It's time to play "Guess what Cafe Kuehn will Say" with your host, BoscoH. The way this game works is that your host makes the first guest and the contestants make their guesses. Daniel will be the judge of the winner whether he wants to or not because he will post. Here we go…
(My guess) Higgs' analogy is wrong. Bernanke is like an ice cream man that shows up on a hot day to bring ice cream to all the kids in the neighborhood who are happy to see him. He's in a tough spot because the last ice cream man got 20 years for molesting kids.
dg lesvicApril 16, 2009 at 12:09 am
Daniel,
Do us all a favor. Give us just a few moments to savor this masterpiece, and then you can go crap all over the place again.
vidyohsApril 16, 2009 at 8:14 am
Bernanke may be a mjor player, but let's not forget he is but one of many who contributed to this fine mess we find ourselves in.
There is a long and almost endless list of elected government officials and appointed bureaucrats that had a hand in this.
From the Whitehouse to the sandbox, it proves more than anything else the devastating effect of government intrusion into "the invisible hand's" work space.
John FApril 16, 2009 at 8:28 am
Can you say: Fatal Conceit?
Daniel KuehnApril 16, 2009 at 1:30 pm
It's not especially inaccurate… my understanding is that Bernanke did vote for some of the early rate cuts, but there was definitely sharp disagreement between Bernanke and Greenspan at the end of Greenspan's term. So I guess I'm just saying that in terms of actually describing what caused the crisis, I'm not sure why Higgs focused on Bernanke. It seems like if that was what he was trying to do, he should have talked about Greenspan.
Unless he just has an axe to grind and is more concerned about speaking to what Bernanke is doing now – in which case that would explain the focus on Bernanke. If that's the case, I can't say I'm especially impressed by his grasp of monetary policy, but for that matter I don't have a very impressive grasp of monetary policy either, so what do I know? And as people often remind me, nobody here really cares what I am or am not impressed with (which is seemingly contradicted by the fact that they keep feeling the need to tell me they don't care what I think of something).
Daniel KuehnApril 16, 2009 at 1:53 pm
And in Greenspan and Bernanke's defense, Higgs also conveniently ignores the role of export-oriented Chinese policymakers in fueling the bubble. Whatever mistakes the Fed made (and they certainly did), they didn't do that.
RandyApril 16, 2009 at 1:56 pm
The "mad truck driver". That's good. But he could have avoided naming Bernanke, and simply referred to him as… FrED.
dg lesvicApril 16, 2009 at 3:29 pm
Daniel,
Congratulations.
You made a good point, as you occasionally do.
By the way, you made some good points in connection with my theory of redistribution, and I was very disappointed that you abandoned them without much of a fight.
I don't agree with your criticism of Higgs, though. In a short piece, he was not obliged to exhaust every possible avenue of approach.
But the question you raised about the role of the Chinese in fueling the bubble is an excellent one. I'm uncertain of that myself, and would like to see an expert analysis of it.
Daniel KuehnApril 16, 2009 at 4:01 pm
dg lesvic -
I didn't abandon my points on your redistribution theory – I just thought they were so good they didn't require further comment
He wasn't obliged to exhaust every approach, you're right. Especially because it was supposed to be a very accessible kind of piece. But that still doesn't explain why he targets Bernanke instead of Greenspan… unless he's setting himself up to attack what Bernanke's doing now.
D. F. LintonApril 16, 2009 at 4:35 pm
Higgs is truly wise. In an earlier post he said:
"During the painful years of the Bush regime, we had to endure the slings and arrows of the brown shirts who compose the so-called Republican base. Now that Obama has ascended the throne, the brown shirts of the left are emerging as the more conspicuous barbarians. Thank God it is not the case, as far too many people suppose, that we must be on one of these sides or the other. We can transcend this disgusting political spectrum, placing ourselves neither on the left nor on the right — nor even in the so-called “independent” zone somewhere between them — but rather rising above the entire line and insisting that red-state savagery and blue-state savagery are equally despicable and intolerable. I daresay that the future of our civilization hinges on whether a sufficient number of us will choose this transcendence."
Would that his critics were half as noble.
Daniel KuehnApril 16, 2009 at 5:14 pm
"Would that his critics were half as noble" – haha! What exactly is ignoble about criticizing this guy? Is he somehow above that?
