yaz
11-03-2009, 09:51 PM
ME: I think that if you agree with the Austrian theory of the business cycle, http://en.wikipedia.org/wiki/Austrian_business_cycle_theory , then you have to think that abolishing the Fed is a good idea.
I'm not convinced that the whole system would collapse without our intervention. http://thecurrent.theatlantic.com/archives/2008/09/not-buying-it.php We're esentially trusting the same people who caused or helped to creat the crisis in the first place.
http://mises.org/story/3132
" The 1930's depresion was also funded by the fed the reason the money supply dropped was not because the fed did not supply liquididy but because the gov regulated prices; so they could not drop and no one would borrow money at to high of prices. We need to let prices fall to the right level (whatever that might be) so we can go on with good investments and let the bad ones go. If we bail out then we are just letting the fed remonitize the problem they already created and it will come back to bite us in the rear down the road. The fed created the bubble and is trying to create another instead of letting if pop. It does not matter if it was housing or dot.com or tulips, it was still a bubble and has to pop. What we realy need to get rid of is the fed so we can go to a natural business cycle not the big boom and bust of the fed."
Not Me: First, you would need to tell me why a "natural business cycle" is superior. Fact, in the era of non activist, no Fed, business cycles featured more frequent and more virulent recessions. Fact, the more recent period in history after governments chose to follow a more hands on approach we have less frequent and shorter lasting recessions with expansions that are a lot longer. Lets further look at two examples of countries in latin america with banking crisis with similar economies. Mexico formed Fobaproa to orderly close banks, to keep asset prices from free falling irritionally caused by over reactions due to irrational fear. Then there was Argentina, Argentina decided to keep their hands off, to let banks fail, to let prices free fall. Mexico recovered within 2 years, they started again on a growth path and saw a very prosperous decade. Argentina was not so lucky, it took them more than half a decade to see their situation improve and only marginally.
With regards to falling prices, one would have to closely examine the reason prices are falling. Price controls indeed were enacted, but those were for some goods and services and for some salaries and wages. None of those price controls existed for asset prices. What goes on with asset prices is a relevant story where rapidly falling prices are NOT a good thing. Let me explain, in the case of the great depression, as well as the case here recently many financial institutions had stocks, MBS, etc as their assets. Now, when an institution like Lehman with huge holdings of those instruments goes bust, they have to unload all those in the market place, rapidly increasing supply and forcing the price down. People holding the asset on margin see the value of their collateral go down and get margin calls, they have to unload. Fear sets in as everyone holding those assets wants to get out before price slides further down, nobody can find buyers, the traditional valuation models don't hold water anymore, there is uncertainty, and fear and over reaction set in forcing prices down adversely impacting the balance sheet of the institutions that hold them. the paradox is, evrybody is trying to unload their assets to improve their balance sheet and capital positions to prevent failure. the problem is, that since everybody is trying at the same time, no one can is able to improve their financials no matter how much they unload. traditional credit instruments such as the fed funds window, libor, etc... dry up as uncertainty increases with regard to the strenght of balance sheets. those institutions find themselves overnight beat up, without access to credit, with depositors running on the bank, undercapitalized. ALL at the same time.
I'm not convinced that the whole system would collapse without our intervention. http://thecurrent.theatlantic.com/archives/2008/09/not-buying-it.php We're esentially trusting the same people who caused or helped to creat the crisis in the first place.
http://mises.org/story/3132
" The 1930's depresion was also funded by the fed the reason the money supply dropped was not because the fed did not supply liquididy but because the gov regulated prices; so they could not drop and no one would borrow money at to high of prices. We need to let prices fall to the right level (whatever that might be) so we can go on with good investments and let the bad ones go. If we bail out then we are just letting the fed remonitize the problem they already created and it will come back to bite us in the rear down the road. The fed created the bubble and is trying to create another instead of letting if pop. It does not matter if it was housing or dot.com or tulips, it was still a bubble and has to pop. What we realy need to get rid of is the fed so we can go to a natural business cycle not the big boom and bust of the fed."
Not Me: First, you would need to tell me why a "natural business cycle" is superior. Fact, in the era of non activist, no Fed, business cycles featured more frequent and more virulent recessions. Fact, the more recent period in history after governments chose to follow a more hands on approach we have less frequent and shorter lasting recessions with expansions that are a lot longer. Lets further look at two examples of countries in latin america with banking crisis with similar economies. Mexico formed Fobaproa to orderly close banks, to keep asset prices from free falling irritionally caused by over reactions due to irrational fear. Then there was Argentina, Argentina decided to keep their hands off, to let banks fail, to let prices free fall. Mexico recovered within 2 years, they started again on a growth path and saw a very prosperous decade. Argentina was not so lucky, it took them more than half a decade to see their situation improve and only marginally.
With regards to falling prices, one would have to closely examine the reason prices are falling. Price controls indeed were enacted, but those were for some goods and services and for some salaries and wages. None of those price controls existed for asset prices. What goes on with asset prices is a relevant story where rapidly falling prices are NOT a good thing. Let me explain, in the case of the great depression, as well as the case here recently many financial institutions had stocks, MBS, etc as their assets. Now, when an institution like Lehman with huge holdings of those instruments goes bust, they have to unload all those in the market place, rapidly increasing supply and forcing the price down. People holding the asset on margin see the value of their collateral go down and get margin calls, they have to unload. Fear sets in as everyone holding those assets wants to get out before price slides further down, nobody can find buyers, the traditional valuation models don't hold water anymore, there is uncertainty, and fear and over reaction set in forcing prices down adversely impacting the balance sheet of the institutions that hold them. the paradox is, evrybody is trying to unload their assets to improve their balance sheet and capital positions to prevent failure. the problem is, that since everybody is trying at the same time, no one can is able to improve their financials no matter how much they unload. traditional credit instruments such as the fed funds window, libor, etc... dry up as uncertainty increases with regard to the strenght of balance sheets. those institutions find themselves overnight beat up, without access to credit, with depositors running on the bank, undercapitalized. ALL at the same time.