Old Fixes For The 'Real Economy' No Help In Market-Based Calamity

IBD Editorials ^ | September 29, 2008 | ROBERT SAMUELSON

[Kaslin]

What we are witnessing, in the broadest sense, is the bankruptcy of modern economics. Its conceit has been that we had solved the problem of stability.

Oh, there would be periodic recessions, but the prospects of a major economic collapse were negligible because we knew how the system worked and could take precautionary steps to prevent it.

What's been so unsettling about the present crisis is that it has not conformed to the standard model of business cycles and has not submitted to familiar textbook solutions.

A hallmark of the crisis has been the stark contrast between the "real economy" of production and jobs, and the tumultuous financial markets of stocks, bonds, banks, money funds and the like.

Even with the 60% drop in housing construction, the real economy has so far suffered only modest setbacks. Yes, payroll jobs have declined 605,000 since December; still, 137.5 million jobs remain.

Meanwhile, financial markets verge on hysteria. The question is whether this hysteria will drive the real economy into a deep recession or worse — and what we can do to prevent that.

The word that best epitomizes mainstream "macroeconomics" (the study of the entire economy, not individual markets) is demand. If weak demand left the economy in a slump, government could rectify the situation by stimulating more demand through tax cuts, higher spending or lower interest rates. If excess demand created inflation, government could suppress it by cutting demand through more taxes, less spending or higher interest rates.

[DRey]

Of course it hasn’t conformed to economic models. Congress keeps meddling with it, artificially inflating it instead of letting it correct itself as needed. THAT is the system. Take away its immune system and it dies, no matter how much antibiotic you prescribe.

[saganite]

No economic system can withstand the repeated intrusions of the political class.

[Alberta's Child]

Even with the 60% drop in housing construction, the real economy has so far suffered only modest setbacks.

I've long suspected that the disproportionate numbers of illegal immigrants in residential construction was the primary reason why the steep decline in housing construction over the last two years wasn't accompanied by a dramatic increase in the unemployment rate.

[freeforall]

The only way to stop this is 100% reserve requirement for all banks etc. No more credit out of thin air.

[biscuit jane]

quote: “Its conceit has been that we had solved the problem of stability.

Oh, there would be periodic recessions, but the prospects of a major economic collapse were negligible because we knew how the system worked and could take precautionary steps to prevent it. “

---

Kind of like an economic lobotomy.

[steve8714]

The market is a force of nature, as variable as the weather. Economics as a science is useful only in telling us what conditions are favorable for markets as a whole, and hindsighting past phenomena.
Economic predictions are almost never reliable.

[vbmoneyspender]

The only way to stop this is 100% reserve requirement for all banks etc. No more credit out of thin air.

Thanks for the economic advice Herbert.

[XEHRpa]

> What’s been so unsettling about the present crisis is that it has not conformed to the standard model of business cycles and has not submitted to familiar textbook solutions.

That is the most common reason why really big bubbles burst. See the post about “Memoirs of Extraordinary Popular Delusions and the Madness of Crowds” at

http://www.freerepublic.com/focus/f-news/2092074/posts

[Grampa Dave]

[who_would_fardels_bear]

Adam Smith's Invisible Hand might have worked in the good old days because pretty much every large venture was a long-term one, e.g. voyages to the New World. This required capitalists to take the long view.

Now, however, there are lots of ways to commit huge quantities of wealth for short term gains. Today's capitalists are not only encouraged, but essentially required, by the market to be focused on the short-term returns on massive investments/speculations.

In exchange for allowing hedge funds and investment banks to do pretty much as they please we should at least require that no organization can become "too big to fail".

If corporations are not required to look too far into the future, at least we the people should if we will end up holding the bag when the speculators guess wrong.

[RegulatorCountry]

The only way to stop this is 100% reserve requirement for all banks etc. No more credit out of thin air.

I've seen this posted several times, by different FReepers, and I'm curious ... just how much would you be willing to pay a bank, to keep all your money, and everyone else's money, in a vault? You do realize that such a bank could never make a loan, don't you? How do you suppose this bank would make any profit, in order to pay you interest?

[freeforall]

The alternative is inflation which is a type of theft.Is it Right for Someone to Increase the Supply of Dollars?
When you increase the supply of dollars, you decrease the buying power of each dollar. Whoever adds dollars to the money supply adds dollars to his own pocket and takes buying power out of your pocket by devaluing the dollars in your pocket. Whether the person spends the extra dollars or lends them
out, it doesn't’t change the fact that the buying power - wealth - has been stolen
from you. It doesn't’t matter whether the extra dollars come in the form of cash or
credit (i.e., bank IOUs). It doesn't’t matter whether the person doing it is a regular Joe (e.g., a counterfeiter), a government, or a bank. No matter who does it, you are the loser, and they are the winner: the buying power leaves the dollars in your pocket, and enters the newly created dollars in theirs. So, is it desirable to
allow anyone to increase the supply of dollars? Obviously, the answer is no: not
individuals, not governments, and not banks.

Thanks for your insisive comments.

[freeforall]

That is a market problem not a regulatory problem. How businesses make money is determined by the price system.
Banks would have to survive like any other business and charge for services.The banks would actually have $1 of cash for every dollar they owe to their customers: there would be no chance of a harmful run on the banks

[RegulatorCountry]

The banks would actually have $1 of cash for every dollar they owe to their customers: there would be no chance of a harmful run on the banks

No, there wouldn't be any chance of a bank run, because there wouldn't be any banks. Few, if any, people would be willing to pay a large enough monthly fee, for a bank to be willing and able to keep it for them.

Your mattress is 100% reserve. Not safe enough? Buy a safe.

[bruinbirdman]

"Its conceit has been that we had solved the problem of stability."

Does anyone remember "DOW 30,000" in 1999?

Evidently not.

yitbos

[paudio]

What we are witnessing, in the broadest sense, is the bankruptcy of modern economics. Its conceit has been that we had solved the problem of stability.

I thought that's why we have to learn about cateris paribus in econ 101.

[Realism]

How do you suppose this bank would make any profit, in order to pay you interest?

They take that cash and debt roll it up into multi-billoin packages, sell it 15 or 20 times, then call it a bond and trade it on the stock market until its no longer of any value. /s

[freeforall]

You could still borrow money from banks. There would be just as much money as there is now. Banks would still lend you the money deposited by their depositors. The banks and their depositors would still receive interest from borrowers. The only real difference would be that the borrowed money would be cash, not bank-created credit (borrowers would not need to have physical possession of the cash: as they could spend borrowed cash with cheques or debit cards instead, if they preferred).