> <i>"Mr. Bernanke has a lot of money, as do the other bankers on the committee and the people who selected them. So they’ve decided to let millions and millions of people be unemployed and the rest of us experience the resulting recession rather than risk the chance that some of their money might be worth a little less."</i><p>Okay, I was with you until this part - that's a pretty serious claim to make without any substantiating evidence, or even something that <i>kind of</i> looks like evidence.<p>This seems like a gross oversimplification of a complex problem to me, and like most other gross oversimplifications of the recession, seems to just pin the blame on "greedy bankers".
The article makes wrong conclusions.<p>Money doesn't run the economy. Confidence does. Economy is and has always been a confidence game.<p>If people in the baby-sitting co-op are confident to find / earn more scrips in the future, they will spend their scrip today - even if its their last remaining scrip. But if they have no confidence of earning a scrip in the future, they will save it.<p>But if everyone starts saving the scrip, exchange doesn't happen. And economy suffers. And because the economy suffers, people save more scrips. And it creates a downward spiral loop.<p>On the other hand - if everyone gets over-confident and starts spending scrips they don't have, we see a bubble and then a bubble-burst. Which leads to some very bad consequences too.<p>So the trick has always been: make sure the people remain confident about the future. But that they don't become over-confident.
Keeping inflation under control isn't just something done to protect "wealthy bankers". The stability of the financial system as a whole is predicated upon the fact that money that I earn today will be worth something tomorrow.
This is basically the same article Aaron wrote early last year:<p><a href="http://www.aaronsw.com/weblog/depressions" rel="nofollow">http://www.aaronsw.com/weblog/depressions</a><p>The difference is that now he says it's all because Ben Bernanke wants to, um, profit on his dollar-denominated holdings. Which is sort of like claiming that the CEO of Exxon really believes in global warming, but he wants his next beach vacation to be .1 degrees warmer.
The problem I have is his basic premise is flawed. He's using the dropping of the Gold Standard as proof that pumping money into the economy will create new jobs. But if you look at unemployment after 1933 (<a href="http://bit.ly/9k4xVu" rel="nofollow">http://bit.ly/9k4xVu</a>) you see it did dip but then started to rise again. Because eventually printing that money devalued the dollar.<p>See the inflation charts here: <a href="http://bit.ly/aA5MXb" rel="nofollow">http://bit.ly/aA5MXb</a><p>So Roosevelt's plan failed (and it did fail) because the dollar's value dropped. So while more money was getting pumped in to the economy that was being negated by the assets of U.S. companies dropping in value. That drop caused business owners to stop hiring again.<p>My understanding of the Obama administration's basic plan is to pump money into the economy while trying to control inflation. That way companies will get the benefit of the Government's money without having their own assets devalued (and Ideally that will cause them to start hiring again)
...and this is why programmers should just program, vs. spreading some unsupported gutty-feely conjeture of an economic problem way too complex.
Crap... anybody feels they can write about economy after misreading a couple lousy quotes from a guy who actively proposes inflation to any bleeping crisis around the globe.
The anecdote about the babysitters and the lesson he's explaining is lifted directly from Krugman's <i>Depression Economics</i>.<p>He mentions Krugman briefly later, in support of his argument, but doesn't properly cite the material in question or mention the fact that Krugman is in fact the one making the argument...
I wish there was more than that baby-sitting co-op to support those ideas. One story doesn't make a proof. Krugman brings it up all the time - so the hopes of the nation apparently rest on a single baby-sitting co-op.<p>It's been too long since I thought about it, but back then I felt there were some aspects missing from the story. Must think about it again, but overall, it is a very limited experiment, hardly the same as a full economy.<p>Also, doesn't the co-op story show that people can also create their own money? If lack of money was the problem, why don't they just exchange services and products (I mow your lawn and you clean my car)? Money is just a tool to make exchanges more efficient, but it's not that without money they become impossible.<p>Of course, it is always appealing to blame everything on some rich elite.
I know I only see a small part of a whole and I lack full perspective on things, but from where I'm standing the biggest challenge of <i>every</i> funded/profitable company I know is hiring good people fast enough. All the good people I know (even in non-tech fields, including finance and real estate) are employed. Even most pretty marginal people I know are employed (at salaries they aren't happy with, but certainly nothing unbearable). Perhaps the people that are losing jobs weren't that good at them to begin with?<p>I realize that not everyone can be super-professional at what they do, and that's fine. But in my social circle (which includes all kinds of people from no skills/no education immigrants to highly specialized professionals in a variety of locations throughout the U.S.), nobody is <i>really</i> struggling. So what gives?
