Barry Ritholtz–Imagining if the Financial Fiasco had been Handled Properly

We don’t have alternative universe laboratories to run control bailout experiments, but we can imagine the alternative outcomes if different actions were taken.

So let’s do just that. Imagine a nation in the midst of an economic crisis, circa September-December 2008. Only this time, there are key differences: 1) A President who understood Capitalism requires insolvent firms to suffer failure (as opposed to a lame duck running out the clock); 2) A Treasury Secretary who was not a former Goldman Sachs CEO, with a misguided sympathy for Wall Street firms at risk of failure (as opposed to overseeing the greatest wealth transfer in human history); 3) A Federal Reserve Chairman who understood the limits of the Federal Reserve (versus a massive expansion of its power and balance sheet).

In my counter factual, the bailouts did not occur. Instead of the Japanese model, the US government went the Swedish route of banking crises: They stepped in with temporary nationalizations, prepackaged bankruptcies, and financial reorganizations; banks write down all of their bad debt, they sell off the paper. Int he end, the goal is to spin out clean, well financed, toxic-asset-free banks into the public markets.

Read it all.


Posted in * Culture-Watch, * Economics, Politics, Economy, Federal Reserve, History, House of Representatives, Office of the President, Politics in General, President Barack Obama, Senate, The 2009 Obama Administration Bank Bailout Plan, The 2009 Obama Administration Housing Amelioration Plan, The Banking System/Sector, The Credit Freeze Crisis of Fall 2008/The Recession of 2007--, The Fiscal Stimulus Package of 2009, The Possibility of a Bailout for the U.S. Auto Industry, The September 2008 Proposed Henry Paulson 700 Billion Bailout Package, The U.S. Government, Treasury Secretary Timothy Geithner

34 comments on “Barry Ritholtz–Imagining if the Financial Fiasco had been Handled Properly

  1. sophy0075 says:

    Or better yet, if Barney Frank hadn’t leaned on Freddie and Fannie to reduce mortgage lending requirements. That way, the derivatives created by Wall Street wouldn’t have been worth the bundle of bad mortgages and credit risks that they were.

  2. Sick & Tired of Nuance says:

    Is it possible for us to do a massive “reboot”? Could the US declare that the Federal Reserve is bankrupt, dismantle the FED, and go back to having congress control the money supply and the government minting the money?

    When the Soviet Union collapsed, it didn’t take long for Russia to emerge with a viable currency. The US has an abundance of natural resources and we still have some manufacturing capacity…couldn’t that be the basis of our restored Federal Dollars once the Federal Reserve Notes were declared worthless? After all, the FED is really just a group of private banks. They can go bankrupt. The congress has the authority to mint money. We could even go back to a silver standard. The silver dollar would be worth about $20 of today’s Federal Reserve Notes in purchasing power. The restored dollar would have an actual value, which would allow for international commerce to continue.

    Why can’t we do a national reboot? This article is great as far as analysis of the past, but where do we go from where we actually are now? Where are the solutions? What was done was the wrong thing. What can we do now to change course?

  3. Bart Hall (Kansas, USA) says:

    Actually, we need only look north for a rather good example. Canada has cut its corporate tax rate from 28% to 18%, and will cut it again in 2012. Nearly all the job losses from the ’08 – ’09 recession have been recuperated, primarily through creation of new jobs in a private sector seeing both its tax and regulatory burdens diminish.

    Canada also has the very best banking system in the world. Not one bank has failed since 1923. Yes, ’23, not ’33. There is no such thing as a 30-year fixed mortgage (they all reset after 5 years), and mortgage interest is not tax deductible. There is no federal program facilitating mortgages for people who can’t make a large down payment. Those folks rent.

    As a side-note to STN … adjusted for inflation, US manufacturing has [i]doubled[/i] since 1983, nearly all of that growth coming from small and medium businesses. That is a real compound annual growth rate of 3% per year. Not bad.

    Similarly, “hard money” is not an answer. The worst depression in American history, 1837 to ’44, occurred during a hard-money era. It also gave rise to some of the greatest innovation our land has ever seen, for example, McCormick’s reaper.

    The real problem is not depressions, for they are inherently healthy for the economy, inspiring innovation and cleaning up balance sheets across the board.