What savagery is he refering to specifically – he's leaving it a little vague (although I agree, it reads very nicely).
CrawdadApril 16, 2009 at 5:17 pm
Daniel,
Just go to The Beacon and read his post on the hate mail he's been receiving since his C-Span appearance.
dg lesvicApril 16, 2009 at 8:27 pm
Daniel,
You wrote,
"dg lesvic -
I didn't abandon my points on your redistribution theory – I just thought they were so good they didn't require further comment "
They didn't require a defense, questions about them didn't require answers?
I'm sorry, I didn't realize I was receiving the word of God.
I will take exception to Higgs' characterization of the difference between the "brown shirts" of the left and of the right. The difference between one group of "brown shirts" and another is within the left and not between left and right.
Still waiting and hoping for enlightenment on China's possible role in our burst bubble. At the moment I don't see how the Chinese could have had anything to do with it. But even assuming that their actions fueled an inflationary bubble, why didn't the Fed take remedial action? That was it's job. Whose fault was it if it didn't do its job?
dg lesvicApril 17, 2009 at 12:54 am
To ask if the Chinese, rather than the Fed, fueled our inflationary bubble is really to ask if the free market, rather than the “government,” did so.
If, in fact, it was the Chinese, it could only have been through the money multiplying effects of our fractional reserve banking system.
Could there have been such a system in a free market?
Certainly not, if it continually failed.
So, whether the Fed itself is implicated, the free market certainly is not.
But my guess is that what Higgs was getting at was that it wasn’t so much the bursting of the bubble that put us in the current mess as the political reaction to it that did so. The free market itself would have repaired the damage. But the political reaction to it has prevented the market from doing so. And it was Bernanke, more than Greedspan, or anyone else, who was the architect of that policy.
dg lesvicApril 17, 2009 at 4:01 am
There was no difference between a dollar that went to China and the same dollar that the Chinese returned to America. There was still just that one dollar, no more. But there was this difference. It was in the hands of the Chinese rather than Americans, and, presumably, the Chinese were the more inclined to saving. So, the difference was really between savers and spenders, and what it comes down is saying not that the Chinese any more than the Fed fueled our inflationary bubble but that savers did so. Without or without the Chinese or the Fed, savers could fuel an inflationary bubble. But, without the intervention of the Fed, any inflationary actions of savers would be self-correcting, to the extent that they pushed prices up, discouraging further saving. It is only the aggressive actions of the Fed that could tip the balance toward a continuing inflationary bias.
dg lesvicApril 17, 2009 at 4:40 am
Since any inflationary bias of the market would be limited by actual production and real saving, it could not outrun the deflationary reaction against it. It is only the inflationary bias of the Fed, unlimited by anything other than the will of its masters, that could do so.
dg lesvicApril 17, 2009 at 4:45 am
And that, Daniel, is why the Chinese had nothing to do with it.
Daniel KuehnApril 17, 2009 at 6:17 am
dg lesvic -
RE: "They didn't require a defense, questions about them didn't require answers? I'm sorry, I didn't realize I was receiving the word of God."
Oh I was joking around with you – don't worry. And you know I stop checking posts after they get near the bottom of the blog roll. Feel free to repose anything you want.
RE: "Still waiting and hoping for enlightenment on China's possible role in our burst bubble. At the moment I don't see how the Chinese could have had anything to do with it. But even assuming that their actions fueled an inflationary bubble, why didn't the Fed take remedial action? That was it's job."
I'm no expert, but the crisis was essentially caused by overleveraging due to excessive liquidity. One source of that liquidity was Greenspan. Another enormous source was Chinese (and other) savings that came pouring into the US. And what's especially bothersome about that savings is that it was artificial in many ways (and as such, I think you could call it a glut). The Chinese government deliberately orients it's economy towards exports. It forces consumption down, the same way the Japanese did, to boost savings – but unlike the Japanese, my understanding is that the Chinese haven't really plowed that savings back into their own economy (I may be wrong, this isn't my area). The point is, over the last decade we've had a flood of cash from them. It actually might even be bigger than the change in the money supply by the Fed, I'm not sure of that. And I think you're dead on – the Fed should have taken that into account (I imagine they did… just not quite enough). I think CFR has a report out on this.
