Nationalised banking sector vs. private banking sector

[J]

Throwing money at banks is not "Keynesianism". Stimulus is, and you need to explain your stance that it is "idiotism" (perhaps you meant 'idiocy'). Stimulus, or shoring up aggregate demand through government intervention in labour markets by providing employment to those affected by the recession, has been shown to work in recessions caused by loss of demand (oil shock recessions, not as much...).

So, I'd love to be convinced by you on the stuff you're spouting right now.

I'm going to ask a very simple question: Are we going through an inventory recession caused by lack of demand or is it a credit based recession where we've reached the carrying capacity for debt and run into a wall?

[Teebs]

Could you explain, please, how any of Europe's responses to the recession (austerity, raising interest rates, lack of fiscal programmes) is ultra-Keynesian? The only "European" country that had a Keynesian response (that I know of) to the crisis was Gordon Brown's Britain, which recovered faster than most western countries because of the prompt response. Germany did well, too, but that's because the Euro tanked with the crisis and they were able to reap the benefits of having a strong manufacturing base (and educated/trained populace) along with being perceived as a safe haven. But "Europe" as a whole has gone completely - pardon the pun - Austrian about the whole crisis, making it worse.

I don't think the UK recovered faster than most Western countries. If you look at this link it grew more slowly than both the USA and Germany in all periods since 2009 and below the EU average in all except one.

[UnderAGreySky]

My opinion, based on what I read, is that is lack of demand. Surveys have shown that the biggest thing business owners are worried about today is not taxes or regulation, but lack of customers. In a way the former can cause the latter (again, this is my opinion) because if I was a business owner and wanted to expand, banks would say "You want money? Who's gonna buy your stuff? Who do you think you are, Apple Inc.?" and charge high rates of interest.

This I suspect applies more for the US and the UK than it does for the European periphery - the Greek ability to repay loans today will just not be trusted.

[UnderAGreySky]

I don't think the UK recovered faster than most Western countries. If you look at this link it grew more slowly than both the USA and Germany in all periods since 2009 and below the EU average in all except one.

Hmm, good catch. Looks like I got the extent of their policies wrong - the stimuli were only 0.2 and 1.4% of GDP in two parts (one each in '08 and '09). The output gap was 6% there too...

[J]

My opinion, based on what I read, is that is lack of demand. Surveys have shown that the biggest thing business owners are worried about today is not taxes or regulation, but lack of customers. In a way the former can cause the latter (again, this is my opinion) because if I was a business owner and wanted to expand, banks would say "You want money? Who's gonna buy your stuff? Who do you think you are, Apple Inc.?" and charge high rates of interest.

This I suspect applies more for the US and the UK than it does for the European periphery - the Greek ability to repay loans today will just not be trusted.

http://market-ticker.org/akcs-www?singlepost=2454726

Note when the debt hits a wall and stops rising. This is a textbook credit based recession.

[UnderAGreySky]

My opinion, based on what I read, is that is lack of demand. Surveys have shown that the biggest thing business owners are worried about today is not taxes or regulation, but lack of customers. In a way the former can cause the latter (again, this is my opinion) because if I was a business owner and wanted to expand, banks would say "You want money? Who's gonna buy your stuff? Who do you think you are, Apple Inc.?" and charge high rates of interest.

This I suspect applies more for the US and the UK than it does for the European periphery - the Greek ability to repay loans today will just not be trusted.

http://market-ticker.org/akcs-www?singlepost=2454726

Note when the debt hits a wall and stops rising. This is a textbook credit based recession.

What's the difference between the two, qualitatively? (asked as a genuine question from the point of view of how they should be tackled, as I'm not grasping the differences in implication of the recession being one way or the other in this case) And are credit-based recessions due to consumers unwilling to borrow or banks unwilling to lend?

[Simon_Jester]

J, in your opinion could we have both kinds of recessions at once? I don't know about GreySky, but if I had to guess I'd say we have both a problem with overleveraged financial houses of cards and huge numbers of people being out of work, underemployed, or working hard but too poor to contribute much to demand.