    What should be feared are militant idealogues with no real-world economic experience. Most of the current crew in DC are indeed idealogues — they sound like your average faculty-lounge bull session — and most of them have never even run a lemonade stand.

    That is predictably dangerous, and we’re already seeing the results.

  4. Sick & Tired of Nuance says:

    Thanks Bart. I had heard that the US manufacturing base was only about 20% what it was back in the 70’s. What you said is encouraging. I like the idea of a hard currency, but I am not married to it.

    I do not quite understand what you were getting at with this comment:
    [blockquote]Similarly, “hard money” is not an answer. The worst depression in American history, 1837 to ‘44, occurred during a hard-money era. It also gave rise to some of the greatest innovation our land has ever seen, for example, McCormick’s reaper.

    The real problem is not depressions, for they are inherently healthy for the economy, inspiring innovation and cleaning up balance sheets across the board.[/blockquote]

    If depressions are not bad and are healthy for the economy…why not have a hard currency, since the chief objection to it seems to be that the worst depression happened when we had hard currency?

    What about the thoughts on allowing the FED to go bankrupt and having the congress resume its constitutional role viz currency? The FED was supposed to limit the destructive effects of the business cycle. They have failed. Why perpetuate an institution that costs us money, adds a layer of bureaucracy, and is insulated from any accountability?

    I highly respect your opinion and your amazing knowledge and I ask these questions respectfully and with a desire to become better informed.

  5. John Wilkins says:

    Bart is right. They also, of course, have a health care system that most of them love and public education that is enviable.

    Depressions are horrible for the poor. They create misery and destroy families. What creates innovation is not merely depressions, but people who invest time and money in innovation. During the time of no depressions (say, from 1945-72), with healthy Keynesian policies, we reached the moon.

    The author of the passage is right. A swedish ceanup would have been better. But the captains of high finance don’t like to bear the consequences of their actions, and resent anyone who tells them otherwise. They are often petulant, arrogant and entitled. The American people are right to be angry and resentful toward them.

  6. AnglicanFirst says:

    “They also, of course, have a health care system that most of them love and public education that is enviable.”

    This statement flies in the face of the horror stories about the Canadian health care system that have been made public over the past years.

  7. Bart Hall (Kansas, USA) says:

    I’m not objecting to hard currency on the basis of any depression, I’m simply saying that hard currency does not prevent financial crises, which are born in the fundamentals of our fallen greed.

    Perhaps our biggest challenge in these times is first that government has become far to large, powerful and intrusive, and second the Washington has been taken over by Wall Street … not the other way around.

  8. J. Champlin says:

    Just a note. This is a fun and informative exchange to read. Thank you both John Wilkins and Bart Hall for your comments — and it’s not all that often that a body gets to say that.

  9. Sick & Tired of Nuance says:

    Thanks again Bart. So, if hard currency doesn’t prevent financial crises, but neither does the FED issuance of Notes, why not go with the hard currency? It seems to resist inflation better than paper, that’s why a silver dollar today “sells” for about $18-$20 worth of FED Notes. I don’t understand the value of the FED since they have repeatedly failed so badly. From my perspective, they are unconstitutional, expensive, and ineffective. It seems that I am missing something important, but I don’t know what I don’t know. The currency could be based on oil or coal or even copper…just so that it has some intrinsic value. Full faith and credit of the government isn’t particularly reassuring.

  10. Don R says:

    I think the phrase “healthy Keynesian policies” is oxymoronic. 🙂 The situation that produced the post-World-War-II boom was pretty unique in history, and even that took us only so far. Rooted in the notion that wise men of compassion and vision could “manage” an economy into perpetual prosperity, those “healthy Keynesian policies” brought what Keynesians thought was literally impossible: economic stagnation accompanied by high inflation. Something very much like that could happen again.

  11. Septuagenarian says:

    Canada also has regulators that regulate instead of doing the regulated’s bidding. It is not the laissez-faire, Ayn Rand paradise some would like to have you believe.

    Aslan told the children, “You are not to know what might have happened.”

    That said, I imagine that the Republican right would have screamed bloody murder had Ritholtz’s counter factual been implemented and for exactly the same reasons that they screamed bloody murder about what was actually done.

