Krugman explains the 2008 crisis in lay terms.

[2 yen]

Krugman explains the 2008 crisis in lay terms.

http://www.guardian.co.uk/books/2008/de ... risis-2008

[bubbalouie]

Interesting article 2 yen. Thank you. However, I can't help but think it is misguided and missing the big picture.

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What we need right now is a rescue operation. Policy-makers around the world need to do two things: get credit flowing again and prop up spending

There is no turning back now. What started out as a major credit crisis will soon move into a full-blown currency crisis. The middle class will be wiped out.

[rhenderson]

Interesting article 2 yen. Thank you. However, I can't help but think it is misguided and missing the big picture.

There is no turning back now. What started out as a major credit crisis will soon move into a full-blown currency crisis. The middle class will be wiped out.

I consider myself middle class so I have to take issue with your blanket statement.

Could you please explain how someone with no debt, holding real return bonds, some precious metals, preferred shares, 25% equities (mainly utilities) will be wiped out

[bubbalouie]

Could you please explain how someone with no debt, holding real return bonds, some precious metals, preferred shares, 25% equities (mainly utilities) will be wiped out

I was mainly talking about Americans holding US dollars and US stocks but it applies to anyone holding these instruments. However, hyperinflation will also come to Canada although our currency will partially protect us. Holding cash and bonds will be detrimental. Holding on to real estate and gold and anything tangible that will move up in price with the hyperinflation is the best strategy.

Reading 1923 German history now will be better than reading it later. I need to read more of it too.

[bubbalouie]

BTW, a few years ago I was obsessed with German history. My favorite book on the subject was Berlin , by David Clay Large (2000). It describes a hyperinflation environment very well.

[MoneyTrev]

Could you please explain how someone with no debt, holding real return bonds, some precious metals, preferred shares, 25% equities (mainly utilities) will be wiped out

I was mainly talking about Americans holding US dollars and US stocks but it applies to anyone holding these instruments. However, hyperinflation will also come to Canada although our currency will partially protect us. Holding cash and bonds will be detrimental. Holding on to real estate and gold and anything tangible that will move up in price with the hyperinflation is the best strategy.

Reading 1923 German history now will be better than reading it later. I need to read more of it too.

I agree.
In fact, you can just hold 100% gold. It's a global currency, it can turn into any currency and you are well protected from inflation because it inflates but the $10 dollar bill in your pocket doesn't.

[rhenderson]

Could you please explain how someone with no debt, holding real return bonds, some precious metals, preferred shares, 25% equities (mainly utilities) will be wiped out

Holding cash and bonds will be detrimental. Holding on to real estate and gold and anything tangible that will move up in price with the hyperinflation is the best strategy.

Reading 1923 German history now will be better than reading it later. I need to read more of it too.

Agreed, especially with "anything tangible", ie along with other holdings a stock like CNR, imagine what it would cost in a time of hyperflation to replace their infrastructure.

[chiaroscuro]

While things look bad, does this mean that all roads lead to Damascus? Is it really time to get out the money belt, buy guns, and tin cans? Japan went through deflation, bailed out their banks, and although you can say it wasn't pretty...life goes on there for the middle class. Why is hyperinflation assumed? I can see the possibility but don't you have to get out of deflation first?

[DanielCarrera]

However, hyperinflation will also come to Canada although our currency will partially protect us. Holding cash and bonds will be detrimental. Holding on to real estate and gold and anything tangible that will move up in price with the hyperinflation is the best strategy.

I don't think hyperinflation is realistic, but if you are worried about that, consider Real Return Bonds. That's probably as close to risk-free as you can get. Gold is extremely volatile and it is known to lose money over long periods (e.g. 30-years).

[lilbit]

California residents trade guns for groceries: sign of the times...

http://www.msnbc.msn.com/id/28099745

[bubbalouie]

I don't think hyperinflation is realistic, but if you are worried about that, consider Real Return Bonds.

Thanks, very interesting.

[MoneyTrev]

I don't think hyperinflation is realistic, but if you are worried about that, consider Real Return Bonds.

Thanks, very interesting.

Wow. Very interesting and impressive thing to invest in.

[Bylo Selhi]

California residents trade guns for groceries: sign of the times...

Meanwhile Tronntonians traded pistols for pixels. What's that a sign of?