RE: "But, without the intervention of the Fed, any inflationary actions of savers would be self-correcting, to the extent that they pushed prices up, discouraging further saving."
I think you're being naive if you assume that the Chinese savings rate is a function of market behavior. I'm sure it partly is, but I wouldn't count on the market as the source of the massive (and still persisting) global imbalances.
Daniel KuehnApril 17, 2009 at 6:22 am
dg lesvic -
RE: "The free market itself would have repaired the damage. But the political reaction to it has prevented the market from doing so. And it was Bernanke, more than Greedspan, or anyone else, who was the architect of that policy."
I agree that this was probably more what Higgs was trying to do – but if it was, I think he did it poorly because he seemed to lay the whole bubble at Bernanke's feet.
I also think if this is the argument he's trying to make, he didn't put too much effort into actually making his case! It may be obvious to him that this is true, but many economists feel that Bernanke is one of the only policy makers holding the economy together right now. Could we see some disastrous inflation if he doesn't reel back in the money supply? Absolutely – that's a very big concern of mine. I watched him speak at Moorehouse yesterday, and he made it very clear it's a big concern of his as well. I think that's a legitimate thing to address and most would agree. But if the argument is that Bernanke is actually HURTING things right now, Higgs could have benefited from actually explaining how he got to that conclusion, rather than just presenting a colorful metaphor that probably left all but his admirers scratching their heads.
dg lesvicApril 17, 2009 at 1:31 pm
Daniel,
You wrote,
"Oh I was joking around with you – don't worry. And you know I stop checking posts after they get near the bottom of the blog roll. Feel free to repose anything you want."
Taking from the rich to give to the poor does not reduce but increases inequality.
You wrote,
"I think you're being naive if you assume that the Chinese savings rate is a function of market behavior."
That's irrelevant. Since their savings and credit were not created out of thin air like that of the Fed, but were limited by actual production, unlike that of the Fed, any inflationary impact of their savings could not have outrun the market's reaction to it, unlike that of the Fed.
How odd to be talking about an inflationary impact of savings, and deflationary of spending. But that is the assumption that I have been presented with, and, to refute, must address on its own terms.
You keep attacking Higgs' for not doing what you wanted him to do rather than what he set out to do. His purpose was not to present the last but the first word on the subject, not to resolve the issue once and for all but to open people's eyes to the fact that there was an issue. And he did it magnificently.
yet another DaveApril 17, 2009 at 1:53 pm
Re Daniel:
And you know I stop checking posts after they get near the bottom of the blog roll.
I wish you'd check this one again:
/2009/04/more-enlightement-from-adam-smith/comments/page/3/#comments
We were discussing the dynamic market vs government intervention.
Daniel KuehnApril 17, 2009 at 2:01 pm
dg lesvic -
RE: "Taking from the rich to give to the poor does not reduce but increases inequality."
Always happy to rehash this! But I haven't dodged this general point of yours at all – in fact I've addressed it quite extensively, including examples. So rather than re-performing our entire, previously choreographed, argument why don't you suggest something specific about that previous argument that left you unsatisfied (hint – "your entire answer" doesn't count as "something specific").
RE: "Since their savings and credit were not created out of thin air like that of the Fed, but were limited by actual production, unlike that of the Fed, any inflationary impact of their savings could not have outrun the market's reaction to it, unlike that of the Fed."
First, we're not talking about inflation, we're talking about easy money and the build-up to the crisis. Second, we're talking about country-to-country flows. So while you're right that Chinese savings and credit is coupled with actual production, and so on net "their savings could not outrun the market's reaction to it", it's CERTAINLY possible that the flow of their savings to America could have "outrun the market's reaction to it" in America. Right? So even if there's no net, global effect, it still represents a flood of credit into the U.S. market. Third, your argument against the Fed here sounds more like a concernt with fractional banking in general than the Fed in particular.