  12. Bart Hall (Kansas, USA) says:

    Actually, since 1870 silver has lost about 75% of its value compared to gold, whereas the US dollar has lost 95%. Since 1963 I’ve called them Federal Reserve Accounting Unit Dollars — FRAUDs.

    Money has three functions: to measure value, to transfer value, and to store value. FRAUDs are just fine for the first two of those three, and at the time-scale that matters for most people they’re decent at the third.

    Effective money is durable, which is why we don’t use strawberries. It is divisible, which is why we no longer use oxen (and the did in 8th C BC Greece). It is portable, which is why coal would be at least a little bit clumsy.

    Only if I stuffed FRAUDs into a mattress in 1974 would I be upset that they now purchase but a quarter of what they did back then.

    The easiest and most effective answer is to find ways around the FRAUD’s weakness is storing value. For that we have gold, shares in a profitable and growing business, productive farmland (talk about a portability and a divisibility problem!), and any of assorted other ways to preserve value.

    This will seem strange, but these are the facts. Look at any graph of American economic history from our founding forward, so long as it has those grey bands indicating recessions and depressions. What you will see is that prior to 1933 recessions were long and remarkably frequent compared to everything since that date.

    Getting off the gold standard and allowing the Fed to “print” money has had one undeniable effect — recessions are astoundingly infrequent and short compared to what they used to be.

    Our core problem has been, for a generation, profligate government spending and debt, not the lack of a hard currency.

  13. Sick & Tired of Nuance says:

    Thanks again Bart. One more question, please. The economists are talking that we may be in for a 10 to 20 year long recession this time (like Japan). We had the .com bust about 2000-2001. Only six to seven years later, we had the housing bust in 2007. Then, in 2008 we had the derivatives bust. Now, in 2010, there is considerable discussion of a double dip recession. The current crop of recessions seem to be coming with increased frequency and the projections are for at least a decade before we recover. The current fiat system allows the government to just print money. That seems different from what you describe. It seems like they have figured out a way to game the system. I’m still not there with your thinking yet. I mean, our core problem of profligate government spending (and the corollary inflation) has been going on for a generation. The FED and the current currency scheme seem to have enabled this practice. If the currency was tied to something, I think it would be harder for them to just create money (which is really just notes of debt) out of thin air like they have been doing. Silver may have lost value compared to gold, but it is 18 to 20 times more valuable than the paper script that replaced it and that is with active market manipulation going on to suppress the value of precious metals. Also, there appear to be more certificates of gold than there is gold in the vaults, so that doesn’t seem to be a good way to retain value. (BTW, I wasn’t suggesting that we barter, I was suggesting that our script be tied to some tangible asset…not just “full faith and credit”. The government has exhausted everyone’s faith in it and they are rapidly exhausting their credit line.)

  14. TACit says:

    I heard Joseph Stiglitz on the radio here in Australia a week or so ago, saying that Australia has managed the global financial crisis/fallout best of any of the developed countries (and I suppose he was including Canada in the list).
    Two facts about Canada and Australia are that their populations are each a small percentage of that of the USA and thus inherently more manageable, and that both have economies much dominated by mining, which the USA certainly does not have. The culture of healthy mining companies is inherently conservative, and also management-rich because of their extremely risk-beset operating environment. This is all to say that Ritholz should probably not have bothered with his Canada comparison as it’s just too different from the USA to be very meaningful. He should move to Canada if he thinks it’s better-run, and he doesn’t already live there – though the climate will probably put him off doing that.

    I don’t disagree with his critique; it’s just not likely to be relevant. The US does badly need a better regulatory system both w/r/t banking and w/r/t the resource extraction industries. To achieve either of those it would seemingly be necessary to de-couple the control by the petrochemical industries from the national economy, as led by ExxonMobil (whose banker in booming China and many other places is Goldman Sachs), and that’s a very big task, since the control by these Rockefeller dynastic industrial giants over the US economy arose in the mid-19th century and persists over 150 years later.