A credit-based recession could be a lot harder to crack, because you can't just stimulate your way out of it- giving people some money in the short term to increase demand won't remove the systemic problem that too many people have borrowed too much money, even if it puts something in their pocket right now.

[K. A. Pital]

is downright silly; I said Europe DID NOT attempt ANY form of Keynesian economics, they went all Austrian about it demanding austerity and debt elimination in the periphery (Ireland, Greece, Spain, Portugal and now Italy). Now you explain to me how the fuck is that neo- or otherwise Keynesian?

Europe before 2010 did not preach any "austerity", it spent and spent. Only after Greece nearly went belly up, "austerity" was on the table. Having a remarkably short memory is a problem.

[UnderAGreySky]

Europe before 2010 did not preach any "austerity", it spent and spent. Only after Greece nearly went belly up, "austerity" was on the table. Having a remarkably short memory is a problem.

"Europe" "spent and spent"? You genius, Spain and Ireland were running SURPLUSES on the eve of the recession. It was the socialising of the losses of the banks that tipped them over. Greece, yes, but it was backed by tax fraud. Portugal, yes, spent badly but to pretend that 1) This crisis was caused by government overspending and 2) that over-spending BEFORE a crisis is "Keynesian" is stupid.

I may have a short memory, you on the other hand don't have an argument.

[UnderAGreySky]

J, in your opinion could we have both kinds of recessions at once? I don't know about GreySky, but if I had to guess I'd say we have both a problem with overleveraged financial houses of cards and huge numbers of people being out of work, underemployed, or working hard but too poor to contribute much to demand.

A credit-based recession could be a lot harder to crack, because you can't just stimulate your way out of it- giving people some money in the short term to increase demand won't remove the systemic problem that too many people have borrowed too much money, even if it puts something in their pocket right now.

I agree with most of what you're saying; but I'm not sure I look at it from a "giving people money" point of view. When you decide to make a new bridge you've got to buy the concrete and steel and energy required to make it; so along with the workers you hire for it you also have to pay the companies who supply your resources. It means that they either go out and spend it or pay off their debts and that eases burdens on either retailers or lenders associated. The closer people are to paying off their debts the better.

[K. A. Pital]

Europe before 2010 did not preach any "austerity", it spent and spent. Only after Greece nearly went belly up, "austerity" was on the table. Having a remarkably short memory is a problem.

"Europe" "spent and spent"? You genius, Spain and Ireland were running SURPLUSES on the eve of the recession.

I was speaking about 2008-2010 obviously Nobody cares about what was before the recession. No Keynesian policies were pursued before the recession and indeed, Keynesianism does NOT advocate expanding your spending and debt when not in recession. Is that really hard to grasp?

It was the socialising of the losses of the banks that tipped them over.

Krugman and most Neokeynesians backed it.

Greece, yes, but it was backed by tax fraud.

Greece's debt skyrocketed after 2007, that's clearly notable.

Portugal, yes, spent badly but to pretend that 1) This crisis was caused by government overspending and 2) that over-spending BEFORE a crisis is "Keynesian" is stupid. I may have a short memory, you on the other hand don't have an argument.

Since I never said that "overspending before the crisis" was a problem (how the hell is that even related to Keyneisanism at all?) and centered on overspending after the crisis, your anger is misdirected.

Let's say that the bank bailouts were the only thing that "tipped them over". Why did their debt continue to grow after 2008, when the bailout was more or less a one-time thing, tightly concentrated within the last few months of 2008?

I already said that Greece put a hole in its budget during the bailout in 2008, and so did most of the periphery nations, but please do explain how they didn't automatically go bankrupt there and then... ah right, they used borrowing to keep spending and maintain the status-quo. Instead of the house of cards coming down in 2008, it is coming down several years later.

