Financial instruments behind the global meltdown cannot be understood

[abskebabs]

I would, if the alternative were the collapse of the financial sector/economy. That was the case here, unless you're saying otherwise.

 

As I tried to point out, this would not culminate in a complete collapse of either the financial sector or the economy. There were plenty of smaller banks ready to take the place of the failing ones.

 

I don't deny there would have been a short, sharp depression if nothing was done, but the damage was already done during the boom making such a correction inevitable. All the further interventions have done is make a larger collapse inevitable, while the fundamentals economically are terrible, and politically preferred failing institutions have been bailed out.

 

Given the interventions, the outlook looks far worse as a result. If you see "green shoots" give me a shout, but you're chasing a unicorn.

[bascule]

As I tried to point out, this would not culminate in a complete collapse of either the financial sector or the economy. There were plenty of smaller banks ready to take the place of the failing ones.

 

You're in the minority on that opinion and I don't find it particularly defensible.

 

How far would small banks have to leverage themselves to provide the sheer volume of credit needed to power our economy?

 

I don't deny there would have been a short, sharp depression if nothing was done, but the damage was already done during the boom making such a correction inevitable.

 

Why do you think the depression would be short? You're talking about the backbone of our entire finance system vanishing off the face of the earth, leaving massive debts in their wake. Lehman Brothers alone had a debt larger than the GDP of most nations on earth. Had the government not intervened AIG, Goldman Sachs, and many others would've followed:

 

 

What on earth makes you think such a depression would be short? Where would the new financial industry arise from? How long do you think it would take? Do you seriously expect it to have the volume of credit needed to run the US economy in short order?

 

All the further interventions have done is make a larger collapse inevitable, while the fundamentals economically are terrible, and politically preferred failing institutions have been bailed out.

 

What makes you think the collapse will be larger? How much larger?

 

I really don't think we're going to reach any common ground here abskebabs. You think I'm swallowing Paulson's turds whole, and I think you're off in theoretical Austrian na na land and have no clue about reality.

[abskebabs]

I think you first have to get rid of the popularly propogated and unjustified neo-mercantillist myth that the "credit" created by fractional reserve and central banking somehow creates real economic growth, rather than inflation, malinvestment and fraud.

 

Sure the debt ridden institutions would have been liquidated, and where their creditors could not be paid back from the sale of their assets they would have to abide by their losses as part of the contract; simple as that.

 

Sustainable investment has to come from real savings(these have been destroyed in the US, hence why it is no longer a creditor nation), to allow true development via capital accumulation, a truth Adam Smith thought he made clear when destroying the fallacies of the mercantillists, which unfortunately came back to haunt the world with the writings of John Maynard Keynes and his followers in the 20th century.

 

Indeed a rise in interest rates that would occur if the recession were allowed to take course would help both increase the rate of savings, as well as prevent further capital flow toward wasteful projects, as has been continued for the last year. Both these steps would mark the first few towards a real recovery, though there is no doubt that the structural problems in the US economy are serious. Exacerbating them further however will not help.

 

So you understand where I'm coming from, I'd like to recommend, if the fact it's hosted by mises.org doesn't make you sneeze ideologically, you read the following set of essays:

http://mises.org/pdf/austtrad.pdf

 

You never know, you might learn a lot.

[bascule]

Sure the debt ridden institutions would have been liquidated, and where their creditors could not be paid back from the sale of their assets they would have to abide by their losses as part of the contract; simple as that.

 

And when those losses are equivalent to the GDP of a small nation? From a SINGLE INSTITUTION?

 

The predicted effect is a cascade failure as the bad debt passes from one institution to another (accumulating as it takes down successive institutions), bankrupting them all.

 

Do you think, had the bailout not happened, there would've been a different outcome?

 

I think you first have to get rid of the popularly propogated and unjustified neo-mercantillist myth that the "credit" created by fractional reserve and central banking somehow creates real economic growth, rather than inflation, malinvestment and fraud.

 

I'm not even talking about that. I'm talking about damage control in the wake of a financial disaster.

 

You want to let the system collapse completely. I think the bailout was an acceptable alternative. You don't. This is just going around in circles at this point.

 

Going back to what I said earlier, economics isn't a science. There are no "right answers". We're just talking past each other because our opinions are rather different. Although your interpretation seems a bit light on facts, and I find your predictions of the future based on a collapse scenario tainted by Austrian rose colored glasses. I'm sure you think they're perfectly realistic.

 

Do you really want to keep discussing this? I don't think we're making any progress.

 

Agree to disagree?

[abskebabs]

Equally, I find your responses to demonstrate very little critical reasoning or thought with regard to the concepts under discussion.

 

You're right we entirely disagree. I brought up mercantillism precisely to respond to your claims about credit being the alleged lifeblood of the economy; a treacherous half-truth at best.

 

You seem to miss the point that liquidation would have brought about massive deflation erasing much of the previously created artificial credit, so losses in real terms would not have actually been that high, given the drop in money supply. Indeed this is part and parcel of the entire correction process as had occured in 1921, and other recession recoveries.

 

In any case, if you read the set of essays I linked and would like to discuss the matter further, possibly in another thread, send me a PM. I also would like to apologise for being rude eariler. The nature of what I've seen discussed on this forum lately, from defenses of marxism to utter blindly naive defenses of current economic policy has really ruffled my feathers.

[bascule]

Equally, I find your responses to demonstrate very little critical reasoning or thought with regard to the concepts under discussion. [...] I also would like to apologise for being rude eariler.

 

That's quite the backhanded apology, but... thanks, I guess?

 

I'm not sure in what way I'm demonstrating "very little critical reasoning or thought with regard to the concepts under discussion."

 

As far as I can tell there are no matters being discussed here which transcend the realm of opinion.

 

Again, economics is not a science. I would certainly hope you Austrian school people appreciate that more than anyone.

 

Anyway, I'm done, unless someone actually wants to discuss CDOs.

[abskebabs]

Again, economics is not a science. I would certainly hope you Austrian school people appreciate that more than anyone.

 

Depends what you mean by science. If you mean it has nothing relevant to say about the real world that is nothing more than the collection of arbitrary opinions on a certain subject, I entirely disagree.

 

I can only slightly sympathise, as this was my opinion before engaging in a study of the subject myself. The concepts of psychic profit, loss and marginal utillity are defined in the very concept of action in the real world in the first place, in the sense we cannot reason it to occur without them.

 

Again without reading the subject, it's very easy to dismiss it out of hand. I urge you again to read the essays I linked.

Edited October 20, 2009 by abskebabs

[bascule]

Depends what you mean by science.

 

We've bumped heads on this matter on this thread already. If you would like to discuss the matter further I suggest we continue there.