  15. Capt. Father Warren says:

    Bart’s analysis is really first rate. I would like to add a little story to his narrative. We must not, as a nation, forget the power of basic manufacturing to create wealth.
    I recently spent a night in Lanett, AL. Now this historically was a place off of I-85 that you would never stop at unless you needed gas or you needed an auto repair.
    I stayed in a brand new Hampton Inn. The major roads were all new 4 lanes, the city hall was brand new, several new apartment complexes had sprung up. Of course super Walmart, Lowes, Home Depot and many others were there in brand new buildings.
    What happened? Was it stimulus money that did this?
    Hell no, it was the brand new Kia North American manufacturing plant and all the supplier plants just a couple of miles down the road that had injected more wealth into this area than these people had ever dreamed could happen.
    I can’t tell you how happy I was to see the transformation that had taken place!!!!!

  16. Bart Hall (Kansas, USA) says:

    STN, I’ll attempt to keep this thing short. Though a soil chemist by training (well, my first two degrees were in geology and the Alberta oil patch paid for my Masters), and a farmer by trade, I am a passionate amateur historian, and in particular economic history. I probably read 600 to 900 pages a month in that discipline, and if you want I can even talk about the price of donkeys in early 10th century Portugal or the interest rate on loans against stored barley in Babylon in 1850 BC. Yip, Yip, Yahoo.

    The point is, the last 200 years are pocket change. Heck, in geology 10 million years are pocket change, but global warming is another thread. Certain things hold true across the centuries, one of which is that depressions are caused by excess debt. Ask the Greeks in 594 BC.

    The phenomena you mention each describe the creation of more debt (=”liquidity”) as an attempt to deal with incipient balance-sheet corrections. As long as the demographics provided a consumer tailwind — spending tends to peak at age 49 and the peak year of Baby Boom births was 1957-’58 — the Fed and everyone else could get away with goosing the “money” supply (which was really a [i]debt[/i] supply) to the extent that people were spending 106% of disposable income for about five years.

    In essence they were cannibalising future spending capacity. Now they’re freaked about personal debt and unsure what government will do to them next, beyond a huge tax increase in just over four months.

    Apart from staying out of the way, government can rarely make the economy better. Intervention, however, can make things vastly worse. These days the Obama administration and allies in Congress are making the same mistakes of both Hoover and the Japanese. Ten or twenty years of suffering may well be the result.

    As I said above, these people are incompetent, inexperienced idealogues. That’s a dangerous combination. As the Germans would say, “it’s a straight-edge razor in the hands of an ape.”

    You have to understand … it is [i]POLITICIANS[/i] in their hunger for power that enable and stimulate the process of economic disintegration. The essence of the political drama is this: there are always three players — the victim, the villain, and the hero. Politicians will always place themselves in the position of hero, and attempt to use our money to to reinforce that position by creating a class of alleged victims, demagoguing the purported villain, and saying “I’ll help you.”

    Even 16th century autocrats debased their “hard” money in an attempt to keep the people content.

    “Put not your trust in princes or men of power, because they will lead you astray for their own purposes.” Psalm 146

  17. Larry Morse says:

    See #15. I wonder if the kind of depression we are now in is not endemic to a society which draws its financial strength from services, not goods. No, I am not a student of the gray science, so I am speculating. BUT #15’S position seem to point out that one sound way of storing wealth is to manufacture a wealth substitute, namely, goods. Another way of storing wealth is in agriculture,which is, after all, manufacturing a wealth substitute. Would it not be wise to restore manufacturing and revitaiize agriculture? Economically, you may tell me that this is impossible, but I wonder if there is not something other than washing machines that American inventiveness could not manufacture. And as I farmer, I can say with all justice that if John Deere turned its massive skills toward inventing practical horse drawn equipment geared for 20th century production, there are many would buy it precisely because, for the small farm, geared to making enough money to get by – and there are more and more of these – horse drawn equipment is the way to go. Larry

  18. Bart Hall (Kansas, USA) says:

    Larry, you might wish to investigate Maurice Telleen and the Draft Horse Journal. Much of what I suspect you hope for is already out there. Look at what are called fore-carts, which run a standard 3-pt hitch off a ground-driven hydraulic accumulator.

    Not quite 40 years ago I had the remarkable privilege, in Alberta, of watching one man plough up wheat stubble with a 44-horse hitch. He must have been about 80 at the time, and another fellow there said it wasn’t clear who would die first, the ploughman or his horses, but that I was unlikely ever to see such a sight again. He was right.

