Election 2016

[Ancient History]

Part of the problem is that economics-as-a-morality-play is basically the main framework of the Republican Party - and they've been yelling it loud enough and long enough that even a healthy chunk of the Democratic Party find themselves arguing over the flavor of the kool aid.

Hell, Trump has given lip service to bringing back the gold standard (granted, this is Trump, who will say completely opposite things and then allow you to decide which one he meant) - and he wasn't the only one. The GOP has spent decades talking about smaller government and lower deficits explicitly because they pretend that economics is a morality play, where pork barrel spending is like a family of five living on credit cards. Paul Ryan is still considered a serious policy wonk despite never putting forth a serious policy proposal.

[MGuy]

I remember hearing about Bear Sterns but I thought that they 'did' try to save it but it was already too far gone. It's been a while since I've heard people talking about the collapse but I don't get how or why anyone would want to bail out a piece of Chase that was apparently doomed anyway.

[name_here]

The government could just have tossed arbitrary amounts of money to keep Bear Sterns afloat. But they didn't, and a whole bunch of basically unrelated companies lost a ton of money as a result, plus it going under was the official signal that it was time to panic because lots of other major companies were in similiarly risky positions and it suddenly looked very unlikely the government would rescue them if things went bad.

[RadiantPhoenix]

The government could just have tossed arbitrary amounts of money to keep Bear Sterns afloat. But they didn't, and a whole bunch of basically unrelated companies lost a ton of money as a result, plus it going under was the official signal that it was time to panic because lots of other major companies were in similiarly risky positions and it suddenly looked very unlikely the government would rescue them if things went bad.

Kind of like how Spain and Italy started having trouble because the EU didn't bail out Greece.

[Prak]

Ok, I thought that was what FDIC was for, but I wasn't sure.

So, when banks crash the economy, with shadow banking, or subprime mortgages, or whatever, if letting them just fucking fail is a bad idea, what would be a punishment that would actually make sense?

[Omegonthesane]

Presumably, some variation of holding the people who actually took the risks liable for a meaningful portion of the bad shit, and regulating the specific forms of shadow banking that were used so that they at least have to think of new schemes to do it again.

[name_here]

There indeed is nothing fundamentally stopping the government from doing bailouts by nationalizing companies and seizing whatever portion of their assets the government feels like. Though it's generally considered bad to arrest or fine people for things that weren't illegal when they did those things.

[erik]

Hillary's actual policy, speechifying aside, is going to have banks pay into sort of insurance fund, rather than attempt to break them up or reduce their power or overhaul how much money they can put into a political candidates campaign and associated super PACs.

I thought banks were already insured?

Frank addressed the broad scope of it, so here's some more specifics.

It isn't the banks that are insured per se, it is the deposits that are covered, protected by a fund that banks pay into. And FDIC isn't total coverage for deposits either. It covers up to $250,000 currently. For individuals like you and me, that's more than plenty, and gives peace of mind so that we don't go pull our money out of a bank in fright during a crisis. Hell, if my savings gets big enough to kiss that I can just split it into two banks for up to $500,000 coverage.

But that doesn't work out as well for businesses. Payroll and other expenses can easily top that on a weekly basis, so they aren't going to be 100% protected.

And also back when the financial crisis began the limit was $100,000. That's low enough that a lot more individuals may begin getting concerned. I imagine most people did not split things up into different banks because it has been almost 30 years since a large number of banks failed in a big way.

One of the things Congress did to try and dissuade bank runs was stepping up the amount to $250,000, first as a temporary measure, and then later it was signed into law as a permanent measure. But get this, they had to do emergency steps to refill the FDIC fund because it almost got completely tapped out in 2009. While the government isn't required to pony up funds if the FDIC runs out and the collective banks cannot come up with extra funding, we can be goddamned sure the taxpayers will be on the hook because otherwise it's a fucking catastrophe. If the FDIC stopped having any meaning then we get massive bank runs during a crisis and everything will go to shit in the blink of an eye.