RE: "How odd to be talking about an inflationary impact of savings, and deflationary of spending. But that is the assumption that I have been presented with, and, to refute, must address on its own terms. "
dg – I never once mentioned inflation with respect to the Chinese savings rate – that was all you. You can scroll up and check So don't project it on me! Those weren't the terms that I introduced! My point was that the crisis was caused by lots highly leveraged bad bets, which were in part made possible by the fact that credit was cheap. A big part of the reason for that was China's largely artificial savings rate (due to their export-orientation), and their largely artificial pipeline that sent a large portion of those savings to the U.S. (due to I don't know what policy goal). There were two major catalysts for irresponsible leveraging in my mind – Greenspan and China. I never once mentioned inflation with regard to either of them.
RE: "You keep attacking Higgs' for not doing what you wanted him to do rather than what he set out to do."
No, I'm saying that he did a bad job at what he seemed to be saying he was trying to do (presumably pin the crisis on Bernanke). And then I acknowledged that he might have done a better job at achieving an unstated goal of his (setting up Bernanke for an attack based on what he's doing now). I don't especially WANT him to do anything. In fact, since I disagree with him on both counts it's in my interest that he just retire from writing columns entirely!
RE: "not to resolve the issue once and for all but to open people's eyes to the fact that there was an issue"
OK, ease up I don't expect him to resolve the issue once and for all by any means. I'm just really confused about what "issue" he's even raising. It seems to be that Bernanke got us into this, which sounds a little odd to me.
Daniel KuehnApril 17, 2009 at 3:13 pm
yet another Dave -
Thanks for raising it again… I've just commented on several loose ends there.
Daniel KuehnApril 17, 2009 at 3:16 pm
yet another Dave -
To summarize, I basically suggest that I've never advocated planning a market that is still adjusting. I've only argued for intervention when (1.) there are chronic under- and over-investments which the government does have a chance of correcting, precisely because these under- and over-investments are persistent and not transitory, and (2.) providing a positive (or negative) shock to break out of vicious cycles/feedback loops/bubbles, etc.
The interventions you've brought up seem to involve actually planning the market, which I've never advocated.
dg lesvicApril 17, 2009 at 3:19 pm
Daniel,
Please, for the last time:
There were three issues Higgs' might have addressed, the creation of the bubble, the bursting of the bubble, and the political reaction to the bursting of the bubble.
It seems to me that he was addressing the last of the three, and attacking the right man, Bernancke, as the architect of that policy.
Let's not go over that ground any more.
About redistribution, I had asked why an employer would pay a wage of $20M if he could hire the labor at $19,999.99.
It was at that point that you decided that you had had enough of the discussion, which, of course, was another great triumph for you.
On the issue of the Chinese money, I'm in way over my head, and need help.
But I can't see the Chinese money as the cause of our problem, for it was our money to begin with, and didn't become any "easier" because it had passed from our hands to theirs and then back into ours again.
The only "easy" money is that created out of thin air, and that was not the Chinese money but only the Fed's money.
Daniel KuehnApril 17, 2009 at 3:41 pm
dg lesvic –
On Higgs, please just reread his last paragraph. He is clearly talking about the bubble, not the reaction to the bubble. Don't try to impose on him what you wish he was talking about. Read that last paragraph and try and tell me how he's not discussing the cause of the bubble.
On redistribution… I don't see why they would pay $20"K", when he could hire the labor for $19,999.99. I'm almost positive I never said he would, and even if I did say that I'm not sure what that has to do with your redistribution theory.
On Chinese money – it's not an expertise of mine – I'm in over my head too. But the general point is, our money goes over there at market price, and comes back to us under market price. Somebody smarter than I should weigh in on this, but I think a large part of the reason why so much money has come our way from the Chinese is that their demand for American assets doesn't seem to reflect the higher returns possible from investing in the Chinese economy. This isn't like the Japanese, who plowed our money back into their economy to develop a highly advanced industrial sector, and only investing in American assets after exhausting those domestic investments. Again – totally out of my league, but I know a lot of people considered the imbalance artificial – money was coming back into the US under market price, which added to leveraging.
Daniel KuehnApril 17, 2009 at 3:44 pm
dg lesvic -
RE: "The only "easy" money is that created out of thin air, and that was not the Chinese money but only the Fed's money."
I'm confused – do you just not like fractional reserve banking in general? Because that's the "thin air" part, and I think that's crazy to oppose. Or do you just not like that the Fed doesn't follow a profit motive… that's a much better reason to oppose the Fed, although I still don't agree with it.
Daniel KuehnApril 17, 2009 at 3:47 pm
Or is it a gold standard thing?