    It has the same feeling when as a lad in the early 1950s I was told excitedly by my father to observe closely the incredibly old man leading the Memorial Day parade because I’d never see anything like it again. He was one of the last Union vets from the Civil War.

    There is nothing nicer in farming than seeding spring grain with a good old team.

  19. Sick & Tired of Nuance says:

    Thank you so much for educating me. As I said before, I highly respect your opinion. Thank you for your time and efforts. I will try to absorb as much as I can. (BTW…I wish I knew how to farm. When I think of all the totally useless stuff I was forced to learn and compare it to what I would love to have studied in school…Well, I guess there is always the cooperative extension.)

  20. Bart Hall (Kansas, USA) says:

    If you think you’ll be able to learn [i]anything[/i] useful about agriculture from Extension … well, there’s a Nigerian diplomat who’d appreciate your assistance in repatriating a family fortune.

    Educate yourself, and don’t rely on anyone else to do it for you. I encourage you to begin with Nicolas Lampkin’s 1990 classic [url=]Organic Farming[/url]. Though from the UK it’s as good an overview as you’re likely to find. Do not hesitate, however, as it is out of print and only used copies are available.

  21. robroy says:

    I would like to add my name to Bart’s fan club! I read all his posts.

    I would also like to second Capt. Deacon Warren’s post. We desperately need to move away from the consumer economy. It is a shell game that will soon be exposed for the sham that it is. Currently, about 70% of the economy is consumer driven. In this crazy consumer economy, spending is good, savings is bad. The consumer confidence metrics are more important than GDP. This leads to politicians trying to deceive the consumers through the next election cycle. Everything is swell! Spend, spend, spend. It is insane. It is also guaranteed to pass on to the next generation an economy built on cards.

  22. Larry Morse says:

    Bart, as to Extension…Amen Amen . And these are my taxes at work.
    For me. Goody.
    I will go to the Draft Horse Journal.
    Bart, if we could lower the cost of being poor, then farming would make more economic sense. I’m 76. So long ago, in my little town in New Hampshire, a large portion of the population was equally poor. Just like my family. Being poor was financial, not spiritual; this marks a difference from contemporary poverty. One worked and got by the best one could. My point is that we COULD get by because being poor was not so costly. See therefore #21. We had lowered expectations and so did not suffer poverty-as-frustration-at-not-having-what-everyone-else-has-because-we-deserve-it-too-and-more. In a sense, there was a cultural sense that Ecclesiates was right; stay a way from the vanities and they will stay away from you. I had books and plenty of play space and strawberries and real maple syrup.
    So I went to Dartmouth and learned that with dedication, I could make a TON of money and was morally obligated to do so. My classmates are now dying richrichrich. Are they better off in the walled communities? They think so. I think they cost society more than they have ever produced. And what they have done,and all like them have done, is so raise expectations and demand that successfully being poor now is impossible. A life of wealth and a life filled with meaning have no necessary connection to each other – and they are often antithetical.
    This is not to deny the benefits of capitalism. This is to deny, with 21, to deny the necessity of endless consumption. Or, tell me, is it the case the an ever increasing rise of consumption is an inescapable consequence of any kind of capitalism? Larry

  23. Sarah says:

    What a great thread.

    Just to reiterate a point Bart Hall made: “Apart from staying out of the way, government can rarely make the economy better. Intervention, however, can make things vastly worse.”

    Back in 2008 as I watched the State do all the wrong things for a recovery, people were predicting improvement by close of 09 and at the latest beginning of 10. It was nice to be able to explain to my corporate friends and partners that no such thing would occur and why that was the case. Discerning people were able to prepare for precisely what has happened and store up their money and try to sell/market the heck out of what they were doing to try to make it through the extended, State-induced bad times that were to come and remain for a long time.

    In a good company, sales may decline — but market share will increase, so that at the end of the hard times, the net income soars, due to the increased market share attained during the recession.

  24. Bart Hall (Kansas, USA) says:

    It’s getting late in the thread, but I’ll add a few comments nevertheless. First, and primarily, we have to understand that capitalism is [i]not[/i] a philosophy.

