The idea underlying all interventionist policies is that the higher income and wealth of the more affluent part of the population is a fund which can be freely used for the improvement of the conditions of the less prosperous. The essence of the interventionist policy is to take from one group to give to another. It is confiscation and distribution. Every measure is ultimately justified by declaring that it is fair to curb the rich for the benefit of the poor. In the field of public finance progressive taxation of incomes and estates is the most characteristic manifestation of this doctrine. Tax the rich and spend the revenue for the improvement of the condition of the poor, is the principle of contemporary budgets. In the field of industrial relations shortening the hours of work, raising wages, and a thousand other measures are recommended under the assumption that they favor the employee and burden the employer. Every issue of government and community affairs is dealt with exclusively from the point of view of this principle.
…
The interventionist in advocating additional public expenditure is not aware of the fact that the funds available are limited. He does not realize that increasing expenditure in one department enjoins restricting it in other departments. In his opinion there is plenty of money available. The income and wealth of the rich can be freely tapped. In recommending a greater allowance for the schools he simply stresses the point that it would be a good thing to spend more for education. He does not venture to prove that to raise the budgetary allowance for schools is more expedient than to raise that of another department, e.g., that of health. It never occurs to him that grave arguments could be advanced in favor of restricting public spending and lowering the burden of taxation. The champions of cuts in the budget are in his eyes merely the defenders of the manifestly unfair class interests of the rich.
From Human Action pg. 855 – 857.
Can anybody explain this Socialist fad with describing the likes of Mises and Hayek as Zombies? And why they all reprint almost exactly the same line on Hayek = Pinochet. Do they have a secret handshake or annual conference?
It started in 2007/2008 with the leader of the UK Socialist Worker’s Party Chris Harman. Harman’s book Zombie Capitalism: Global Crisis And The Relevance Of Marx has sparked a whole industry of Socialist “zombie” watchers.
But if you want to know what the real agenda behind the left-wing “zombie” hunters, here it is.
Chris Harman shows that the roots of the crisis today lie not in financial speculation but much deeper in a crisis of profitability which 30 years of the neoliberal offensive have failed to reverse. The future of the system will not be a return to steady growth but repeated instability and upheaval, together with a rising ecological crisis. Finally he looks the force in society capable of ending the rule of capital— the global working class.
This is what I have long suspected about those who have exploited the ‘GFC’, but are too timid/sly to reveal their true agenda. That is why so many of Harman’s followers engage in so much Keynesian hand-waving.
While Harman is at least honest in mourning the post-1970s period as a reactionary movement against the progressive and thus inevitable march of Socialism, his more cunning fellow-travelers couch precisely the same ideological dream as a reactionary movement against the so-called “Keynesian consensus.” But their timelines and real agendas are exactly the same.
Peter Patton
27 Feb 10 at 7:31 pm
Some proof of his theory would be you know, interesting and perhaps useful.
Semi Regular Libertarian
27 Feb 10 at 8:03 pm
Keynesian handwaving? Keynes would have identified the GFC as the product of good old fashioned financial market instability, which is a central theme of the GT.
sdfc
27 Feb 10 at 8:14 pm
sdfc
How could he possibly have done so. He would have been stumped on the OTC vs Exchange derivatives and swaps, global floating exchange rates, a stinking rich China holding most of the US government’s debt, and legalized gay marriage in Vermont and Holland!
Peter Patton
27 Feb 10 at 8:36 pm
Peter – Financial crises have been with us since at least Roman times. The causes are nearly always the same.
It is the increase in leverage as the result of irrational exuberance (animal spirits gone wild) which is at the heart of the problem.
Once the bubble pops in appropriatly low risk premiums are replaced by a surge in risk premiums.
This is the result of changes in liquidity preference. Crisis prone financial markets are not a new phenomena.
sdfc
27 Feb 10 at 8:55 pm
Inappropriate is of course one word.
sdfc
27 Feb 10 at 8:57 pm
sdfc
I probably go along with you. My interest is the rise of explanations that blame the turn away from Socialism in the 1970s.
Peter Patton
27 Feb 10 at 8:59 pm
Peter I agree, the so-called Keynesianism of the 1960′s and 70′s in addition to loose monetary policy in my opinion gave us the inflation of the 1970′s.