Please explain to me how Europe was not at all acting Keynesian. Spain spent 11 billion in "stimulus", Portugal 2 billion. ECB's "directed lending" (or, to put it bluntly, bailouts) in Europe is not exactly a Keynesian tool? Needless to remind that Neokeynesians demanded "more expansionary monetary policy" from the ECB (i.e. they demanded continued ECB bailouts, like the one they carried out in Ireland and continue to selectively carry out in crisis spots). Krugman continued to demand this even as Greece was going belly up.

Well, at least he's consistent, he demanded it even in 2009 - he praised the way America "handled it" (the bank bailout and "unfreezing credit markets" and urged Europe to do the same).
http://www.nytimes.com/2009/03/16/opini ... ugman.html

ECB's stealth bailouts and bank bailouts were nothing but following the advice of Krugman and his colleagues. I am not sure whether the "BAILOUT BANKS!! NYAH!" is truly an old-Keynesian policy, but Krugman has consistently favored bank bailouts and supported the US massive bailouts from their beginning to end. Just as European ones.

So you can't just handwave this crap and say "Well, what does this have to do with Neokeynesianism?"

[UnderAGreySky]

A quick reply before I go to bed:

1) Krugman is not a neo-Keynesian. He's old-school, what he calls Keynes-Hicks theory follower. (http://web.mit.edu/krugman/www/islm.html)
2) "they used borrowing to keep spending" (Greece) - true, I won't deny this. But spent it on what? Not on getting people employed for sure - Unemployment has been going up only one way since the crisis. So obviously it wasn't being spent on any sort of stimulus.
3) I'm *not* against bank bailouts. I'm not sure if it's part of Keynesian economics or not, but the banks *did* need to be bailed out then. IMO it was the difference between depression and recession.
4) "Why did their debt continue to grow after 2008" Because that was not the only thing that happened at the same time. Money stopped flowing in because of the recession. All those people employed to build houses and those that depended on their spending suddenly were jobless. (see unemployment figures rise sharply in 2008) Suddenly you have large swathes of people that are a) not paying tax b) not spending money c) drawing unemployment benefits from the state. Wouldn't debt grow under such a scenario?

(I love google public data explorer: Have a play with this! - it shows how Spain and the rest suffered badly from not being able to deflate their way out of the crisis, while Germany has enjoyed the tanking Euro)

[K. A. Pital]

Well, well, well. So you don't disagree that the bailouts were a Keynesian policy just a few posts after you vehemently denied it (and even made me agree with you, since classical Keynes apparently didn't say that bank bailouts were necessary... or maybe I read something wrong)?

I'm *not* against bank bailouts

I explained how bailouts and massive spending created a situation of sovereign default where the pendulum rapidly swung in the opposite direction and in just two years the policy shifted to austerity and spending cuts.

It is obvious that I am against bailouts and in fact I think capitalism deserves to fucking die, but so far we're just discussing what happened, policy-wise, in Europe, not what our personal positions are.

it shows how Spain and the rest suffered badly from not being able to deflate their way out of the crisis, while Germany has enjoyed the tanking Euro)

Because Germany was in a stronger position and had a reasonably strong manufacturing sector; not to mention Germany had been actively intervening in the markets of periphery nations, devouring assets there. That's like saying the center of the Eurozone (France and Germany) got better because they are the center. That's a tautology. It does not really explain neither the superiority nor the underlying reasons for superiority.

What it surely does not explain is how Germany's success, related to the tanking Euro, is anyhow related to "Keynesianism"? Mind explaining? How Germany's actions in 2008-2010 were uniquely Keynesian while the PIIGS actions were not?

Because that was not the only thing that happened at the same time. Money stopped flowing in because of the recession. All those people employed to build houses and those that depended on their spending suddenly were jobless. (see unemployment figures rise sharply in 2008) Suddenly you have large swathes of people that are a) not paying tax b) not spending money c) drawing unemployment benefits from the state. Wouldn't debt grow under such a scenario?

Yup. So in such an environment it is prudent to tank your budget with bank bailouts and stimulus packages to raise the situation to a level where there is a threat of sovereign default? Really? You can note that the Keynesian measures used in Europe did not really stem unemployment. Same as in the US of A: unemployment rose to a certain level and stood there.