    [b]Capitalism is the by-product of [i]FREEDOM[/i].[/b]

    Secondly, we must also understand that “democracy” is most decidedly not the opposite of “totalitarianism.” They answer two very different questions: [i]who[/i] has power … and how [i]much[/i] power do they have. The Republic we now struggle to preserve was the best possible compromise, for it addressed the natural results of human fallen-ness — greed, and the hunger for power.

    Finally, one answer to our current dilemma is to become very materialistic, for (contrary to popular understanding) it is the antidote to consumerism. “Less, but better.” would be a good motto.

    In my farming and carpentry, if I need a tool I’ll buy the cheapest one out there. If it breaks, I replace it with the very best, and never worry again. If it doesn’t break, I haven’t spent more than I need to get the job done. By purchasing well-made work clothes — often Made in USA (!) — I find they last four years, rather than four months. Ten times the durability for three times the price is a really good deal. THAT is materialism, rather than consumption.

    They key in all of this, however, is that we are presently beyond the point of collective solutions to the over-arching problems we face. Until the stale, incompetent and dysfunctional system of bureaucratic governance is washed away in our common inability to support these people in the style to which they have become accustomed … there are only personal, private, and individual responses.

    We are facing monumental changes. What will be the response of people to those changes? More importantly, what will be governments’ response to the people’s response?

    We, as individuals, must plan and protect, but we should not forget that within the assorted reactions to the unavoidable changes thrust upon us … there are numerous opportunities to garner a healthy profit while enabling others to deal with a new reality they never imagined. That profit will enable us to care for the least and the lost, of whom there will be many during this transition we’ve only begun.

  25. Larry Morse says:

    But no one has answered my question -which I have asked of all sorts of people, including economists. Is it inescapable that, for an economy to prosper and be self sustaining, people have to pursue a rising consumption curve.? How is this to be avoided? If more and more people don’t buy more and more, then profits will stagnate and capital investment will therefore make less and less sense. How can our brand of capitalism survive if we adopt (sensibly) the attitude, “We will be content with what we have.” If we adopt that attitude, we will not have rising expectations. If we do not have rising expectations, we will not pursue rising incomes. If we do not pursue rising incomes, we will not buy all the things that rising income encourages. Someone show that this logic is unsound, Please?
    What would happen to the American economy if we only bought what we really needed to do our work or stay healthy?
    The article is interesting (and so has this thread been) but it doesn’t address this fundamental issue,a at least as afar as I can see.
    Our economy and the heady dreams it inspires in citizens and immigrants appears to be wheel of Samsara that lies perpetually to those on it. Lucy (in Peanuts) said, “I don’t want ups and downs in life. I just want ups and more ups.” And we agree with her! Please show me I’m wrong. Larry

  26. Sick & Tired of Nuance says:

    I don’t mean this as a platitude. I honestly believe that it is a profound insight…the love of money is the root of all evil. It is our Sisyphus’ boulder. I think Bart hit it on the head again with the distinction of materialism v consumption.

  27. Septuagenarian says:

    Larry, it really doesn’t make sense to emphasize either “consumption” or “production.” The two are related. Think “supply and demand.” If there is no consumption (i.e., demand) for widgets, it doesn’t really matter how many widgets I produce (i.e., supply); my production will be unprofitable–indeed less profitable the more widgets I produce.

    Usually, however, the supply-demand notion deals with price–i.e., if the supply of widgets exceeds the demand the price of widgets falls and conversely if the demand exceeds the supply the price rises. The other part of the equation is that if the price of widgets falls below the cost of producing widgets, producers will simply stop producing widgets.

    There were several drivers of the general economic growth in industrial nations after WWII. One was the general rise in wages which meant that workers had money to buy houses, cars, refrigerators, TVs, etc. Another was the availability of consumer credit, particularly when buying houses, cars and refrigerators. A third, seldom mentioned, is the “science” of marketing which drives up demand–which in turn drives up production. I didn’t know I needed a LCD TV until the marketers persuaded me that I could not live without one–although somehow I have managed to live without one for over 70 years. (Indeed, I somehow managed to live without a TV of any kind for over 15 years!)

