas do not work. If the government could hand out money to citizens out of thin air, and that money would somehow keep the s
ame value (this is impossible), then maybe the system would work. I think it does not take into account all the effects of currency debasement.
Some Have it Right
"When I took macroeconomics in the 1980s and early 1990s, the textbooks explained the basic system, but then spent a few chapters showing why the Keynesian system did not work," remembers economist Chris Edwards, now of the avowedly anti-Keynesian Cato Institute. The think tank was founded in 1977, near Keynesianism's lowest point. Edwards says he thought the debate of Keynesianism was settled in the 1980s.
Now, with the new stimulus package before Congress, the Keynesians are back — and economists across the spectrum are calling for government spending. Where are the theorists who oppose it? "I thought this sort of kindergarten Keynesianism, as I call it, the simple idea that the government can spend more money to grow the economy, had died in the 1970s," he says. "But I was wrong."
Unfortunately, it seems Chris Edwards was wrong. Keynesianism should have died in the 1970's, but I think the Crack for Politicians idea has caused the Keynsian philosophy to stay alive. They need it to stay alive so that politicians can keep promoting false promises in order to win votes from their constituents. Unfortunately, this government printing, currency debasement, increasing of the public debt, and propping up of zombie, unprofitable, poorly managed companies will only hurt this nation and its wealth-producing capabilities for many, many years to come.
Great Experiment
"So, here's the way Keynes would have done it," Blinder says, sketching points on a blackboard in his office.
The Keynesian formula is straightforward. First, you estimate how much the economy should be producing — given all the people and factories and offices. Blinder's guess is $15 trillion. Then you look at what the economy is actually producing. He puts that at $14 trillion.
The government shouldn't have to spend the entire trillion-dollar shortfall. That's because of something called the "Keynesian multiplier." Every dollar the government spends produces more than a dollar in spending throughout the economy. If the government pays you to build a bridge, you spend your paycheck on rent and food and so on, and then your landlord and grocer have money. Using Keynesian math, you can figure out exactly how much the Obama administration should spend.
This is a really good article from the NPR that shows a little bit of both sides. The entire article is definitely worth the read.
Hopefully the current experiment will be good for Austrian Economics, and Free-Market theory, but I fear it will only be touted as a victory for Keynesianism. "The government shoudn't have to spend the entire trillion-dollar shortfall." Of course readers of this blogk probably know that I will argue that the governemnt shouldn't spend any of the trillion dollar "shortfall"
No one can say what the economy "should" be producing. Just because factories were built foolishly that should not have been built, and too much office space was built that was not needed, does not mean that we "should" be producing more.
People and companies that built excessive commercial real estate and excessive factories made poor investments, and those investments must lose money. The government cannot turn them into good investments no matter how much it spends. All it can do is debase the currency enough to make investments seem as if they didn't lose money, by decreasing the value of the dollar.
This expirement will not be great for the American people or for the wealth of America. Hopefully it can help more people see that we need less government intervention, lower taxes, and less spending. However, with the onslaught of media coverage arguing the contrary, I don't know if enough people will come out of this with the right ideas. Let's do all that we can to educate our representatives and our friends. This is the only way we can come out of this with brighter hopes for the future.
Our Enemy, Inflation
Ron Paul a few days ago. Great video to watch, hopefully we can get more representatives on board with Dr. Paul. Everyone should encourage their representatives to support Dr. Paul and his efforts to end the Fed. The more people we can get behind this the better!