[name_here]

Note that the FDIC fund can't and isn't even intended to cover everyone actually pulling out all their money from a whole bunch of banks at once. The point of the fund is to be able to cover enough withdrawals that people won't feel urgently pressured to pull out all their money before it vanishes and thus avoid bank runs happening in the first place.

I mean, I expect that if it did run out of money arrangements would be made to cover that, but by the point where that's actually happening everything has already gone to hell.

[Koumei]

Because if the bank fails, then all those people whose money got aggregated by the bank lose their money. That is to say, the people who didn't do anything dangerous with their money at all and merely put it in the fucking bank like they are supposed to lose their fucking savings because too many investments made by the other side of the bank went south. That is fucked.

I know we're getting off-topic with this, but something that's puzzled me for some time, and was asked by someone on Have I Got News For You*, given how make-believe money is, when it "disappears" like that, can't someone just "reappear" it? At that point, it's not like actual goods were eaten by a monster, even bank notes haven't actually been set on fire. Just a bunch of numbers on databases changing... it sounds really easy to change it back. I'm not even sure what "happens" to the money that is lost when investments turn sour and banks start to wobble.

Given this hasn't been done, I'm assuming something actually is stopping it from happening, it's not as simple as that, but lack of knowledge on the field makes me wonder.

*Or possibly one of the other British news-related comedy panel shows.

[Mechalich]

I know we're getting off-topic with this, but something that's puzzled me for some time, and was asked by someone on Have I Got News For You*, given how make-believe money is, when it "disappears" like that, can't someone just "reappear" it? At that point, it's not like actual goods were eaten by a monster, even bank notes haven't actually been set on fire. Just a bunch of numbers on databases changing... it sounds really easy to change it back. I'm not even sure what "happens" to the money that is lost when investments turn sour and banks start to wobble.

Given this hasn't been done, I'm assuming something actually is stopping it from happening, it's not as simple as that, but lack of knowledge on the field makes me wonder.

*Or possibly one of the other British news-related comedy panel shows.

Actually this has been done, in a sense. That's what the whole Quantitative Easing policy that the federal reserve conducted was. Basically they created money out of nothing and used it to purchase bank assets at their claimed value, thereby injecting a giant pile of money back into the banking system. That actual technical steps are a little bit more complicated than simply reappearing assets, but effectively that's what happens.

The consequence is that this is essentially the digital equivalent of printing money, and, under normal conditions risks inflation. For a variety of macroeconomic reasons that I don't properly understand the crisis conditions that necessitated this action resisted inflation making this sort of thing viable in the US without any real consequences (though it didn't stop the Republicans shouting about inflation risks and comparing the US to Zimbabwe). For a country where the underlying conditions are different - like in Greece - this solution doesn't work because of the inflationary problem.

[Dominicius]

I can explain some of those reasons.

What makes the dollar so resistant to inflation is simply because it has inherent value outside of US borders. It is the reserve currency of the world, thus most countries have a large stockpile of dollars stashed away (petrodollar is a thing). When you print a large sum of money, inflation still happens but it happens on a global scale, forcing other people all over to share the pain.

So if the dollar ever gets rejected as the world reserve currency expect measures like Quantitative Easing to backfire quite brutally.

[Ancient History]

Well, that's the essential difference between Keynesian economics and GOP policies, though. For the GOP, the solution to any economic solution is to cut taxes and government spending on social services. Economy doing great? Cut taxes! Economy doing shit? Cut taxes! It's their one-stop, go-to policy. The justification sometimes changes, but the action doesn't.

Quantitative easing, on the other hand, is not something you want to do in normal situations, because it is basically printing money. The Fed knows they can get away with it now because interest rates are near the zero lower bound, and that's why they did it. But they wouldn't do it if interest rates were higher, because it would lead to the much-feared hyperinflation.