    And the first two factors lie close to our current economic doldrums. Unemployed workers neither produce nor consume. As fewer people consume, producers cut back production–by laying off workers. Also unemployed workers can’t pay back loans, so credit dries up and consumption falls. It becomes a vicious circle.

    As for the call here to return to the silver (gold?) standard, the problem essentially is that there is simply not enough of either or both to sustain even the U.S. economy, much less the world economy. Of course, I am sure that the speculators in gold and silver would love a return to the precious metal standard, as the government buying huge amounts of gold and silver for coins and reserves would drive up the price of both and effectively devalue the dollar, producing the inflation for which they pine.

    Karl Marx began Das Capital with the question: “Do men dive for pearls because they are valuable, or are pearls valuable because men dive for them?” The answer (not Marx’s) is probably “yes.” Pearls (and gold and silver) are valuable because they are “scarce resources” (i.e., there is always a finite supply) and men desire them either as “investment” or as “the medium of exchange” or for “utility” or for “aesthetics.” And because there is a demand, men mine for gold and silver and dive for pearls. When the demand stops, men will stop mining and diving.

  28. Sick & Tired of Nuance says:

    There is ALWAYS a demand for food and water. Perhaps our currency should be tied to corn or wheat. The point is, fiat currency seems to be an unstable medium of exchange and subject to easy manipulation. It seems to have been the plan to inflate it in perpetuity…continually robbing savers of their purchasing power, forcing consumerism, and constantly transferring wealth from those that are earning it to those that are printing the money. Did I miss something?

  29. Septuagenarian says:

    There are also problems with currency stability when a gold or silver standard is used. Check the economic history of the U.S. before the gold standard or before the end of the silver standard. Or, for that matter, the rest of the world.

    Before the fall of the Republic there were a couple of occasions when the conquest of eastern kingdoms and Egypt, the vastly increased available gold and silver caused rampant inflation and falling interest rates.

    In case you haven’t noticed, the price of gold and silver has undergone dramatic changes–both up and down–in the past quarter century and longer.

  30. Sick & Tired of Nuance says:

    So, since there are problems with both fiat currency and hard currency, why not stick with hard currency? The hard currency can be exchanged for something tangible. The fiat currency is only worth the “full faith and credit” of the government. Of the two, I would rather take my chances with a bit of shiny metal than trusting the lies told by politicians.

  31. John Wilkins says:

    Well, this has been an interesting exchange. Re the canadian health care system- I’m sure there are complaints about it. But anecdotal evidence isn’t that useful. Best to do some comparative studies.

    Bart mentions that the current administration is run by “incompetent ideologues” and I may just have to agree. Although they were the “best and the brightest” they ignored the Keynsians who suggested a stimulus that was double (1.4 trillion), having warned that a half-stimulus would be marginally helpful. Turns out they were probably right. Still, it probably could have been far worse. Are they ideologues? I think so. They adhere to the cult of neo-classical economics and faith in Homo Economicus, the myth of the rational man. I have yet to meet such a person.

    Of course, I find Mr. Hall’s philosophy interesting. If this is what capitalism is about, I admire it. However, I do tend to see things a little differently. Freedom, for me, is also a political concept – not merely an economic one. It is a relationship I have with other persons in the context of governance. Not all people think like this: the Chinese, for example, seem to love economic freedoms but are willing to give up political ones. I think, finally, they are linked.

    I believe this because for an economy to work for all people, some kind of structure, our government, exists to promote trust. Those institutions, individual sinners, who have the power to exploit, change the rules, inhibit competition and discourage trust should be regulated for the sake of allowing the little capitalist who plays by the rules to make their stake.

    What makes capitalism interesting is that it is the most sophisticated form of cooperation the world has ever seen. The amount of trust required to make it work is enormous. Capitalism requires and develops it. But it’s moral insight is even more simple: incentives work.

    But there are plenty of problems in idealizing capitalism. First, I don’t think the word quite captures the entirety of the market. The captain of high finance is a different than the local shoe salesman. The person invests for the long term in a company that produces widgets of value has a different interest than the person gambling stocks for a quick profit. There are also issues of knowledge, social pressure, the “free rider,” the development of human capital, and uncertainty. These challenges are usually the root of legitimate disagreements about the role of the public in economic life.