This may come as a surprise to many on this site but in my opinion persistent budget deficits through periods of growth are a recipe for disaster.
sdfc
27 Feb 10 at 9:06 pm
sdfc
I think my point is more that in the history of the world from 1929 to 2010, “Keynes/ian/ism” is a footnote.
The world is, and was, far more complex, messy, INTERESTING. Now, when we start matching the claims and time lines of the International Socialist Workers, and vanilla pimps for a Keynesian revival, we see naked, a rump of white, male, baby-boomer economist/social scientist academics who got tenure in the 1970s when they thought they had found the policy holy grail – Keynesian aggregate demand management. The implications were that People Like Them Would Rule!
However, right at this very same time (they were in their 20s), the whole Keynesian edifice had been collapsing since the mid 1960s (while they were students). By the time they’d finished their PhDs, and started their first teaching jobs, the so-called Keynesian Consensus, not only had never really existed, but where it did, it was now being treated like a dose of the clap.
They have never recovered, and have kept a candle constantly burning for the inevitable reckoning, which they took Lehman Brothers to be the harbinger.
They were wrong. So wrong.
Peter Patton
27 Feb 10 at 9:21 pm
Peter none of them were really followers of Keynes but rather a bastardised version which failed to recognise the central theme of Keynes work, that being uncertainty, expectations and unstable financing markets.
The rational expectations crowd have also been found wanting in their analysis because they also largely neglected these variables. This was obvious by the failure of mainstream econmomics to spot anything wrong with the increase in instability prior to the flare-up in mid-2007.
sdfc
27 Feb 10 at 9:38 pm
sdfc
Well then how do you explain the great gaggle of blogging Socialists, whose analytical tools, judgements, and timelines are identical to Socialist Worker Party leader Chris Harman, and his book Zombie Capitalism? Why have they all so copied the Zombie riff?
Peter Patton
27 Feb 10 at 9:43 pm
Peter
Since I haven’t been defending them I’m not sure why I have to explain them.
sdfc
27 Feb 10 at 9:46 pm
Good work sfdc. Peter needs to be weaned off this crap.
Here’s the thing Peter. What sfdc says as his explanation makes sense, especially compared to this “Zombie” meme which has no proof, but is just smears. It is a very quick summary of the Misean credit cycle theory. Even if he doesn’t agree, it fits in. It also explains also how GSEs were subsidising risk – now paid up by “forced savings”. Of course more important is why liquidity preferences changed.
You mention plenty of the problems and sfdc missed the US housing market’s social equity provisions. You are right, Keynes could not have said that, but only as a consequence or penultimate event in a chain of causality that led to recession. But he’d still be right, technically. The problem is the US loaded up a financial market with moral hazard on the underlying hard assets and too much liquidity, as well as fiscal, energy and productivity pressure from the budget and the wars. Markets are indeed useful but they are also fragile – like most other human forms of interaction.
I don’t know if the mainstream were wanting either – no other school credibly called the GFC. Some Austrians and some post Keynesians are always predicting the next five recessions. If you look at rational expectations, the implications from Mises’ credit cycle theory look obvious and fit in the orthodoxy.
“My interest is the rise of explanations that blame the turn away from Socialism in the 1970s.”
Please summarise a schematic of how this is meant to operate.
Semi Regular Libertarian
27 Feb 10 at 10:13 pm
SDFC:
Believe it or not, I actually read the general theory about a decade ago.
Where does Keynes actually proscribe in the book that governments should follow the current policies advocated.
As I understood it, his policy was essentially an inflationist one where he suggested quantitative easing. I can’t recall him ever advocating a stimulus program supported by oodles of government borrowing to support it.
Keynes never really said that.
JC
27 Feb 10 at 10:17 pm
Firstly SRL, I have a lot of time for Austrian credit cycle theory as I understand it, my problem is with their prescriptions once the bubble has burst. I don’t think they have valid financial market theory because (and I may be wrong) the theory doesn’t take into account the vast damage deflation does to an economy with high debt levels and a fragile banking system.