I'm just not sure exactly where your opposition to the Fed originates.
I'm confused – do you just not like fractional reserve banking in general?
As libertarians, we oppose any connection between politicians and bankers, that is state banking, central banking, etc.
dg lesvicApril 18, 2009 at 3:52 am
Daniel,
I don't wish you ill, but a mild case of writer's block would be nice.
Before this Higgs matter becomes another of your black holes, I will sign off with one last thought. I understand that you don't care for him, am alright with it, and were I Higgs, would positively rejoice in it.
But, thanks to you, we have an excellent discussion going here, the Chinese role in fueling the bubble. So, let's not interrupt that here. If you would really like to continue the redistribution debate, why not where you left it, at the Keynesianism vs Coordination thread below, and my last comment:
"It looks like this argument is over, the bad guys have retreated with their tails between their legs, and we can get on with reason, science, and economics, and freedom, peace, and progress."
dg lesvicApril 18, 2009 at 3:59 am
Oh,yes, there was one last comment after that:
"Now watch the Bandini hit the fandini."
But it didn't. It just dumped on Higgs.
dg lesvicApril 18, 2009 at 4:04 am
Daniel,
I don't know what you mean by the Chinese money coming back here under market price.
Do you mean the price of money? Do you mean the Chinese were paying more for US Treasuries than others were paying?
dg lesvicApril 18, 2009 at 2:01 pm
The question of the Chinese is really this.
Assuming an American free market, without an American "government" to "protect" it, how could the Chinese bring it down?
In other words, how could any but its political "protectors" bring it down?
It's the fault of the Chinese because their cheap production costs obscured the FED's inflationary policies.
The prices of many products dropped more than the value of the dollar, perhaps leading many to think that the U.S. was experiencing significant gains in productivity and that the dollar was gaining rather than falling.
Yeah, it's their fault.
Daniel KuehnApril 18, 2009 at 6:33 pm
dg -
This is a really good explanation of the role of global imbalances – better than I could provide. It mentions Sam's point about cheap goods as well.
Re: "In other words, how could any but its political "protectors" bring it down?"
You're right that the Chinese were paying more than they had to for US treasuries in the sense that their were higher returns possible from investing domestically. Their demand was based on export-oriented growth and the security of US treasuries. They "brought it down" (not sure if those are the words I would use, but good enough) because they fueled much of the asset bubble here.
RE: "If you would really like to continue the redistribution debate, why not where you left it, at the Keynesianism vs Coordination thread"
I've said all I can think of to say, unless you have other specific points you'd like to talk about. I don't want to keep going back to that post. I guess I would just say I've pretty much closed my argument, unless you bring something new to the table.
RE: "Before this Higgs matter becomes another of your black holes, I will sign off with one last thought. I understand that you don't care for him, am alright with it, and were I Higgs, would positively rejoice in it."
Not being convinced by someone is very different from not caring for them. I thought he was a fine writer – I just didn't quite buy it. If I had to be convinced by everything that I enjoy, I wouldn't be on here much at all
Daniel KuehnApril 18, 2009 at 6:34 pm
Sam -
RE: "As libertarians, we oppose any connection between politicians and bankers, that is state banking, central banking, etc."
Well that's what I'm trying to understand… that I completely get, but dg lesvic seems to be mad about something more fundamental – almost like he doesn't approve of fractional reserve banking or something, I can't tell – that's completely independent of state involvement in banking. But maybe it's just that.
Because it does so for political reasons, to manipulate, not to accommodate market demand (because it cannot).
dg lesvicApril 18, 2009 at 8:52 pm
Daniel,
The author you linked us to referred to “the brutal dangers of accepting capital from foreigners (Mexico in 94, SE Asia in 97-98, Russia in 98, Brazil in 99, Argentina 2001-02).”
Here was what I thought of that notion:
The Curative Global Money Market
Blaming Argentina's economic collapse on the global money market is like blaming the woes of a wastrel on a rich uncle's refusal to go on supporting him.
According to the anti-market jeremiad, it was not Argentina's own profligacy but an ill wind from abroad blowing down its house of cards. But for rising interest rates in the United States, draining Argentina of its vital monetary reserves, there would have been no day of reckoning. Wild public spending and inflation could have gone on indefinitely.
