Homeowners and banks alike used their mortgages as leverage during the housing bubble — they took on more debt according to the value of their assets. But when the bubble burst, both were left in the red.
“When the assets suddenly lose value, as they did in 2008, and everybody’s balance sheet is then underwater,” Blyth says, “you have more liabilities than assets. And that creates a particular problem in terms of the way that we’re experiencing this recession.”
“If every household decides not to spend, you have no spending,” Blyth explains. “If every country tries to clean its balance sheet at once, then you end up basically reducing the economy overall.”
Take the U.K. for example, he says, which leads the trend in austerity politics. In debt and worried about the country’s credibility in the financial markets, Britain aims to drastically reduce government spending.
“Now, if every other country is continuing to spend and continuing to grow, you can have ‘growth-friendly consolidation,’ as it’s called. If, on the other hand, everyone does this [reduces spending] at once, it’s just the same as every household not spending,” Blyth says."
I don´t understand why the concept that if you overextend yourself that some initial sacrifices are necessary in order to build up capital in order to spend in the future. Nor do I understand how a correction can be interpreted as a permanent shrinkage of the economy. My preference is history, but the economics interest me as well. Someone please explain to me why making sacrifices when we’ve lived beyond our means due to a boom economy that was stimulated by central bank policies in order to create a healthier economic base is a bad thing.
I also can’t understand how he conflates goods produced privately with government services, for lack of a better word, that result from theft and the redistribution of wealth.
A " Why people like Mark Blyth think like they do" for dummies would be appreciated
Sorry. I just noticed your real question at the bottom of your post. I was originally answering the question in the title of the thread, which says “what’s wrong with this video”…but in your post you actually point out whats wrong with it and ask “why do this guy and people like him think this stuff?”
The answer to that is “they don’t know any better.” The vast majority of the time, that’s the case. It’s that simple. They don’t understand economics. Or at least, much of their knowledge is flawed. As Ronald Reagan said “they know so much that isn’t so.”
:/EDIT:
The presenter’s too-thick Scottish accent.
Seriously though, first off, right out of the gate his definition is misleading at best. He even inputs the text up on the screen in dictionary format, as if what he said was even a real definition…
Second, his explanation of what took place is just as useless as anything you hear on MSNBC. "We need to remember how we got here: Two years ago, the world’s financial system exploded. The crisis blew a $2 trillion hole in financial space-time [“financial space-time? ] and collectively the rich governments of the world spent, lent, or guaranteed between 5 and 50% of their country’s annual product, saving the banks. Given this, you might think that a period of austerity is a good idea, but to see why it’s not you have think about the world as a series of balance sheets.”
The guy makes it quite clear he has no real understanding of economics or what actually happened, or why.
Then he throws in little half truths and fallacies here and there like: “back then it made sense for many of us to take on debt. For example the bottom 40% of the U.S. income distribution hasn’t had a real wage increase since 1979…really that’s true.” First of all, “the bottom 40% of the U.S. income distribution?” He’s talking about a statistical category as if it were an actual human being. This is a total farce. And what’s more…his entire point is that if your wage doesn’t go up, that means it makes sense for you to take on debt. Are you kidding me?
He further illustrates this idiocy in the very next sentence: “Corprates (especially banks) did the same. But they did it to make money, not to pay the bills.” Think about that. He is literally implying that “taking on debt to invest it and make money = bad thing. Taking on debt to pay your bills = sensible, good thing.” I shouldn’t even have to go any further.
But to continue down his road of bullshit he goes on to equate leverage (aka debt) with gambling. He literally says it’s like going double or nothing in blackjack.
And interestingly enough, even though he’s trying to demonize a business for taking on debt, he uses the example of a homeowner: “If you’ve taken on debt from a mortgage, you hope your house will increase in value. If you think there’s a high chance the value will increase, you might go double or nothing and take a bigger mortgage. But like blackjack, there’s always the risk of losing.”
Gee. Now it sounds like the general public was making a bunch of bad decisions. But I thought it made sense to take on debt if your wage didn’t increase? I mean, it’s not like you could keep your expenses low or something like that. No. You deserve to live in your own house, even if you can’t afford one.
Essentially for the rest of the video he goes on talking about debt and the economy from the basic flawed Keynesian model of aggregate demand being the lifeblood of the economy. He claims that if individual people in the economy are tightening their belts and saving instead of consuming a lot, then the government has to step in to spend for them to make up the difference. He actually tries to say that basically we can’t all be prudent (or “austere”) at the same time or the economy will crash. He actually claims it’s a fallacy of composition.
Later he claims “austerity” is “the pain after the party”. He even uses the word “hangover”. Then he goes into this egalitarian nonsense about how “the hangover of austerity” is not going to be felt the same across the income distribution.
It’s funny…he never assigns any blame for the bailouts that made the public “pay for it” in the first place. He talks about it as if everything is the fault of greedy corporations. Who was it that took the public’s money and handed it over to the greedy corporates? It certainly wasn’t some company…
It was his almighty, infallible government that he seems to still believe is “of the people, by the people, for the people.” Why he doesn’t get this is beyond me.
If I can recall correctly, Doug French made an excellent point in his monograph, “Walk Away”, that home-buyers were the most rational actors in the housing bubble- they took the banks and mortgage providers for over $2 trillion and then threw the keys to the house right back at them.
I haven’t read the text, but it was my understanding that French was making the case that there was nothing morally wrong with walking away from the house and mortgage…not that these people necessarily came out on top or made wise decisions when they took on loans they couldn’t afford to repay.