I don’t buy the theory that the CRA was in any way a major cause of the boom and bust in credit, non-agency financial institutions provided the vast amount of the increase in funding to the sub-prime market. The San Francisco Fed has a paper on the issue, I’ve posted the link here before.
In my opinion it was the product of easy money, not just in the US but globally, and a profit seeking banking system that was the major cause. Classic financial market instability.
In regard to the crisis, anyone who is familiar with the past history of financial crisis would know the crucial ground work for such an occurrence was being laid. It was ignored because the mainstream theories seem to treat the financial markets as a bit player in the economy. Credit is the life blood of an economy, once it recedes you can be in real trouble.
sdfc
27 Feb 10 at 10:37 pm
Keynes would have identified the GFC as the product of good old fashioned financial market instability, which is a central theme of the GT.
The geniuses. Their intellectual stature is breathtaking.
Here’s the thing, SDFC. Mises is basically right. Everything he writes about is 100%. The only thing I would disagree with him is on the use of maths in economics as I think it’s been a useful tool in being able to test hypothesis. But everything else? he fucking nails it.
Is, or has our banking system been unstable? Of course it fucking unstable and potentially suicidal. It couldn’t be any other way when you consider the wafer then equity that anchors the asset side of the balance sheet.
Large money center banks were running around with 17:1 debt to equity ratios. In reality the leverage was much higher when tangible common equity is taken in to account and shitty stuff that banks include as equity such as various intangibles like good will and future tax benefits suggests they were running around with real debt to equity rations of 25:1.
That means that you only need an adverse movement of 3 to 5% in the asset side of the balance for a bank to go belly up.
These fucking morons like Krugman and other s blaming the banks for the collapse are not really understanding the what happened and simply blaming the banks for the clusterfuck.
Anyone can lose that sort of money in terms of net worth. Non bank firms are constantly writing down impairments of up to 10% of their assets etc. without going broke.
Our banking systems are way too under-capitalized for the risk involved.
The new suggestion that’s coming from these geniuses is that the banks should be more highly regulated which makes me reach the following conclusion.
1. The fuck-knuckles that thought this sort of leverage was okay are still in charge of the hen house, not realizing that the problem is low equity level.
2. They say they want to regulate the banks even more and turn them into utilities , but at no stage are these morons talking about lowering the level of leverage.
The septuagenarian (volcker) is trying to take away the very thing that didn’t cause the banks to go bust which was really falling real estate prices. He trying to regulate banks out of prop trading. However it was real estate that caused the banks grief and this isn’t something these fuckers want to remove from the banks activities for obvious political reasons.
The economics profession astounds me at times.
JC
27 Feb 10 at 10:43 pm
“I don’t think they have valid financial market theory because (and I may be wrong) the theory doesn’t take into account the vast damage deflation does to an economy with high debt levels and a fragile banking system.”
I don’t know why people insist that they think deflation is the prescribed policy. It’s not. Ultimately, Hayek and Keynes showed a preference for free banking – which would seek to offer liquidity and tend towards price neutrality – as there are arbitrages in inflation and deflation that they would be encouraged to act against.
“I don’t buy the theory that the CRA was in any way a major cause of the boom and bust in credit, non-agency financial institutions provided the vast amount of the increase in funding to the sub-prime market. The San Francisco Fed has a paper on the issue, I’ve posted the link here before.”
There were many causes. None of which have been fixed. That paper was shallow. Much of the credit issued as “non CRA” was CRA stuff that was simply repackaged.
http://mises.org/daily/2963
*Gordon cites Fed bureaucrat Janet Yellen as the source of a “killer statistic” that absolves the government of all guilt: “Independent mortgage companies” which are not covered by the CRA made many more “high-priced loans” to borrowers with bad credit than did CRA-regulated banks, she says. Well, so what? Even if Yellen is correct, that does not mean that CRA-regulated loans have not caused tens of billions of dollars in defaults.
Moreover, Yellen and Gordon don’t seem to understand what an “independent mortgage company” is. Many of these companies are like the one in which my next-door neighbor is employed: they are middlemen who arrange mortgage loans for borrowers — including “subprime” borrowers — with banks, including CRA-regulated banks. Some killer statistic.*
Semi Regular Libertarian
27 Feb 10 at 10:54 pm
Yellen and Gordon don’t even mention the fact that Fred and Fannie were leveraged at 125:1!!!!!!!!!!!!