So why exactly and how had these measures not constituted a problem? They were not reducing the unemployment, or not reducing it enough, but in the end the governments faced a threat of sovereign default.

There can be two replies: (a) they should've been even more Keynesian and spent more and more and re-hired all the lost jobs - tanking their budgets even faster and facing sovereign default in 2009 already (b) they should've been less Keynesian and spent less and less and witnessed a massive collapse in the private sector, but sovereign default wouldn't be on the cards. Except in the end they could've defaulted as well because private sector's collapse could've led to shrinking tax incomes and an inability to service the debt which was already large enough for some nations like Greece.

None of them really carries a meaningful solution to the issue.

Hence my comment that two shits don't make a right. Oh well.

[J]

What's the difference between the two, qualitatively? (asked as a genuine question from the point of view of how they should be tackled, as I'm not grasping the differences in implication of the recession being one way or the other in this case) And are credit-based recessions due to consumers unwilling to borrow or banks unwilling to lend?

An inventory recession is your run of the mill business cycle downturn, there's not enough demand and the affected sector(s) go into a slump, see for instance the dot-com bust around the turn of the millennium. Given a couple years they usually resolve themselves as companies in the sector(s) are bankrupted and supply falls to match demand.

A credit based recession is when we reach & exceed the debt carrying capacity of an economy. There's no longer enough surplus left over to cover the interest & other payments on the debts and they begin defaulting en masse. Consumers & other creditors are unable and unwilling to borrow while banks & other lenders are unable and unwilling to lend. Interest rates go up, loans become nearly impossible to obtain, banks & other lenders are decimated, borrowers are bankrupted, and everything comes to a crunching halt. There is no recovery until debt defaults & liquidations bring the overall debt level back down to a sustainable level. This is what happened in the Great Depression.

1) Krugman is not a neo-Keynesian. He's old-school, what he calls Keynes-Hicks theory follower. (http://web.mit.edu/krugman/www/islm.html)

Krugman failed to receive the memo: John Hicks has repudiated his IS/LM model.

[K. A. Pital]

Krugman failed to receive the memo

Krugman is a bit slow in general in his reaction to the events that actually happen. He was advocating "more agressive ECB action" at the same time as Greece was going belly up, like I said. That was in early 2010. I never forgot that, and now I take everything Krugman says with a huge grain of salt. It is not like he's a complete idiot but tunnel vision is a huge problem. Saying neoclassics still have a leg to stand on was his "concession" to academia and automatically the beginning of a long trail of stupid.

[Samuel]

Looking at the article, something jumped out at me:

That means that if there is a “winning” economic theory out there, then it must be one that argues that government action alone can help an economy recover from a crisis, and indeed maintain output growth at a level that will maintain full employment.

Communism fullfils these requirements. In fact, I'm pretty sure there were business cycles in the Eastern block and the governments managed to overcome them while maintaining full employment. And I misunderstanding what he is trying to say here?

[K. A. Pital]

Looking at the article, something jumped out at me:

That means that if there is a “winning” economic theory out there, then it must be one that argues that government action alone can help an economy recover from a crisis, and indeed maintain output growth at a level that will maintain full employment.

Communism fullfils these requirements. In fact, I'm pretty sure there were business cycles in the Eastern block and the governments managed to overcome them while maintaining full employment. And I misunderstanding what he is trying to say here?

Um... what business cycles, Samuel? Do not apply inapplicable concepts to command economies. But yes, before 1991 the traditional policy of the traditional command economy had been guaranteed full employment. Business cycles are simply inapplicable.

I'm not sure he's advocating command economies there

[Samuel]

Business cycle does not require businesses, capitalism or a free market. It refers to fluctuation in production and economic activity. You'd have the same thing under communism for the same reason as you do in capitalism- the decision making is imperfect.

