Domino effect of failing banks, role of inflation, and critique of Austrian economics

[John_James]

@FlyingAxe's wife's cousin

No, I don’t agree that interest rates are determined purely by “time-preferences” in a completely free market. One obvious factor is market participants’ expectations of the future time preferences of others, which is in turn affected by numerous factors, including emotional swings.

You’re in luck. The Pure Time-Preference Theory of Interest just hit the Mises Store and (free) .epub format literally within the last couple of weeks.

The introduction can be found here. If your friend needs a refutation of his amateur conjecture-without-reasoning-or-analysis, send him a link to the book. He can download the PDF or the epub (to read on his eReader) completely free of charge.

As Tunk said, he’s not even really refuting anything. It’s just like when he tried to claim “there have been booms and busts, caused by various factors, including environmental, mercantile, emotional, etc.” or when the pony tried to claim “The ABCT explains a particular kind of financial crisis and why that particular crisis is caused by the fed. It does not rule out recessions, panics, crisises, or lower prices altogether.”

In your friend’s case he just keeps isolating various things that play into the larger overall cause. (And of course as I pointed out in the pony’s case, she goes a step farther and literally just lists synonyms as if they were different things.)

I don’t think the Fed is perfect, I just know they are much better than nothing.

Oh he “knows” this. I’m on the edge of my seat for this one.

1. Allowing the money supply to shrink relative to the economy by keeping it fixed would cause a recession that would likely last as long as the policy were in place. One reason is that few participants would invest, knowing that they could just hold their dollars and allow them to appreciate.

In a free market no one would “keep” the money supply doing anything. I love the way people purport to attack “free market” and then go on to describe something else as they knock it down.

Also, I’m wondering how this genius would explain all the economic growth that occurred when there wasn’t centralized manipulation of money supply. According to him, history was one big perpetual decline, with the only times of prosperity being when we had the manipulation. (Which of course were (in reality) the only times we had boom-busts.)

2. The transition to a fiat currency caused significant inflation largely because the dollar had been artificially pegged at $35/oz of gold, which was fat below the market price, causing sudden inflation when the peg was removed.

Uh. So let me get this straight. The money supply was constrained by a link to gold, meaning the value of a dollar had a roughly stable value in terms of gold. It was only when this link was cut, and the central bank could print all the money it wanted out of thin air…it was only then that the “true” value of the dollar was revealed, and a “market price” was reached.

Does he even listen to what he’s saying?

Inflation and monetary uncertainty both beget inflation, and this was much of the cause of the inflation of the '70s.

Inflation begets inflation. Mmmkay. So how is the first inflation begotten?

Inflation in the last two decades, once that initial problem was resolved, has been quite tame.

Again, he means “since the way inflation is officially measured was changed, official measurements of inflation have been relatively tame”, right?

3. a. [This is reply to the question of what happens if Fed fails to sell back all its assets.] Ok, but if they are only 98% successful and avoid a depression, while taking a small loss, that seems like a clear win to me. Again, it is not a perfect system, just much better than any other we know of.

a) I’m sorry, “avoid”? Because the past 3 years has been such a walk in the park.

b) Yeah yeah…don’t tell me. “Oh but it would have been so much worse”. Again, the very government he claims is intelligent enough to centrally plan the economy is the one that literally said the unemployment rate would be lower than it has been if they hadn’t done the stimulus. (Why do I keep having to link the same damn things?)

c) “98% successful”. I’m wondering what this means. The whole reason the Fed bought all this stuff was because no one wanted it…as in, it was virutally useless…as in, it had no market value…it was “toxic”. And this guy is suggesting that somehow, now the market will want to buy crap that has no value? And for a premium? (Or at least the premium the Fed paid for it)? Seriously? Why?

d) And also let’s not overlook the fact that this guy is literally arguing that putting a gun to your head, taking your money and giving it to someone else is perfectly fine, so long as the thief hires an economist to issue a statement telling you it’s for your own good, and “trust me, you’re better off.”

b. [This is reply to analogy of what would happen if Fed started buying up Honda cars. Wouldn’t that cause malinvestment in Honda and eventual bust?] My point was that it wouldn’t have to go through a bust if they held the cars and let them out very slowly, essentially what has happened with the so-called “toxic assets.” Since many of these pools were sound, once there was liquidity in the market and confidence that the US economy wasn’t going completely down the drain, over time they have come back up toward their true value.