I was having a discussion with my friend today on related topics and I couldn't figure out the answer to this question: where does the demand for talent in the finance industry come from? On a basic level, banks exist to facilitate loans. Someone with money gives it to the bank. The bank loans it out to someone who pays it back plus interest over a period of time. At the end, the bank and the original investor get some return on his/her money. The hardest part about this chain on events is picking people who wont default on their loans.<p>But clearly the demand for talent in banking is much higher than that. These people get paid extraordinary amounts of money. So where is that demand coming from? What service is being provided by banks that warrants the compensation?
An interesting atlantic article on a similar topic:<p><a href="http://www.theatlantic.com/magazine/archive/2010/04/my-inflation-nightmare/7995" rel="nofollow">http://www.theatlantic.com/magazine/archive/2010/04/my-infla...</a><p>This writer also comes to the conclusion that inflation might be the way out.
I thought this was an excellent explanation, but I really don't appreciate the impeachment of the Fed. The author starts with a very nice explanation, but then goes to an extreme simplification of the complex process of balancing inflationary pressure with the rest of the economy. It's certainly fair to criticize the Fed, but to present their objectives as one-sided where inflation is always good is as equally foolish as the people calling for the gold standard again.<p>Frankly the Fed is probably only doing their job if everyone is angry at them. Which seems to be the case, so I tend to think they're probably making a decent trade-off at this point, as hard as it is for both sides to stomach.
See <a href="http://mises.org/Community/forums/t/7037.aspx" rel="nofollow">http://mises.org/Community/forums/t/7037.aspx</a> for a rebuttal of the baby sitting co-op story.
If what he says is true, then the U.S. can print lots of money, pay off the national debt, and create jobs.<p>Sounds like a win win.<p>Probably it isn't though.
This just dances around the edges of the key point: the gap between rich and poor. It's not that there isn't ENOUGH money, it's WHERE the money is. Of course printing new money, and redistributing actual physical units of money are kind of similar things to do (they both equate to wealth redistribution), so while I agree with a lot of what Aaron says, he's only CLOSE to the issue at hand, not actually hitting it on the head.<p>If you want a TLDR version of the economic crisis, like Aaron attempts here, you really want to just look at the increasing divide between rich and poor in the country (aka the unbalanced distribution of resources = unbalanced distribution of power = system susceptible to corruption, greed etc = incentives lined up to benefit small portions of society not large = economic failure.)
It seems like there is a lot of contradiction in how the Fed/Gov are trying to restore the Banking system. On the one side they are telling banks to keep more cash in reserve. (This is a worldwide phenomena). On the other side they are asking them to ease credit a complete contradiction to keeping more reserve. At the moment, banks are building up stock with cheap money from the Fed (at least that what I think they are doing) and credit should ease once they do so (as I believe it is doing currently). Inflation in this scheme would not be a factor because the money is being soaked up by banks as reserve.<p>At least this is what I'm getting from all the CNBC/Bloomberg watching ;p
"It all worked great for a while, until one day they found they had too few pieces of scrip. Every couple had only a couple hours left and, having so little, they didn’t want to waste it."<p>Wait... where did the old pieces of scrip go?
This would have been an amazing read if the author had included something more than a few quotes. Charts and Graphs and Statistics and Links Full of Research. I don't have the time to check up on this information myself (hence reading the article), but if the author had backed up all of his <i>crazy</i> theories with tangible evidence- this article would have been amazing.<p>So to answer your question, Mr. Author, I will listen to you when you back up what you say with something tangible I can hold onto.
What substantiative actions are being taken by the reserve? To me it appears they are gunning for inflation with the low rates.<p>If I have $billions then I can invest my money in a way that hedges against inflation. Conversely if I make $20k/year I can't insist that my employer pay me in a fixed number of long oil positions. So it's not true that inflation always hurts the bourgeoisie and helps the proletariat.<p>It is true that inflation hurts a lender and helps a debtor. If inflation is at 10% and your mortgage at 6% then you're effectively making a 4% return on debt. Conversely the bank is losing money because the money repaid is worth so much less than the money lent. <i>Bonus points for anyone that figures out why the banks aren't lending</i><p>As for Bernanke/cronies motivations; the federal government would like inflation to be as high as possible without risking collapse. So if "money for their masters" was the Fed's goal they will keep gunning for sustainable inflation. Bernanke/cronies can hedge against it, and the largest debtor in the world would prefer to pay a low interest rate.