There would have been no monetary shock for a completely free market Argentina. It would have been as attractive to investors as any other part of the world. The anti-market choices making it less so were not the fault of the market. Steering capital away from wastrels is what the market is supposed to do; and, condemning it for that, shooting the doctor.
Flight from weak currencies is not the cause of the problem; inflating and weakening them is the cause, and, flight, the solution. Inflation is like drug addiction: the pleasure of the artificial boom today must be paid for by the pain of depression tomorrow; and, the sooner the depression, the lesser the pain. Withdrawal from the squandering malinvestments and overconsumption of the boom period is an essential step on the road to recovery; and blaming the market for the pain of it blaming the cure rather than the disease.
See Mises, Human Action, P 575
It was not the market's fault that politicians embarked upon a policy of inflation, and the cycle of boom and bust, nor that their continuing interference with the market made recovery more difficult than necessary. But it was to the market's credit that it brought the process to a halt before it could lead to an even harder fall, and its discredit only that it didn't do so sooner, and ever invested at all in the currencies and promises of politicians.
Rather than wantonly pulling the plug on them, the market bought additional time for them to put their houses in order. If they squandered the opportunity, why blame the market, and lock the squandering in and recovery out?
The difference between the Chinese money coming into the American economy and the Fed's money coming into it is the difference between real and funny money coming it, money that represents genuine saving, and a real, market preference for deferred over present consumption, and money that falsely signals such a preference, and that the market will not sustain.
That, in a crude nutshell, is the Austrian Theory of the Business Cycle, and explains why the Chinese money fueld investment and only the Fed's money fueled the bubble.
As for fractional reserve banking, I would let the market decide for or against it.
dg lesvicApril 18, 2009 at 10:13 pm
Daniel,
About redistribution, you wrote:
"I guess I would just say I've pretty much closed my argument, unless you bring something new to the table."
You didn't close my argument. You just slunked away from it. Answer my last question, and then we'll see if I need to bring anything new.
dg lesvicApril 18, 2009 at 10:52 pm
I meant slunk, not slunked, though, knowing Daniel, he probably did both.
dg lesvicApril 18, 2009 at 11:25 pm
From Mises on the Business Cycle by Murray Rothbard.
"Into the smoothly functioning and harmonious market economy comes the expansion of bank credit and bank money, encouraged and promoted by the government and its central bank. As the banks expand the supply of money…and lend the new money to business, they push the interest rate below…the free market rate which reflects the voluntary proportions of consumption and investment by the public. As the interest rate is artificially lowered, the businesses take the new money and expand the structure of production, adding to capital investment, especially…in lengthy projects…The new money is used to bid up wages and other costs and to transfer resources into these…'higher' orders of investment. Then, when the workers and other producers receive the new money, their time preferences having remain unchanged, they spend it in the old proportions. But this means that the public will not be saving enough to purchase the new high order investments, and a collapse of those businesses and investments becomes inevitable."
In other words, "The inflationary expansion of money by the governmentally run banking system creates over-investment in the capital goods industries and under-investment in consumer goods."
The Chinese money doesn't do that, for it is the money of real actors in the market implementing their real time preferences.
FWIW, Higgs' article does touch on the impact of the Chinese, albeit obliquely. Notice the link in the last paragraph, under the word "role".
GilApril 18, 2009 at 11:45 pm
"As libertarians, we . . ."
Who's the 'we', Sam?
dg lesvicApril 19, 2009 at 12:28 am
Iohannes,
Thanx for pointing out that link. Unfortunately, it was more economic history than economics proper, and would have left me as confused as before, without the pure economic insight of Mises and Rothbard.
dg lesvicApril 19, 2009 at 1:19 am
I just noticed that Roberts had posted a conversation with Boudreaux on the Austrian Theory of the Business Cycle just below. Hope he'll repost it in text for those of us who can't access audio.
In the meantime, hope this makes it a little clearer:
The money that the Chinese make available for investment represents a real time preference in the market, for future over present consumption, and therefore for more capital than consumer goods.
The money that the Fed makes availaable for investment does not represent a real time preference in the market, and therefore allocates resources away from what the market wants to what it doesn't want.
Since the Chinese money is allocated to what the market wants, it fuels sustainable growth.
