How to stop Recession & advice to Mr Bernake'''

For KYli:
Read Adam Smith sometime, he was a lot more progressive than he is oft given credit. For one, he was a strong advocate of progressive taxation, and argued that taxing the lowest income workers was essentially self defeating. He called taxes on income and profits the fairest possible taxes, then dismissed them both out of hand because, from his late 18th Century vantage point he could see no way to collect accurate information regarding personal income or business profits without excessively intrusive investigations of everyone. Today it is a moot point. So no, I think even a progressive has a hard time arguing with Adam Smith, except maybe with his advocacy of retaliatory tariffs. Isn't that surprising?
Keep in mind the "market" as Adam Smith defines it has to have a nearly infinite number of both buyers and sellers, so that everyone is what he calls a "price taker". In other words, the overall interactions of too numerous to count buyers and sellers sets the market price, and no one or two entities have the power to do anything that could possibly affect the market price. You either take it or leave it. In actual markets, this is often not the case. UPS and FedEx together command 80% of the package shipping market in the US. This is not a market as Adam Smith defines it, any action FedEx does UPS must respond to and vice versa. There are lots of other such markets. Coke vs Pepsi anyone? Airbus vs Boeing? Lever Brothers vs Proctor and Gamble? Lots of markets are dominated by two or three big firms. There is no theory of how such oligopolies behave that has any predictive ability at all. There may be something lurking in game theory but so far the complexity of the mathematical relationship has defeated all efforts. There is certainly a Noble Prize for the person or team who work this out, so go for it! One must not just understand how markets are supposed to behave in theory, but also understand how the often fail in actuality.
By calling for fully floating currencies I am calling for an end to fiat currencies. Currency values will be determined by their value in trade. As far as specie goes, it has failed every time it is tried. For an economy to grow, banks or some other such entity must make loans to existing and new businesses. Such loans are no different than printing money. I bet you never looked at it that way did you? There really is no difference. The bank puts a number in a deposit account when you take a loan and the money is spent. A central bank like the Fed or any other nation's central bank controls the growth of the money supply indirectly by enforcing reserve requirements on banks and by manipulating the interest rate it charges banks to loan them money. When banks make loans to individuals and businesses and they don't have reserves to cover these loans, they go to their central bank for more, but there is a cost in this reflected in the "discount rate" the central bank charges. If the central bank raises the discount rate, banks curtail loans and this effectively slows the growth of the money supply. The Fed does not "print money" but banks do so every single day.
The money supply must grow if an economy is to grow, but the growth must be balanced against economic growth to minimize inflation. This is a judgement call. But, curtail money supply growth too much and you choke off economic growth, maybe even precipitate a deflation.
This is where specie fails miserably. There has never been enough gold and silver, with one exception, to grow the money supply to accommodate economic growth. In every case where specie has been used, it has had to be supplemented by a paper currency ( bank loans are effectively paper currency ) to keep the nation in question's economy growing. In any event, whenever the value of the metal a currency is made of exceeds the value stamped on the coin, all those coins quickly disappear and are melted down for their higher value in metal. Coins can be shaved and adulterated as well. This is all well known. Paper currencies do not have such problems. In every case where specie was tried it was soon overtaken by the supplemental paper printed to allow business loans and economic growth. This was true of the Dutch two centuries ago and the US and UK last century. Btw, the US was only on a gold standard for 80 years. We were on a tobacco standard for far longer.
I am not advocating a command economy. Where did you get this. Lets examine the equation for national income. GDP = C + I + G + ( Ex - Im ). Income equals the sum of consumption, investment, government spending and the net of exports minus imports. Where is the US in this one year ago. C and I are falling rapidly. Ex - Im has been negative for ages. That means that GDP is falling. The only way to immediately moderate that fall is for the government to spend. Plain and simple. How much and for how long is of course very controversial. I am positing that the US should have intervened not with the banks, but directly at the source of the problem, which at the time was bad home mortgages. We spent trillions with minimal effect in my view, and still face a crisis situation. Were it my decision, I would have put $100 grand directly into each mortgage, or less if less paid off the mortgage. That would have ended the mortgage crisis right there. The rest of the cascading effects would have been squelched. That is not the long term solution, bank regulation is necessary ( and I'm not confident the US will do this, but a return to the post Depression regulations is necessary now, no yesterday ) but doing that would have ended the crisis right away. Now we cannot do that, but there is still a great deal of bad debt coming due, on top of people loosing jobs and not being able to pay their debts. Add to this the fact that millions of US workers in their prime earning years have lost jobs and will most likely never again make anywhere near as much as they did, and we see a nation with vastly diminished purchasing power and loads of bad debt. The banking system will be choked by bad debt for many more years, and this will choke business of the loans they need to stay in businesses. I consider that to be critical. Keep as many businesses in business and keep people in their jobs. I have nothing for the banking or credit industries, but I think the end game may be some sort of mass credit forgiveness. It's not a pretty picture, but I think in time we will come to this.
Regarding the Renminbi, I think the market should set it's value in trade. This will allow trade imbalances to adjust seamlessly and completely. There is never any excuse for long term trade imbalances, it is the hallmark of government interference in a smoothly operating market. It always leads to market distortions, distortions that never last and lead to corrections that cause real human misery. Policy counts folks, and real people suffer real pain due to bad policy. Too may so-called leaders forget this little detail.
I stand by my statement regarding China. I know many do not agree. Lots of people didn't agree with me two or three years ago when I was harping on the dual deficits. Just like many disagree for my call for floating currencies. Disagree to your heart's content but I smell BS. My critique stands.