[chiaroscuro]

California residents trade guns for groceries: sign of the times...

Meanwhile Tronntonians traded pistols for pixels. What's that a sign of?

Common sense.

[bubbalouie]

I don't think hyperinflation is realistic, but if you are worried about that, consider Real Return Bonds.

One of the risks associated with RRB's (which isn't discussed on bylo's website) is the government's chronic underreporting of the CPI in its official statistics.

As Peter Schiff, in Crash Proof, discusses, it's in the governments interest to under-report inflation for 5 reasons:
1. it keeps interest on national debt lower because conspicuous inflation would cause lenders to require an inflation premium in the form of higher rates
2. government benefits are indexed to inflation so a lower CPI translates into less money the government has to pay for those needing it
3.personal exemptions on income taxes are indexed to inflation so people would get a bigger exemption if there was higher inflation
4. lower inflation translates into lower interest rates for everyone, allowing the consumer economy to continue its phony expansion
5. relates to RRB's and TIPS, the government is required to pay more money if there is a higher CPI; Schiff says this is akin to the fox guarding the henhouse.

If it's true that governments under-report CPI numbers, this makes RRBs less attractive an investment. Also, in the USA, CPI is based on trailing 12 month numbers so there's a lag; it may be the same in Canada.

[ghariton]

I guess I'll make my standard comments.

Economists overwhelmingly agree that the CPI, in both Canada and the U.S., overstates inflation, by some 0.5% a year -- although some say 1% and more.

The CPI is an average -- any individual's actual experience may differ. But studies of subgroups (seniors, low income, etc) show that, at that level, the CPI is a pretty good indicator for the subgroup.

The main objection to the present methodology, from popular commentators but not from professional economists, are quality adjustments. The CPI is adjusted for improvements in quality of goods and services. This has been debated at length elsewhere on this forum, and I won't repeat it.

The government is not a faceless monolith. It is made up of people -- MPs and bureaucrats. All of these people have, or will have, a government pension indexed to the CPI. In which direction would you expect any bias?

Finally, methodology of the CPI is regularly reviewed by an outside panel of independent experts. Further, the methodology, and many of the details, are open for all to see. In fact, it is one of the most open processes of the Canadian government.

George

[bubbalouie]

ghariton: okay, so what you're saying is that Peter Schiff doesn't have any valid concerns about cpi and that you believe what you read

i can only tell you that when the popular media was publicizing low inflation the last 2 years, I saw huge inflation in food and energy; this in turn left me less money to buy other things

[ghariton]

i can only tell you that when the popular media was publicizing low inflation the last 2 years, I saw huge inflation in food and energy; this in turn left me less money to buy other things

There are two CPI calculations widely published in Canada, the "core" CPI and the total CPI. The core CPI leaves out such things as energy and food. It is used by the Bank of Canada in setting monetary policy, and the Bank of Canada believes that the total CPI is too volatile for their purposes. That's their choice.

The total CPI does include energy and food, etc, etc. It is the index used for real return bonds, and CPP and OAS, and tax bracket indexation, and -- most important of all for my peace of mind -- indexation of MPs' and bureaucrats' pensions.

Remember that, while increases in the price of gasoline over the past year were spectacular, for most people gasoline is only a small proportion of their total expenses. The flip side will show itself in this month's CPI -- although gasoline prices have fallen dramatically, I expect the CPI to be flat.

George

[parvus]

Back to Krugman:

What lies behind the credit squeeze is the combination of reduced trust in and decimated capital at financial institutions. People and institutions, including the financial institutions, don't want to deal with anyone unless they have substantial capital to back up their promises, yet the crisis has depleted capital across the board.

The obvious solution is to put in more capital. In fact, that's a standard response in financial crises. In 1933 the Roosevelt administration used the Reconstruction Finance Corporation to recapitalize banks by buying preferred stock—stock that had priority over common stock in terms of its claims on profits. When Sweden experienced a financial crisis in the early 1990s, the government stepped in and provided the banks with additional capital equal to 4 percent of the country's GDP—the equivalent of about $600 billion for the United States today—in return for a partial ownership. When Japan moved to rescue its banks in 1998, it purchased more than $500 billion in preferred stock, the equivalent relative to GDP of around a $2 trillion capital injection in the United States. In each case, the provision of capital helped restore the ability of banks to lend, and unfroze the credit markets.