I have no idea what he thinks he’s talking about. I want to see the data. I want to see the reports that show people have been buying these securities and the Fed has been “slowly” selling them at a market price. I would also like to see what these “sound pools” were.

Where is he getting this from? Again it sounds like he’s just making shit up the way he thinks it should go/the way he was told it should go/the way he would like to be.

4. The media are sensationalists, because that is how they attract more readers/listeners/viewers. They focus on foreclosures, short sales, etc. In the nation as a whole, inventories are back down to what they werein late '05 to early '06, and home sales are back up to what they were in early '08. Median existing home prices are slightly down from 2009, as of early 2011- and if they followed trendlines since then (the data isn’t available yet), is flat to slightly up since then. only the last clause was speculation- the rest was all factual.

1. Source please. (Also see my last two sentences directly above.) If you don’t feel like waiting for him to come up with an excuse as to why he can’t actually provide the evidence to support his claim, you can include this graphic. Be sure and tell him that you’re just a naive [whatever you do], but you could have sworn 5.4 million is more than 3.8 million.

2. His numbers are just like this other friend of another member here. What’s the relevance of 2009? Why not 2008? 2010? 2000? And even though he’s wrong on the actual numbers, why is he looking at “late '05 to early '06”? Why not 2002? Why not 1982?

As if committing the sharpshooter fallacy was bad enough, this guy doesn’t even do it right. He picks the worst time to compare (and he’s still wrong). He’s literally looking at the height of the housing bubble and saying “hey look…inventory is the same as what it was then. All good.” (The reality is it’s currently more than 42% higher than even that, but still). As A. Gary Shilling points out here, if you actually look at a historical average and not at some single few-month time frame, new and existing inventories listed for sale have averaged about 2.5 million. And this friend of yours wants to look at the peak of the biggest glut in home building in history, and say that matching that inventory (which is 52% higher than the historical average) is just dandy.

This is what happens when people who don’t have a clue think they know everything.

The government is not propping up home prices in particular, other than tax breaks and mortgage guarantees that have been in place for decades.

Bullshit. [1][2][3] (And that’s just what I came up with in 30 seconds)

[Here I asked for a proof of total market collapse if the government did not bail out the banks.]

Do you need proof that a sharp rise in defaults of large financial institutions would lead to defaults in those that rely on their guarantees, or that virtally all major financial institutions are intertwined and borrow and lend to and from each other as well as rely on each others’ guarantees, or that virtally all major financial institutions failing would cause a depression?

No, I need proof that things would be worse if money wasn’t taken from the public and handed over to corporations that essentially made terrible bets because they knew they wouldn’t be on the hook when they lost. I need proof that a company is “too big to fail” as opposed to “too big to bailout”. I need proof that simply letting the people who lost, actually suffer their own losses, and letting the remaining good assets come under new ownership would cause a world collapse from which there is no return. I need proof that somehow simply not having the same people in charge of assets would mean the end of the world as we know it.

You know. Just proof of anything you’ve said.

P.S.

As for his nonsense article, I’d like to first go back to his premise about how necessary the Fed is. Oh yes, it’s been all sunshine and lollipops since the Federal Reserve has been in existence.

But that article asks: “abolishing the Fed only raises the bigger issue: What would-or should-be in its place?”

Thomas Sowell answers that question perfectly by the end of this segment:

Thomas Sowell: Federal Reserve a 'Cancer'