    Further, conservatism historically had a nuanced view of capitalism because tended to break apart social bonds; it aggressively promoted the new and cast a skeptical eye on tradition. Marx’s understanding of capitalism, because of it’s destruction of the feudal, was fundamentally one of awe and respect. He understood that it changes the world of social relationships. And that it has.

  32. Bart Hall (Kansas, USA) says:

    My goodness, I figured this thread was dead — or at least “resting” — when I jumped down to find it still chugging along.

    Larry #25: The answer to your question is a much-qualified Yes. Here’s where my training in the sciences intersects my passion for economic history. Several years back I graphed economic growth and prices for not quite the last 4000 years. The data thin out badly past 600 BC or so, and they’re not great earlier than about 900 AD.

    Using least-square curve fitting and regression analysis it is possible to develop a serviceable trendline with decent R-squared. What emerges is a mean-reverting cyclical variability across that trend with peak-to-peak of 235 ± 52 years with N=17. For non-stats-geeks, that is seventeen cycles, which in the circumstances makes things manageable for analysis. It’s also the best I can do here, because before the fall of Abraham’s Ur in 2050 BC or so the data are as suspect as they are wonky. Most cultures didn’t even [i]write[/i] before 2000 BC.

    Here’s the payoff. What the trendline shows is a compound annual growth rate of about 1/2 percent. Boom times goose it, and hard times stomp on it, but the trend is clear.

    This 1/2 percent is [i]also[/i] the average Net Primary Productivity within temperate biomes. Of my nearly 700 comments over the years … that is the most important single thing I have ever said.

    What I’m saying is that about 1/2 percent of all solar energy falling on the earth in temperate regions is captured and is available to create new wealth. This is [i]SOLAR[/i] wealth, and it is sustainable forever.

    Four four millennia real wealth has doubled every 150 years. Gentle, sustained growth in line with true solar wealth is to be expected and welcomed.

    Over the long-term an economy can consider a 5-generation doubling rate both reasonable and sustainable. For the Kansas state employee pension fund to predicate its operation on 11% annual growth forever … is laughable, and should (perhaps) be criminal.

    Blessings, all. Stay safe out there. Pay off your debts. Build your social networks. And don’t get greedy. It’s a sin, and it will usually bite your arse.

  33. Capt. Father Warren says:

    This has been a great thread and I will stop posting with this thought….from post #22……”if we could reduce the cost of being poor”.
    For life & tax planning purposes, I have been documenting our spending lately (partly to project into next year).
    With a paid off mortgage, paid off (3) cars, here are some spending shockers for me: insurance spending is out of proportion to what I ever thought it would be: home, autos, boat, umbrella, health (group plan) adds up to about $7,000/yr. We are blessed with low property taxes of $900/yr, Cable, internet, phone, cell phones $1800/yr.
    So there we are: the “necessities” of life are costing us a cool $10,000/yr. Add in a rock bottom $5000/yr for food & wine and I quickly surmise that my cost of “being poor” is about $15,000/yr.
    For someone with a mortgage and a single car note, the cost of being for two might be more like $30,000/yr.
    Of all those items, we figure food, cable, internet, food won’t rise too quickly. However, another big hurricane could drive both home and auto insurance up 50% in a single year (we have seen worse).
    Just food for thought……………..

  34. Septuagenarian says:

    [blockquote]So, since there are problems with both fiat currency and hard currency, why not stick with hard currency?[/blockquote]


    1. There simply is not enough precious metals in the world to provide the U.S. economy with “hard currency,” much less the world economy.

    2. Attempting to do so would drive up the cost of precious metals, increasing dramatically the production costs of many consumer goods, such as electronic goods among others.

    3. It would result in a horrendous devaluation of the dollar.

    4. Unless other major industrial countries, such as China and Germany, also adopted “hard currency standard” backed by gold and silver reserves, it the yen and the euro would drive the dollar out of circulation.

    I would note that the dollar has been strengthening against the euro, which is actually bad news because it makes U.S. exports more expensive (so Europe doesn’t buy American or visit the U.S.) and European imports less expensive (so Americans buy more European goods take more European vacations) causing larger trade deficit.