<snip>
It seems doubtful, however, that this will be enough to turn things around, for at least three reasons. First, even if the full $700 billion is used for recapitalization (so far only a fraction has been committed), it will still be small, relative to GDP, compared with the Japanese bank bailout—and it's arguable that the severity of the financial crisis in the United States and Europe now rivals that of Japan. Second, it's still not clear how much of the bailout will reach the components of the shadow banking system—largely unregulated financial organizations including investment banks and hedge funds—that are at the core of the problem. Third, it's not clear whether banks will be willing to lend out the funds, as opposed to sitting on them (a problem encountered by the New Deal seventy-five years ago).

My guess is that the recapitalization will eventually have to get bigger and broader, and that there will eventually have to be more assertion of government control—in effect, it will come closer to a full temporary nationalization of a significant part of the financial system. Just to be clear, this isn't a long-term goal, a matter of seizing the economy's commanding heights: finance should be reprivatized as soon as it's safe to do so, just as Sweden put banking back in the private sector after its big bailout in the early Nineties. But for now the important thing is to loosen up credit by any means at hand, without getting tied up in ideological knots. Nothing could be worse than failing to do what's necessary out of fear that acting to save the financial system is somehow "socialist."

The same goes for another line of approach to resolving the credit crunch: getting the Federal Reserve, temporarily, into the business of lending directly to the nonfinancial sector. The Federal Reserve's willingness to buy commercial paper is a major step in this direction, but more will probably be necessary.

All these actions should be coordinated with other advanced countries. The reason is the globalization of finance. Part of the payoff for US rescues of the financial system is that they help loosen up access to credit in Europe; part of the payoff to European rescue efforts is that they loosen up credit here. So everyone should be doing more or less the same thing; we're all in this together.

As for the CPI debates, be wary of [s]Greeks bearing gifts[/s] economists riding hobby horses.

[Shakespeare]

Despair over financial policy

This plan will produce big gains for banks that didn’t actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work.

What an awful mess.

More on the bank plan

But Treasury is still clinging to the idea that this is just a panic attack, and that all it needs to do is calm the markets by buying up a bunch of troubled assets. Actually, that’s not quite it: the Obama administration has apparently made the judgment that there would be a public outcry if it announced a straightforward plan along these lines, so it has produced what Yves Smith calls “a lot of bells and whistles to finesse the fact that the government will wind up paying well above market for [I don't think I can finish this on a Times blog]”

Why am I so vehement about this? Because I’m afraid that this will be the administration’s only shot — that if the first bank plan is an abject failure, it won’t have the political capital for a second. So it’s just horrifying that Obama — and yes, the buck stops there — has decided to base his financial plan on the fantasy that a bit of financial hocus-pocus will turn the clock back to 2006.

[WishingWealth]

Mister Doctor Nobel Price winner Paul Krugman will be on Charlie Rose tonight.
I'm sure one will be able to extract a few good signatures lines from his teachings.

WW

[WishingWealth]

Kerkufle in our coop.
@ Times on Line.
http://business.timesonline.co.uk/tol/b ... 806419.ece

Professor Paul Krugman at war with Niall Ferguson over inflation
America’s top liberal pundit is at loggerheads with a British don over how to save the world economy
One of them is a “poseur”. The other is “patronising”. One suffers from “verbal diarrhoea”. The other is a “whiner”.

A bust-up on the set of High School Musical 4 perhaps? A scrap behind the catwalk at a Milan fashion show? No. Those accusations were slung round in an increasingly bitter public row between two of the world’s most distinguished commentators on global finance and economics, professors Paul Krugman and Niall Ferguson, of Princeton and Harvard, respectively.

It started as an argument about bond prices. But last week it blew up into a row about racism, printing money, spending our way out of recession, and the fate of the global economy.
...

I'm sure some people will object to the wording at the beginning of the article: one is... the other is ...
Some people would simply say they both are but that would be mean.

WW

[NormR]

LOL ...