[MGuy]

Well this has been very educational. While we are on the subject though why has it been that after so long since, and after understanding so much of, the financial collapse have so few people actually been punished or even brought forth as culprits in such a massive, costly scheme? I mean I'd heard it said that some people saw the coming collapse and that some group of people even bet (and made money) on it but clearly the guv'ment isn't going to move on speculation and hearsay (except for terrorism maybe). Anyway, from the sounds of it the guv'ment is just supposed to fucking shoulder ever fuck up these people make and hopefully put a stop to it after. At this point there's been a long long talk about what fucked up and how, what exactly in these last 8 years has been done to actually punish people because I've not heard much of anything outside of a few people being trotted out to say "Yeah we fucked up. Sorry?"

[Ancient History]

Who do you assign blame to? A lot of the shadow banking was technically legal, if ill-considered; the real estate bubble was a collaborative fuck-up, with each toxic loan issued and every overpriced piece of property sold. You could make a serious argument that the heads of the major financial institutions involved should have known better, and yeah they should probably be sacked - but those people were just following through on their mission to increase shareholder value - and they have enough money to drag any court case out for years, even if you did catch them doing anything illegal. The politicians that removed financial regulations that allowed shadow banking to increase to the point it did in the first place? Yeah, that's not going to happen - those assholes didn't just get re-elected, they're still bitching about over-regulation in the finance industry!

Assigning blame is the other half of the morality play view of economics. Yes, people should have known better - but it's damn hard to hold them responsible, when what they've done is legal. The easiest way to see them "pay" for their actions is to let their institutions fail, depriving them of wealth and income - but remember, they're not playing with their own money, they're playing with everyone else's money. When a bank fails, the banker loses a job but it's the people with savings in the bank that lose their money.

So what you have to do is bail out the institution - and then you either force out the people running it, or saddle them with enough regulation and oversight that they don't do it again. A couple fines might be issued, but fining a company just means they're going to pass the cost of the fines on to their clients. Holding individuals liable in that circumstance is a bitch.

[erik]

Because fucking up the world economy isn't illegal nor were almost all the steps leading up to it. You can only jail people for breaking laws.

[MGuy]

Well fuck AH you make it sound fucking hopeless. I'm not talking about a play on morality though. I'm wondering how the fuck 'can' the people who cause such a thing be made to suffer the consequences so that it can be avoided in the future by other people who want to play fast and loose with people's livelihoods. If we can't assign blame who are we going to force out of the company?

[name_here]

Because if the bank fails, then all those people whose money got aggregated by the bank lose their money. That is to say, the people who didn't do anything dangerous with their money at all and merely put it in the fucking bank like they are supposed to lose their fucking savings because too many investments made by the other side of the bank went south. That is fucked.

I know we're getting off-topic with this, but something that's puzzled me for some time, and was asked by someone on Have I Got News For You*, given how make-believe money is, when it "disappears" like that, can't someone just "reappear" it? At that point, it's not like actual goods were eaten by a monster, even bank notes haven't actually been set on fire. Just a bunch of numbers on databases changing... it sounds really easy to change it back. I'm not even sure what "happens" to the money that is lost when investments turn sour and banks start to wobble.

Given this hasn't been done, I'm assuming something actually is stopping it from happening, it's not as simple as that, but lack of knowledge on the field makes me wonder.

*Or possibly one of the other British news-related comedy panel shows.

Well, what happens to the money is that the bank doesn't actually have it to start with. They'll have like 10% of deposits as cash on hand (they're required by law to keep a certain minimum, not sure how much, but sometimes they are very stupid and use accounting tricks to count risky investments as cash on hand) and invest the rest. If the investments go sour, they don't get that money back. And people insist on withdrawing cash and banks pay interest, so they eventually run out of money. Once they're out, no one else can withdraw money because there isn't any.

In the modern land of fiat currency, governments can just print more money and hand it to the people who lost their investments, but they prefer to avoid doing that because it causes inflation; the deposits are still somewhere, just not in the bank. Inflation does both good and bad things and governments usually have a target number, which is generally lower than it probably should be.

On the good side, it makes individual debts effectively smaller and people tend to have more debt than cash; with positive net worth they've usually got assets like cars or houses or stock making up a large chunk. It also makes keeping money in the sock drawer a worse idea and incentivizes people to invest it in companies or put it in the bank where the bank can use it to issue loans. On the bad side, it can make people gun-shy about issuing loans and it can incentivize making stupid investments to try to keep up with inflation.