That’s right , they were leveraged at 125 to fucking 1 and they think it absolves the fucking government of this shit fight. These people are fucking delusional and ought to be drummed out of the business of ever commenting again.
At one stage, for 2006 to about late 2007 the only MBS buyers around were Fred and Fannie.
JC
27 Feb 10 at 10:59 pm
JC Keynes was an advocate of monetary policy as the first line of defence. Most of what he said about financial marktets has in my experience turned out to be pretty much spot on. Interest rates and the central bank response have followed a Keynes’ formula.
Keynes did advocate deficit spending but only in an environment when liquidity preference and asset price deflation rendered MP almost ineffective. The US in the 1930′s and now are two such examples.
I don’t believe Australia is an example.
sdfc
27 Feb 10 at 11:00 pm
SDFC;
GT from what I recall is a really heavy going book as you have to focus on each sentence or you lose the train of thought.
I don’t recall Keynes ever suggesting that governments should embark on stimulus programs with borrowed money.
He was really after creating the money illusion (another terms for QE) which other than for short -term crisis periods is doesn’t work.
JC
27 Feb 10 at 11:12 pm
The drivers were there outside of Fannie and Freddie, non-agency securitisation expoded, it was rife throughout the financial sytem. If it was just Freddie and Fannie we wouldn’t be in this mess.
The boom pretty much ended in early 2006, if Freddie and Fannie hadn’t of stepped in the crash might have happened sooner. That might have been a good thing.
sdfc
27 Feb 10 at 11:25 pm
Fred, Fan, the CRA were the main drivers for the collapse. CRA wasn’t just a specific set of laws, it was almost like a bi-partisan ideology that ran through both parties for different reasons.
The GOP thought that home ownership would make people more responsible and the Dems thought it would narrow inequality.
I actually witnessed bad policy in the making and recall at the time I thought it would end up in tears.
It was around 1997.
I recall how the Clinton administration came after the banks over the issue of “racist lending” sending out various arms of the government to threaten and strong arm the banks to start lending in red line districts. This was further supported by Alan Greenspan. I distinctly recall him appearing before the congress and agreeing that red lining was racist, that the Fed would begin closely monitoring the banks activities and demand they start lending in previously red lined districts.
The banks had good reason to red line these areas. They were lending sink holes where they would lose the money the minute they wrote the cheque.
I also recall in the earlier part of the 90′s the SEC was demanding that the banks start to securiize as much of their balance sheets as they could in order that they could liquify the asset side in the vent of trouble. In fact Basel 1 & 2 offered banks better capital allocation terms if a loan was securitized.
Lastly the government more or less created the oligopoly in the rating business by essentially having an approved list held by the SEC and creating enormous barriers to entry in that line of business.
The SEC requiring that banks and certain asset managers could only hold rated paper from approved rating agencies.
Everything the governments did set us up for the fall. Everything they touched ended up turning to shit like Midas in reverse.
JC
27 Feb 10 at 11:48 pm
Keynes did posit that the govt would have to become a permanent driver of investment and spending and so has some responsibility for the post-war keynsianism. He did recommend deficit spending as the last line of defence, but whether deficit spending is now worth the cost is harder to say given that the structure of our economies has changed so much and some people argue that even in the liquidity crisis you can have monetary policy by other means.
I don’t think the Austrians are 100% right, especially the take your medicine school.
As for Mises’ point about redistribution, I think the argument has probably gotten a bit more sophisticated since then, but the point remains valid. To my mind the real issue is the moral arguments for and against redistribution.
pedro
28 Feb 10 at 7:54 am
JC every financial crisis has its trigger point but in my opinion the underlying reason is the same in every financial crisis, easy money and mispriced risk.
I have no problem with a risk seeking, innovative financial sector, it lowers the cost of capital, however letting credit growth get out of hand is a recipe for disaster.
Pedro, I’m not a fan of Keynes’ more wacky ideas like the state inducing investment so as to increase available capital to a point where it is no longer scarce. However I have not heard that this was part of the post-war agenda.