Ambivalent said:

Interesting topic. My degrees, BA before my active duty and MA more recently, are both in Economics with particular interests in international trade and finance and development economics.
I can see one very important thing the US in particular must do in the near future, but not this year or next. The US must run budget surpluses for a decade or more to pay down it's national debt. Deficit spending is driving what I call the dual deficits, the budget deficit and the trade deficit. The US spends more than it takes in from taxes, and finances this with Treasury Bills. In a textbook world there is a practical limit to how much of such debt financing a nation may do, as this tends to drive up interest rates and make such borrowing increasingly expensive. The US has short circuited this normal mechanism.
Most Asian nations are growing their economies by developing export oriented industries. They grow their economies by selling stuff to developed nations, in particular the USA. They traditionally run a trade surplus against the US, and the US runs trade deficits year after year. Again, in a textbook world, this should be self correcting. The US buys more abroad than it sells, so dollars should pile up in surplus, lower their value in trade as with any commodity in surplus. This would make US exports a comparative bargain while driving up the cost of foreign imports. However, Japan, China and others cannot afford to loose market share in the US to a rising dollar. Their economic growth would be badly affected. What to do? Well, trade surplus US dollars for all those T-Bills the US Treasury is furiously hawking to all and sundry.
This sordid little trade has gone on for decades, back into the Reagan administration at least. It works for everyone, well almost, but I'll get to that. Asian exporters maintain their favorable terms of trade and grow their economies seemingly without limit. The US government is allowed to spend freely with no constraining financial discipline. The US consumer, ever afraid of that boogyman called inflation ( we never forget the Nixon era stagflation ) get and endless supply of cheap Japanese and now Chinese consumer goods. The CPI is low, Congressmen take home the pork to their districts and Asian Inc, marches forward with development. What's not to like?
Well, this process effectively inflated the Japanese economy until the twin bubbles of their stock and real estate markets both burst. You have to know Chinese leaders see what happened to Japan and suck air between their teeth with every new purchase of US T-Bills. The globe is flooded with US debt, and like any commodity in surplus, it will fall in value. This is a congressmans, and Ben Bernake's worst nightmare. Fisical discipline. Oh the horror! Only the current upheaval bought the US a little, and I do mean a very little time. Right now, for the very immediate future, US debt still looks pretty safe to investors. As other, less leveraged economies recover this picture will change, and rapidly.
My WiFi spot is about to close, so I will finish this half done. In short the US must cut it's foreign debt substantially. But how, when so much value has been lost in the US and the US consumer will no longer be buying for maybe my lifetime. The days of the free spending US consumer are over for a very long time. What now? To be continued.

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your analysis and conclusion is competely correct, the US needs to reduce its debt. it has been the policy of mr.greenspan during the clinton era as well. but how do you suggest they do it? they simply cant. either the government stops spending, or the consumer stops spending, or both. in a perfect world the government will save up when the consumer has too much money and spend in place of the consumers when the latter is in debt. that equilibrium is lost decades ago in the US. you need some MAJOR correction to restore that order. that correction hasnt happened yet.

pla101prc said:

the US cannot justify effective provision against China when its very own currency is also being manipulated. furthermore, trade restrictions between large states have always ended in disaster, from napoleon to hoover, there is nothing the US can do to get the RMB up to the level it thinks is correct. its a bilateral issue not everything is gonna go the american way nowadays. on the other hand, China cannot afford inaction on this issue either, but of course their decision making process does not involve mr bernanke.
i would advice against throwing more money into the financial system. first of all it is already politically unacceptable, obama already said no more bailouts. you can argue what is or isnt a bailout, but the congress doesnt care. besides, Japan already tried this it didnt work for them, and they actually had a crap load of savings to begin with, the US is hopelessly in debt. second of all, what the US is now missing is savings, the only way you get savings is by not spending and produce more at the same time. the result is that you get a long period of low growth. the cut in pay might suck but in the long term it is a good thing, it means that US firms are fighting for productivity, there will be a lot of hardship in the process but its better than going bankrupt.
as for China's growth, the numbers are all from IMF and world bank so its quite real. even the government numbers you see on the news are considerably lower than the sum of what each provincial governments reported. that result is also in line with the prediction of 90% of the experts in the world, that is China (Asia) will bounce back before anyone else does.