Krugman Excels in Two Widely Disparate Activities

It’s always impressive to see one person excel in two widely disparate activities: a first-rate mathematician who’s also a world class mountaineer, or a titan of industry who conducts symphony orchestras on the side. But sometimes I think Paul Krugman is out to top them all, by excelling in two activities that are not just disparate but diametrically opposed: economics (for which he was awarded a well-deserved Nobel Prize) and obliviousness to the lessons of economics (for which he’s been awarded a column at the New York Times).

[WishingWealth]

A public service announcement:
(Bloody restrictions on the forum, no font in flashing fluo colors)

A 12 page biography of Mr. Dr. Krugman, Economics Nobel prize winner.
Page after page of riveting read.

The Deflationist
How Paul Krugman found politics.
by Larissa MacFarquhar
When it is cold at home, or he has a couple of weeks with nothing to do but write his Times column, or when something unexpectedly stressful happens, like winning the Nobel Prize, the Princeton economist Paul Krugman and his wife, Robin Wells, go to St. Croix. Here it is warm, and the days are longer, and the phone doesn’t ring much. Here they live in a one-bedroom condo they bought a few years ago, nothing fancy but right on the beach. The condo’s walls are yellow and blue, the furniture is made of wicker, there are pillows and seashells. There are tall, sprawling bougainvillea bushes along the side of the road.
...

At the NewYorker, a very very serious magazine.
http://www.newyorker.com/reporting/2010 ... acfarquhar

WW

[ghariton]

Since this thread is not just about Dr. Krugman, but also about explaining the financial crisis, I think I'm on topic.

We're seeing quite a number of explanations appear, and will likely see a lot more, as part of the U.S. Financial Crisis Inquiry Commission. These are likely to provide a lot more insight than the simplistic morality tales that we have been flooded with.

John Taylor does a nice job arguing that overly low interest rates were a cause. I've summarized his book (pamphlet) elsewhere on this forum and won't repeat it.

Gary Gorton argues that what we saw was an old-fashioned run on the banks. We used to see it on retail deposits, but deposit insurance has eliminated that kind of panic for retail investors. However, there is no such insurance for corporations and institutional investors, who need to park, say $100 million for a few days. They operate in a "parallel" banking system -- the repo market, backed by securitization of loans and other forms of debt. Since these are not insured by governments, a bank run was quite rational on the part of these investors.

According to Gorton this parallel banking system grew because of the growing need for credit to accomodate economic growth. At the same time, traditional banking turned unprofitable, facing competition from money market funds and junk bonds for sources of funds. Like any unprofitable sector, traditional banking started to shrink as investors put their money elsewhere. The parallel banking system, financed by securitizations, took up the slack. Its growth allowed the economic expansion from the early 1980s to the late 2000s. (Securitization is thirty years old and didn't cause problems before).

But like other forms of fractional reserve banking before it (Gorton does a bit of history), such systems are vulnerable to bank runs, unless insured by governments. A bank run finally hit us, as it was bound to do eventually.

Robert Samuelson argues that it was all the fault of mainstream economists and the presidents who listened to them. (While Samuelson is talking about the Council of Economic Advisers under Kennedy and LBJ -- Walter Heller is particularly responsible for the 2008 crash -- perhaps one lesson is that Mr. Obama should be wary of Drs. Krugman and Summers ). Briefly, the economists convinced Kennedy and LBJ that they could "fine-tune" the economy. They couldn't and the Great Inflation of the 1970s and early 1980s was the result. Inflation destabilized the economy and led to woeful performance for a decade or two. In particular, investors did very badly (as I remember all too well).

Reagan and Volcker managed to lick inflation, and the ensuing disinflation led to a resurgence in the economy, and nearly three decades of spectacular growth for investors. Unfortunately, people came to believe that (a) their investment returns were the result of skill, not disinflation, and (b) thereforte, these returns could continue forever. But while disinflation is good for you if it brings inflation under control, there is only so far it can go before becoming bad for you. In hindsight, simple projections should have shown that returns had to tail off eventually. Unfortunately, very few people could see this clearly enough.

The result was that everyone -- corporate executives, banks, investors, and regulators too -- underestimated risk and tolerated too much of it. In the face of such leverage, small adverse effects could lead to a crash, and so they did.

I should note that Samuelson has written a 300 page book. Either I'm greatly oversimplifying here, or his book has got an awful lot of padding. I tend to think it is the latter, but that's just me.

George