My point has always been that the favoured explanation of Keynes theory, Hicks IS / LM model does not encompass, uncertainty, expectations and financial markets. Keynes has often been vilified because of this omission. Much of what he said about financial crisis and monetary policy has been borne out.
SRL
Are you saying that the Austrians would not be averse to fiscal stimulus in periods of deflation?
In attempting the sheet the blame home to teh CRA, you let the banking system get off scott-free, most of the increase in mortgage loan growth was non-agency securitisation. The CRA did not force them to write loads of sub-prime loans. In my opinion it would not have happened without ridiculously low short-term rates in the US and Japan and the currency pegging shenanigans of China, the oil producers and other currency manipulators.
sdfc
28 Feb 10 at 8:58 pm
“Are you saying that the Austrians would not be averse to fiscal stimulus in periods of deflation?”
What I said was that the Austrians ultimately backed free banking, and banks under that situation have incentives to avoid inflation and deflation.
I didn’t “sheet the blame” on the CRA. It’s part of the mess. To exclude it is to approve a sleight of hand with the data and approve of the mess it made. Look at the sub prime loan data. 70% of it was held by GSEs. Note their implicit multi trillion dollar Treasury guarantees.
Semi Regular Libertarian
28 Feb 10 at 9:13 pm
SRL in 2007 only about 17% of Fannie and Freddie’s total portfolio of subprime so I don’t know where the 70% comes from. Is it new loan originations? Even so their share only reached 70% in 2007.
Free banking is not really a discussion for what happens in a financial collapse.
Free banking actually sounds to me like it wouldn’t make the fiancial markets anymore stable but also introduce cerdit risk into the currency.
sdfc
28 Feb 10 at 9:35 pm
Sorry I got that figure wrong.
You are correct. This however doesn’t mean the CRA is unrelated. They had charter provisions to buy up CRA loans banks didn’t want.
They had 70% of the entire mortgage market. This is not absolution by any means. 70% of the mortgage market was impacted by decisions made under that 2 trillion dollar line of credit.
The CRA may be a smaller player but it’s a bad idea and part of the reason why NINJA loans exist. The whole point being not the GSE gaff I made, but that the true extent of the CRA has been hidden in some sleights of hand. The mortgage company may not be subject to CRA, but the originator that wholesales to them often was.
“Free banking is not really a discussion for what happens in a financial collapse.”
No you asked for the Austrian solution. It isn’t deflation, but to make for price neutral liquidity provision. Free banking has incentives geared towards this. Deflation isn’t the solution. If asset prices fall, so be it. They need to.
“Free banking actually sounds to me like it wouldn’t make the fiancial markets anymore stable but also introduce cerdit risk into the currency.”
Our currency already has credit risk. The alternative is credit risk with market discipline.
Semi Regular Libertarian
28 Feb 10 at 10:31 pm
SRL – I said free banking wasn’t a solution because the financial crisis occurred in a non-free banking environment. That duscussion relates to the structure of hte banking system beyond the GFC. we are currently caught in an environment where a risk averse financial system, inmpaired bank balance sheets and high private debt levels render monetary policy less than effective.
Did Fannie and Freddie contribute by providing too much liquidity to the mortgage market? Of course. I just think that saying they, or the CRA were the major contributor misses the point.
sdfc
28 Feb 10 at 10:39 pm
I’m not that sure that the US banks balance sheets are hugely impaired at the moment, or at least the big banks.
What do you know I don’t, SFDC?
JC
28 Feb 10 at 10:57 pm
No Austrian would advocate fiscal stimulus, and it has been a great failure in the US. The banking system needs rationalisation and the abolition of well meaning, badly thought out loan mercy provisions etc.
What I say next would be contentious to a supporter of the nutty idea of 100% backing if they didn’t pay attention to your efforts for me to refocus on the question at hand. The Fed had little choice but to engage in quantitative easing. This is what a private issuer of currency would do – provide liquidity. (This may be how a reference I made earlier led you to believe I wasn’t talking about the here and now).