Since the Fed money is allocated to what it doesn't want, it just fuels bubbles that must burst.
dg lesvicApril 19, 2009 at 1:45 am
When Daniel has recovered from his Saturday night, and returns to his more serious dissipations, this is what he will say.
The Chinese money does not represent the time preferences of the market, but of a poltical authority, and is as apt to fuel bubbles as the Fed money.
Good point, Daniel, but still not right.
The Chinese money is still real money, and its availability for investment still represents a real time preference, whether of public or private individuals.
dg lesvicApril 19, 2009 at 2:04 am
That last statement of mine was not exactly correct.
It would have been so given a completely free market in America. But, with American public policy channelling the Chinese money to our housing market, there is some truth to saying that the Chinese money contributed to the fueling of the housing bubble.
But that is a half-truth. Saying that by itself implies that the Chinese money by itself was to blame. It wasn't the Chinese money that was to blame but its misallocation by American public policy.
The fault was still with public policy, not with the free market.
dg lesvicApril 19, 2009 at 2:09 am
So, even if you can exonerate the Fed, you can't implicate the free market.
The fault was still entirely that of public policy, whether of the Fed or of some other public agencies.
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It's time to play "Guess what Cafe Kuehn will Say" with your host, BoscoH. The way this game works is that your host makes the first guest and the contestants make their guesses. Daniel will be the judge of the winner whether he wants to or not because he will post. Here we go…
(My guess) Higgs' analogy is wrong. Bernanke is like an ice cream man that shows up on a hot day to bring ice cream to all the kids in the neighborhood who are happy to see him. He's in a tough spot because the last ice cream man got 20 years for molesting kids.
Daniel,
Do us all a favor. Give us just a few moments to savor this masterpiece, and then you can go crap all over the place again.
Bernanke may be a mjor player, but let's not forget he is but one of many who contributed to this fine mess we find ourselves in.
There is a long and almost endless list of elected government officials and appointed bureaucrats that had a hand in this.
From the Whitehouse to the sandbox, it proves more than anything else the devastating effect of government intrusion into "the invisible hand's" work space.
Can you say: Fatal Conceit?
It's not especially inaccurate… my understanding is that Bernanke did vote for some of the early rate cuts, but there was definitely sharp disagreement between Bernanke and Greenspan at the end of Greenspan's term. So I guess I'm just saying that in terms of actually describing what caused the crisis, I'm not sure why Higgs focused on Bernanke. It seems like if that was what he was trying to do, he should have talked about Greenspan.
Unless he just has an axe to grind and is more concerned about speaking to what Bernanke is doing now – in which case that would explain the focus on Bernanke. If that's the case, I can't say I'm especially impressed by his grasp of monetary policy, but for that matter I don't have a very impressive grasp of monetary policy either, so what do I know? And as people often remind me, nobody here really cares what I am or am not impressed with (which is seemingly contradicted by the fact that they keep feeling the need to tell me they don't care what I think of something).
And in Greenspan and Bernanke's defense, Higgs also conveniently ignores the role of export-oriented Chinese policymakers in fueling the bubble. Whatever mistakes the Fed made (and they certainly did), they didn't do that.
The "mad truck driver". That's good. But he could have avoided naming Bernanke, and simply referred to him as… FrED.
Daniel,
Congratulations.
You made a good point, as you occasionally do.
By the way, you made some good points in connection with my theory of redistribution, and I was very disappointed that you abandoned them without much of a fight.
I don't agree with your criticism of Higgs, though. In a short piece, he was not obliged to exhaust every possible avenue of approach.
But the question you raised about the role of the Chinese in fueling the bubble is an excellent one. I'm uncertain of that myself, and would like to see an expert analysis of it.
dg lesvic -
I didn't abandon my points on your redistribution theory – I just thought they were so good they didn't require further comment
He wasn't obliged to exhaust every approach, you're right. Especially because it was supposed to be a very accessible kind of piece. But that still doesn't explain why he targets Bernanke instead of Greenspan… unless he's setting himself up to attack what Bernanke's doing now.