Also, we don't automatically update prices and wages to match inflation and people can end up getting screwed when companies realize they can increase their prices to match inflation and not increase wages accordingly. Particularly since for some goddamn reason we don't peg the minimum wage to inflation.

As for making people suffer the consequences:

No Bill of Attainder or ex post facto Law shall be passed.

Can't do it. And no one actually tries to fuck up the economy and make their companies go out of buisness, so making laws to let us arrest them for it would probably just make them really paranoid about doing anything. What we can do is ban the specific practices that were a problem and set up a stronger system to let regulators ban practices that look like bad ideas before they actually go wrong.

Also, it's important to let people make bets that pay off when bad things happen, because then they can bet 60% of their money on things going well and 40% on things going wrong, and then if things do go wrong they are only out some of their money.

[name_here]

The key of the banking crisis was something called Collateralized Debt Obligations. Essentially, they let banks bundle together ownership of mortgages or parts therof or parts of CDOs and sell them. The bank gets money and transfers risk to the buyer, and since it's a composite of a bunch of mortgages it's less risky than individual mortgages because it's still profitable if some of them default. Major banks bought and sold a ton of them, bundling high-risk high-return mortgages with safer low-yield ones, and selling them as fairly safe investments. Splitting and distributing the risk like that meant banks could make riskier loan offers; if a loan has a 10% chance of defaulting and is bundled with 100 similar loans, usually from other parts of the country to shield from local economic downturns, then almost certainly some of them default and the others pay out enough to cover it. In theory, by collectivizing risk across basically the entire finanical system CDOs effectively eliminated it; as long as enough more mortgages didn't default than did default, everyone makes money instead of statistical clustering meaning some people make more money and other people lose money.

Only the companies that calculated how safe the CDOs were fucked up their math. They made their estimates assuming that people who couldn't afford their mortgages could sell their houses and pay it off, which was true for a while. Consequently they got pretty sloppy about the part of the process where they check if the person they're giving a loan to makes enough money to make payments. When it stopped being true everything promptly went to hell.

[DSMatticus]

Consequently they got pretty sloppy about the part of the process where they check if the person they're giving a loan to makes enough money to make payments..

This is an understatement. The ability to package bad mortgages into good bundles creates legitimate economic demand (on the part of the banks) for bad mortgages, so it's more accurate to say that banks were actively competing with one another to bring in bad mortgages so they could bundle them and sell them off.

[Ancient History]

And it has to be said, the ability to "monetize" debt in this fashion is a fundamental of some legitimate business practices. For example, Hasbro is primarily a toy company, and most toy stores make most of their profit during the Christmas season - which means that they often need to buy the latest toys from Hasbro on credit (or, in accounting parlance, accounts receivable) with the understanding they'll pay them back after the holiday rush. Assuming the toys sell well and the toy stores don't go bust and can actually pay Hasbro back. So one thing that Hasbro does is take a chunk of that accounts receivable and turn it into a kind of investment, which it sells to investors on a fraction of the price - say, 80 cents on the dollar. So Hasbro offsets some of its risks in exchange for cash, and the investors assume some of the risk in exchange for profit.

The problem is, you need to have some idea of the risk you're assuming. Part of the problem with the mortgage crisis is that people knew they were bad mortgages, but they were being rated as very secure, so lots of people were buying them, when they really should have been rated as junk bonds.

As for MGuy's "what can we do response" - the government could just nationalize any financial institution that requires a bail-out, and conduct a very thorough audit which will definitely send the higher-ups to prison for something. But Americans have traditionally been very queasy about nationalizing businesses, and even more queasy about the government creating national services that private industry has to compete with - especially since there are a lot of "small government" types which really want to privatize government services, rather than the other way around.

[erik]

Heh, I remember buying my house in 2011, their formulas for estimating loans were still fucked. They kept pitching me loans for up to 250k when the limit of my comfort level was 150k. This is on an income of 40k a year for a family of 4, and we were netting nothing on the sale of our first home (despite having paid it down 25% and having put in updates costing 15% over purchase price). I'm glad I'm arrogant enough to believe I know better than loan experts.
(is it arrogance when I'm right tho?)