I have a laundry list of reasons, macro and micro why I think it happened. Every time I bring say, the CRA as one of them, someone claims I’m making it out to be THE cause of the GFC. I’m not.
“Did Fannie and Freddie contribute by providing too much liquidity to the mortgage market? Of course. I just think that saying they, or the CRA were the major contributor misses the point.”
Sure it does but that’s not the point I was trying to make. 1. The CRA cannot be discounted. 2. The GSEs carried a large amount of the market with little regard to credit risk, along with being saddled with HUD provisions and GSE loans banks didn’t want.
But these of course are two of many reasons.
Semi Regular Libertarian
28 Feb 10 at 10:57 pm
SRL – That credit risk went out the window is not in dispute, that is a regular outcome of irrational exuberance.
If monetary policy is rendered ineffective by a rise in liquidity preference then we are left with fiscal stimulus to mitigate a deflation. The fiscal stimulus has not been ineffective, that policy has supported activity is in my mind beyond question the CBO puts job creation at between 1 and 2 million in Q4, however this is not the whole story the rise in activity in Q4 has likely assisted in the US emergence from deflation.
There is no argument about the necessity of QE, what is in debate is its effectiveness in promoting economic activity given financial conditions continue to tighten.
The CRA is a convenient scapegoat, the non-agency sector was responsible for the majority of the increase in mortgage finance (including non-prime), this was facilitated by easy money.
sdfc
28 Feb 10 at 11:18 pm
JC – US banks are valuing there most toxic assets at book, short rates are close to zero and the Fefd continues to ring-fence around $306 billion of Citi’s assets (I forget what the figure is for BOA), yes I think their balance sheets are still impaired.
sdfc
28 Feb 10 at 11:22 pm
Sorry guys I’m being summoned, gotta go.
sdfc
28 Feb 10 at 11:27 pm
“If monetary policy is rendered ineffective by a rise in liquidity preference then we are left with fiscal stimulus to mitigate a deflation.”
Why do you want to do that other than to provide liquidity in a price neutral manner? There was a clear asset price bubble that was a cause and helped sustain the pre crisis calamity. I think you’ve been sold a pup on the Austrian theory. Deflation may be necessary re valuations but it is not necessarily persistent. Some capital and assets have effectively been written off forever and so that scarcity gets built into the economy and pricing. Some of the inflation before the bust becomes permanent in prices.
The stimulus is indefensible in terms of job creation. There is no need to go over this. With stimulus, 8% unemployment, without 9%, actual – 10.2%.
“The CRA is a convenient scapegoat, the non-agency sector was responsible for the majority of the increase in mortgage finance (including non-prime), this was facilitated by easy money.”
No. That’s not what I’m doing, so why bring it up as a “scapegoat”? It’s a piece of the bewildering puzzle that is US mortgage policy.
Semi Regular Libertarian
28 Feb 10 at 11:29 pm
Citi has ring fenced the stuff they want to sell out. I disagree with your view that’s all crap though. Some of the stuff they have in there is the 50% of the brokerage they sold out to Morgan stanely.
I like Citi down here. I own them in smallish though. I think the government sell out by late this year or early next.
I think they could end up going to $7.50
———–
My biggest position- long investment position- is bank of America. I figure they have all of 2010 writing off around another 30 billion and from then on they could have a decent balance sheet earning up to 4 bucks a share pro forma by the second 1/2 of 2011 and fully in 2012.
They are the most undervalued stock I see at the moment with book value at around 28 bucks a share which means they are trading at a discount to book at around 70% . Historically banks are as high as 1.7 times book value.
The stress test did actually make the banks face up to the toxic shit.
I think they’ll be as high as 55 bucks a share by 2012.
I bought this stuff so low that by 2012 their earning alone will be a huge slab of my entry price. I bought them well before john Paulson, so technically of the turn this makes me a superior trader than he is, although he owns around 1.8% of the bank. LOL.
Bac has around $60 billion of hard to value assets which was face value but the stress tests forced them to write around 30% of the value down even further than where they had.
their earning power alone could make them 30- 40 billion a year.
Stop reading all the doomsday fucekers on the web and listen to me. The US large banks are fine.
JC
28 Feb 10 at 11:40 pm