For one thing, he completely ignores the fact that the US economy doesn't exist in a vacuum. Inflation can have a big affect on exchange rates, importers and exporters, the attitude of people like China to all the USD debt they own, etc etc.
I think there is some good insights in this. As I see it:<p>FED + Banks is a system of issuing money. As economy grows it needs more money. FED decides how much money is needed and banks determine who needs it and gives it to them (getting healthy profit if they were right).<p>Banks found a way to circumvent FED limits on making money. They made much more money then the FED intending them to make. That money was pushed mostly to real estate market driving prices of houses up so they became completely disassociated with their real value that they may present to anyone. It was kind of spotlight hyperinflation. Each dollar was worth lower and lower fraction of average home. Money was seeping to the rest of the economy but since due to technical advancements real value of economy was growing probably faster then FED expected that inflation was not noticeable in other markets.<p>When credit is paid back the money that was created when credit was given is destroyed. When situation is stable and credits are paid back at predictable rate then banks just give new credit in place of old ones if they are needed and allowed by FED and everything goes just fine.<p>But when credit defaults money all borrowed money not paid back yet is also destroyed. If huge quantity of credit default at once huge quantity of money is destroyed. What is more it's money that belongs to bank is seriously crippled by this. Not only he didn't earned interest rate but also he has less money to give new credits and create more money to profit out of. Defaulting on massive scale is something that current system of issuing money is not protected against.<p>I'm not entirely sure what happens if bank needs to destroy more money for defaulting credits than it has. Bank obviously goes broke but is the rest of the money still destroyed or not?<p>Since a lot of money was destroyed there is possibility that there is too little money now. As far as I know there really are no good ways to estimate how much money is needed (FED and equivalents in other countries do it by more or less educated guess). Maybe issuing more money could help, maybe that is not needed. It's not that obvious as post author has stated but it may be worth a try.<p>Also grudge about wealthy is not very polite but it might be true that they fear inflation more then they should because of their wealth.<p>Disclaimer:
By 'creating money' I don't mean literally printing it, just borrowing many times over the money that bank has (or borrowed).
By destroying money I don't mean burning it but just owing people who deposited money in the bank and not having cash to give them back their money.
Great Post!<p>He's on to vital fundamentals.<p>It's helpful to look at civilizations as products of 'social energy'... countless decisions by individuals and groups. (A decision is an idea + an action).<p>Money and credit are very imperfect technologies for the storage and allocation of this 'social energy' with an inherent bias in favor of any with the power to create it.<p>So, since this 'creator' bias is inevitable the solution has to lie in democratizing (with important checks and balances) the process. This inherent bias also makes the Fed’s claim of independence ridiculous on its face and is a core problem with the monopoly of central banking. (This doesn’t suggest its elimination, only elimination of its monopoly).<p>After all… who has the right to create and than allocate YOUR ’social energy’ without your input?<p>That’s worse than taxation without representation… that’s potentially multi-generational enslavement without having an ounce of input into that allocation of your life’s energy.<p>The thought process that rationalizes it for the ‘credit creator’ and those most closely benefitting is tied to a problem of scaling biological altruism but that’s a separate essay.<p>I believe this inherent bias may suggest that more than one type of credit creation may be desirable. For example local currencies geared to local products and services to function alongside one or more global currencies… in an attempt to overcome a ‘proximity’ bias which goes along with a social bias.<p>This approach can encourage asset-based-community-development and economic and financial resiliency while preserving the advantages of global trade and markets as well.<p>Again, I’m not an economist but it seems to me these are ideas worth investigating.<p>A brief post on some of this here:<p>On Social Energy, Enterprise & Expanding the Technology of Money<p><a href="http://culturalengineer.blogspot.com/2010/01/on-social-energy-enterprise-expanding.html" rel="nofollow">http://culturalengineer.blogspot.com/2010/01/on-social-energ...</a><p>I also believe the Individually-controlled / Commons-dedicated Account facilitating the microtransaction in Commons focussed activities (politics and charity) is an essential piece of this puzzle.<p>Opinion and influence are also aspects of ’social energy’ which money powerfully conveys(though we might wish it weren’t so). Current money technology inhibits the free flow and networking of this energy which distorts opinion markets.<p>And, in fact, tends to further entrench the problem.