I don't remember the name of the book that talked about Eastern block business cycles (I believe it was a two part book at European economic history with the second part being 1870-2000). I remember where it is located in Shields Library, but that isn't helpful.

[Simon_Jester]

Um... what business cycles, Samuel? Do not apply inapplicable concepts to command economies. But yes, before 1991 the traditional policy of the traditional command economy had been guaranteed full employment. Business cycles are simply inapplicable.

I'm not sure he's advocating command economies there

Could you not have cyclic economic crises of other sorts, even without business and employment cycles?

J, in your opinion could we have both kinds of recessions at once? I don't know about GreySky, but if I had to guess I'd say we have both a problem with overleveraged financial houses of cards and huge numbers of people being out of work, underemployed, or working hard but too poor to contribute much to demand.

A credit-based recession could be a lot harder to crack, because you can't just stimulate your way out of it- giving people some money in the short term to increase demand won't remove the systemic problem that too many people have borrowed too much money, even if it puts something in their pocket right now.

I agree with most of what you're saying; but I'm not sure I look at it from a "giving people money" point of view. When you decide to make a new bridge you've got to buy the concrete and steel and energy required to make it; so along with the workers you hire for it you also have to pay the companies who supply your resources. It means that they either go out and spend it or pay off their debts and that eases burdens on either retailers or lenders associated. The closer people are to paying off their debts the better.

The problem seems to be that people (companies, governments, you name it) have borrowed so much money that paying it off while living one's life becomes very difficult. People with mountains of credit card debt may be totally unable to pay it off, people with huge mortgages likewise. Banks which are so leveraged that they have fifty dollars loaned out for every dollar actually stored in their accounts are inherently vulnerable to bad times, no matter what you do. Governments which have national debt equal to their GDP aren't going to be able to pay it off any time soon- it's politically impossible to raise taxes enough to pay 10% of GDP into debt reduction every year.

Capitalist economies use debt as a way to 'multiply' money: one dollar in the bank becomes two or three (or ten, or twenty...) dollars in the economy because the bank issues a lot of loans and bets on the odds of them getting paid back. But when the ratio of 'loaned' dollars to tangible assets gets high enough- well, how do you untangle it? You can get rid of any given loan by robbing Peter to pay Paul, but then Peter's going to have to borrow money himself, and you're back where you started.

Which is not to say this kind of thing is unfixable- it's just hard, much harder to solve than "due to temporary circumstances, 15% of the population lost their jobs and we need to find work for them until things get moving again."

[K. A. Pital]

Business cycle does not require businesses, capitalism or a free market. It refers to fluctuation in production and economic activity. You'd have the same thing under communism for the same reason as you do in capitalism- the decision making is imperfect. I don't remember the name of the book that talked about Eastern block business cycles (I believe it was a two part book at European economic history with the second part being 1870-2000). I remember where it is located in Shields Library, but that isn't helpful.

Eastern Bloc did not have business cycles, it had crises of an entirely different nature. There was little fluctuation in production and economic activity - usually the crisis manifested in deep deficits as opposed to shrinking production or deep unemployment. If you want to turn the waters of terminology into mud, I'm not going to stop you, but don't expect me to use terms in such a casual fashion. Since there never was a fall in industrial output during peacetime development of the "Eastern Bloc economies", I'm not sure how you're going to rationalize the existence of business cycles in command economy. Production did not "fluctuate", it expanded step by step, sometimes slowly, at other times faster, but it did not contract, which is the necessary precondition to consider it a "cycle" in typical orthodox capitalist economics terms.

Could you not have cyclic economic crises of other sorts, even without business and employment cycles?

Yes. However, they are non-cyclic. You also don't call them "business cycles", and finally, production is not contracting but always expanding. That's the key difference.

[Aharon]

Wow, thanks for all the information. Lots of stuff to devour here. Sorry for just leaving the thread without comments - at the moment, I only have Internet Access on the weekends and at work, where I don't want to browse stardestroyer.net
I'll try to read through all the responses and reply to some of your thoughts, but I don't know yet when (or even wether I'll definitely) do so.