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Uh, do you read the news? Savings in the US is up tremendously, so much so that some economists are worried that increased saving will choke off a recovery. Almost everyone in the US has lost their life savings while seeing the value of their home drop. People who thought they could finance their retirement by selling the big home and buying a smaller one no longer can. People who thought they would send the kids through college on home equity have had to change their plans. As a nation, Americans are saving again. I have been reading dire predictions ( overly dire in my estimation ) that every one percent increase in savings knocks three percent off the GDP. I don't buy their math but that is what winds up in the news paper.
I don't think the US has a problem with productivity. It has among the highest worker productivity in the world, and has for many decades. What the US has is a policy problem. Our decades of trade deficits are an artifice of policy, not because US industry is somehow so bad or inefficient. If currencies are allowed to float freely, then trade imbalances adjust automatically.
Yes, the US and it's trade partners have manipulated currency values over the years. I am calling for an end to this. Maybe you didn't read the part where I said the US must run a decade or likely more of budget surpluses to pay down it's debt. That won't be easy to sell in the US, but the US must do this or it's economy will be badly destroyed. But, if the US does this, it must also demand it's trade partners do the right thing and allow their currency values to float. Both sides have manipulated this for their own ends and it has to end as soon as possible.

Ambivalent said:

The only way to immediately moderate that fall is for the government to spend. Plain and simple. How much and for how long is of course very controversial. I am positing that the US should have intervened not with the banks, but directly at the source of the problem, which at the time was bad home mortgages. We spent trillions with minimal effect in my view, and still face a crisis situation. Were it my decision, I would have put $100 grand directly into each mortgage, or less if less paid off the mortgage. That would have ended the mortgage crisis right there. The rest of the cascading effects would have been squelched. That is not the long term solution, bank regulation is necessary ( and I'm not confident the US will do this, but a return to the post Depression regulations is necessary now, no yesterday ) but doing that would have ended the crisis right away. Now we cannot do that, but there is still a great deal of bad debt coming due, on top of people loosing jobs and not being able to pay their debts. Add to this the fact that millions of US workers in their prime earning years have lost jobs and will most likely never again make anywhere near as much as they did, and we see a nation with vastly diminished purchasing power and loads of bad debt. The banking system will be choked by bad debt for many more years, and this will choke business of the loans they need to stay in businesses. I consider that to be critical. Keep as many businesses in business and keep people in their jobs. I have nothing for the banking or credit industries, but I think the end game may be some sort of mass credit forgiveness. It's not a pretty picture, but I think in time we will come to this.
Regarding the Renminbi, I think the market should set it's value in trade. This will allow trade imbalances to adjust seamlessly and completely. There is never any excuse for long term trade imbalances, it is the hallmark of government interference in a smoothly operating market. It always leads to market distortions, distortions that never last and lead to corrections that cause real human misery. Policy counts folks, and real people suffer real pain due to bad policy. Too may so-called leaders forget this little detail.
I stand by my statement regarding China. I know many do not agree. Lots of people didn't agree with me two or three years ago when I was harping on the dual deficits. Just like many disagree for my call for floating currencies. Disagree to your heart's content but I smell BS. My critique stands.

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your arguments reminds me of krugman in some aspects. i stand against that 100000dollar per mortgage proposal. all the economics argument aside (you already admitted that it is not the long term solution), who in the right mind would propose such spending before the crisis happen? politicians think in terms of politics, not economics, and we are talkin about a proposal that could be easily disproved because it does not answer the underlying structural problems of the US economy. now i suck at math, someone can do me a favour and tell me how much money will be involved in this proposal you just made, its prolly a number too big for the americans to accept when they dont see a crisis coming. on top of the politicians in the congress and understandably angry mobs from all over the country, alan greenspan would prolly stand as one of the most influential naysayer to your proposal back in 07.
what's worse about your money injecting scheme is what it will do to the real-estate price that was already far too inflated. the logic is there i dont think i need to explain, overall i'd say what you have recommnded will come nowhere close to becoming an actual policy even if it was presented to bush, partly cuz its unpractical, and partly cuz its not a really good plan, no offense.

It was over sometime ago.

I will not enjoy the fireworks, but it will be spectacular nevertheless.

To the likes of Ambivalent and other die hard fanboys of US military might who are unwilling to concede any possibility of their country being rendered ineffective in influence:

It's over. Stopping wasting your time convincing others it's not. You will soon be ashamed of your nationality and may even develop an inferiority complex based on it. The USSA that's coming will take your breath away.

Nothing new under the sun.

If currencies are allowed to float, the world would pick up the Renminbi as standard and drop the US dollar like a hot potato.