[name_here]

Well, the loan experts want to give you a loan that you will make minimum payments on forever, and their risk target is a bit different from yours; they want to maximize expected value, which means that they'd rather give people big loans they have a small chance of defaulting on than small loans they'll definitely pay back. Because if they make 250K on nine people and lose 250K on one person they're richer than if they made 150K on ten people.

[DSMatticus]

I can explain some of those reasons.

What makes the dollar so resistant to inflation is simply because it has inherent value outside of US borders. It is the reserve currency of the world, thus most countries have a large stockpile of dollars stashed away (petrodollar is a thing). When you print a large sum of money, inflation still happens but it happens on a global scale, forcing other people all over to share the pain.

So if the dollar ever gets rejected as the world reserve currency expect measures like Quantitative Easing to backfire quite brutally.

You are an idiot and you don't know what you're talking about. Stop letting conservatives teach you economics, they haven't been right about anything since the Reagan coalition kicked out all the conservative economicists who were ever right about anything out of the party leadership.

For a country where the underlying conditions are different - like in Greece - this solution doesn't work because of the inflationary problem.

You are less of an idiot, but clearly still don't know what you're talking about.

---

Alright, so let's talk about the money supply. The two most commonly used measures of the money supply are the M0 and the M2. The M0 is a simple measure of the actual amount of liquidity in the economy and the banks. If someone asked you, "so how much cash is there, anyway?" you'd point them to the M0 and tell them "that much." The M2 is more complicated. If I had to describe it in the simplest terms possible, I would say that whereas the M0 was a measure of the amount of liquidity that actually exists, the M2 is a measure of the amount of liquidity that exists on paper. It's the M0 plus a bunch of things that people use in day-to-day economic transactions but aren't cash (their checking accounts, their savings accounts) and things that can be semi-quickly exchanged for cash (certain kinds of mutual funds, certificates of deposit).

And right now you're probably wondering why the M0 and the M2 aren't the same thing. I.e., why doesn't the amount of money that exists on paper equal the amount of money that actually exists? And the answer is fractional reserve banking. Banks are only required to keep a certain percentage of their deposits as cash on hand - usually 10%. That means if the government prints $10 dollars and hands it to a bank (i.e. the M0 increases by $10), that bank can use that $10 dollars to support $100 dollars worth of deposits (i.e. the M2 increases by up to $100). There's a multiplier effect in which $10 worth of physical cash can create up to $100 worth of theoretical cash - theoretical cash that people will use in actual day to day transactions as though it were cash. Even though so much of it is money we're just pretending it exists, the M2 is actually considered the more important of the two by anyone who knows what the fuck they're talking about.

But notice how I said that the M2 increases by up to $100, not that it actually does. And this is very important to understanding why QE didn't cause inflation. The central bank printed a fuckton of money and handed it to our banks, and then instead of taking that money and using the power of fractional reserve banking and credit to create 10x as much pretend-money, they sat on it. See, the banks looked at their internal finances (i.e. barely profitable with tons of toxic assets leftover from the financial crisis) and said "oh god, we're fucked." Then they looked at the economy as a whole (i.e. consumer demand in the shitter, absolutely no sane opportunities for investment) and said "oh god, they're fucked." And they stuck all that money in a vault and are using it to protect themself from the imminent possibility of their own collapse.

The end result is that under QE the M0 has quintupled, while the M2 has only almost doubled. Almost. The M2 is actually on the exact same trajectory it was before the crisis. Looking at an unlabelled graph of the M2, you probably wouldn't even be able to tell me where QE began. And that is why inflation hasn't happened. Because the M2 didn't fuggin' change, and the M0 is fucking irrelevant if the money being printed doesn't make it into circulation (and it isn't, because in practice that's what the M2 is).

[Dominicius]

Money by its very definition exists to be circulated. If the money printed via QE is never added to the economy as a whole then what was the point for its printing?