In other words, it's really the last thing you want.

Please note, what artificially jacks up the US dollar and keeps the Renminbi artificially low is the Chinese banking system buying up US debt. You want a free floating system, the Chinese has to stop buying US debt.

Please note that it is good that finally Americans are saving again. But Americans going out of health insurance at record numbers, and a universal health care system still being debated (this topic would not be debated here, leave that with the politicians to brainache), the danger is that if a member of your family becomes sick, it can wipe out the savings for that family. So practice health care by taking care of your health right now, sickness avoidance is the best policy.

It would help if every American not only starts saving more, and spends wisely, but they should live more healthy, eat more healthy, exercise, and just keep more healthy, stay more healthy. The more sick people you have, the more it does weigh on the total social cost. Its time to examine things like the way you eat canned food and fast food, or the time you should spend being a couch potato instead of exercising.

Ambivalent said:

Uh, do you read the news? Savings in the US is up tremendously, so much so that some economists are worried that increased saving will choke off a recovery. Almost everyone in the US has lost their life savings while seeing the value of their home drop. People who thought they could finance their retirement by selling the big home and buying a smaller one no longer can. People who thought they would send the kids through college on home equity have had to change their plans. As a nation, Americans are saving again. I have been reading dire predictions ( overly dire in my estimation ) that every one percent increase in savings knocks three percent off the GDP. I don't buy their math but that is what winds up in the news paper.
I don't think the US has a problem with productivity. It has among the highest worker productivity in the world, and has for many decades. What the US has is a policy problem. Our decades of trade deficits are an artifice of policy, not because US industry is somehow so bad or inefficient. If currencies are allowed to float freely, then trade imbalances adjust automatically.
Yes, the US and it's trade partners have manipulated currency values over the years. I am calling for an end to this. Maybe you didn't read the part where I said the US must run a decade or likely more of budget surpluses to pay down it's debt. That won't be easy to sell in the US, but the US must do this or it's economy will be badly destroyed. But, if the US does this, it must also demand it's trade partners do the right thing and allow their currency values to float. Both sides have manipulated this for their own ends and it has to end as soon as possible.

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first of all, increase in savings is a correction of the recession, its suppose to be a good thing (note the current level of saving is still nowhere near where it should be, what the economists were worried about is that ppl are not spending, but that's how you save). of course as the ppl are workin their tails off to save, the lovely government and fed steps in and opened the printing press. guess what? the $$$ you thought you saved just lost value. why do you think China Japan Great Britain hate it when the US print money? cuz they are saving US dollar, its the same with the American ppl. and they are way mroe vulnerable to inflation than those major economic powers i just mentioned. someone stated that inflations is a lagging indicator, a statement that i agree with completely, and it only means that the real killer to the savings hasnt even arrived yet.
maybe they dont teach you that in the US but everywhere else you go you'll prolly be told that the productivity in US nowadays suck. the big three is a perfect example, they werent able to compete with Japanese products even before the recession. at that point GM was already heavily relying on the financial sector rather than its products to make money, and when the US financial sector came apart they have lost a vital source of income.
it was the same case with some of the companies in the dot com bubble as well. it used to be the case that the US would assert its advantage in technological innovation. but what ppl fail to realize that technology, like population and capital, is subject to the law of diminishing return to scale. ppl like to brag about how many inventions they have or whatever, but what they dont realize is that the US market is losing appetite for technological innovation, f-22 is a pretty good example of that. just because you have better technology does not mean the market is necessarily gonna take it.
as for the trade thing, both sides have been presenting bogus arguments. the Americans like to think of it as some Chinese conspiracy to benefit itself and hinder the US economy. guess what? the Chinese think the exact opposite, a clever American trap to take China as hostage so that it must continue to buy US t-bills. both arguments are stupid, and any argument that says one side is at fault completely is stupid, its a structural problem not a policy problem, the US gov doesnt even have that much power over the market anyways so dont expect it to somehow make the issue go away.

Crobato, your above advise for health is even more appropriate for the growing middle class in China. The middle class and up in china needs to get off alcohol and oily food. There is also very little health care here. The people need to reform on their life style or we are going to experience "social depression".

crobato said:

If currencies are allowed to float, the world would pick up the Renminbi as standard and drop the US dollar like a hot potato.

In other words, it's really the last thing you want.

Please note, what artificially jacks up the US dollar and keeps the Renminbi artificially low is the Chinese banking system buying up US debt. You want a free floating system, the Chinese has to stop buying US debt.

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there was never a case where currencies were really allowed to float. the US is just as guilty of currency manipulation as China.
if the currencies are really allowed to float it will be detrimental to the world economy though i dont think anyone should doubt that. RMB is strong but China cant digest all the investments rushing in, in the end these money will become refugee capital, and China will be come the next thailand...times 100.