Higgs is truly wise. In an earlier post he said:
"During the painful years of the Bush regime, we had to endure the slings and arrows of the brown shirts who compose the so-called Republican base. Now that Obama has ascended the throne, the brown shirts of the left are emerging as the more conspicuous barbarians. Thank God it is not the case, as far too many people suppose, that we must be on one of these sides or the other. We can transcend this disgusting political spectrum, placing ourselves neither on the left nor on the right — nor even in the so-called “independent” zone somewhere between them — but rather rising above the entire line and insisting that red-state savagery and blue-state savagery are equally despicable and intolerable. I daresay that the future of our civilization hinges on whether a sufficient number of us will choose this transcendence."
Would that his critics were half as noble.
"Would that his critics were half as noble" – haha! What exactly is ignoble about criticizing this guy? Is he somehow above that?
What savagery is he refering to specifically – he's leaving it a little vague (although I agree, it reads very nicely).
Daniel,
Just go to The Beacon and read his post on the hate mail he's been receiving since his C-Span appearance.
Daniel,
You wrote,
"dg lesvic -
"
I didn't abandon my points on your redistribution theory – I just thought they were so good they didn't require further comment
They didn't require a defense, questions about them didn't require answers?
I'm sorry, I didn't realize I was receiving the word of God.
I will take exception to Higgs' characterization of the difference between the "brown shirts" of the left and of the right. The difference between one group of "brown shirts" and another is within the left and not between left and right.
Still waiting and hoping for enlightenment on China's possible role in our burst bubble. At the moment I don't see how the Chinese could have had anything to do with it. But even assuming that their actions fueled an inflationary bubble, why didn't the Fed take remedial action? That was it's job. Whose fault was it if it didn't do its job?
To ask if the Chinese, rather than the Fed, fueled our inflationary bubble is really to ask if the free market, rather than the “government,” did so.
If, in fact, it was the Chinese, it could only have been through the money multiplying effects of our fractional reserve banking system.
Could there have been such a system in a free market?
Certainly not, if it continually failed.
So, whether the Fed itself is implicated, the free market certainly is not.
But my guess is that what Higgs was getting at was that it wasn’t so much the bursting of the bubble that put us in the current mess as the political reaction to it that did so. The free market itself would have repaired the damage. But the political reaction to it has prevented the market from doing so. And it was Bernanke, more than Greedspan, or anyone else, who was the architect of that policy.
There was no difference between a dollar that went to China and the same dollar that the Chinese returned to America. There was still just that one dollar, no more. But there was this difference. It was in the hands of the Chinese rather than Americans, and, presumably, the Chinese were the more inclined to saving. So, the difference was really between savers and spenders, and what it comes down is saying not that the Chinese any more than the Fed fueled our inflationary bubble but that savers did so. Without or without the Chinese or the Fed, savers could fuel an inflationary bubble. But, without the intervention of the Fed, any inflationary actions of savers would be self-correcting, to the extent that they pushed prices up, discouraging further saving. It is only the aggressive actions of the Fed that could tip the balance toward a continuing inflationary bias.
Since any inflationary bias of the market would be limited by actual production and real saving, it could not outrun the deflationary reaction against it. It is only the inflationary bias of the Fed, unlimited by anything other than the will of its masters, that could do so.
And that, Daniel, is why the Chinese had nothing to do with it.
dg lesvic -
RE: "They didn't require a defense, questions about them didn't require answers? I'm sorry, I didn't realize I was receiving the word of God."
Oh I was joking around with you – don't worry. And you know I stop checking posts after they get near the bottom of the blog roll. Feel free to repose anything you want.
RE: "Still waiting and hoping for enlightenment on China's possible role in our burst bubble. At the moment I don't see how the Chinese could have had anything to do with it. But even assuming that their actions fueled an inflationary bubble, why didn't the Fed take remedial action? That was it's job."
I'm no expert, but the crisis was essentially caused by overleveraging due to excessive liquidity. One source of that liquidity was Greenspan. Another enormous source was Chinese (and other) savings that came pouring into the US. And what's especially bothersome about that savings is that it was artificial in many ways (and as such, I think you could call it a glut). The Chinese government deliberately orients it's economy towards exports. It forces consumption down, the same way the Japanese did, to boost savings – but unlike the Japanese, my understanding is that the Chinese haven't really plowed that savings back into their own economy (I may be wrong, this isn't my area). The point is, over the last decade we've had a flood of cash from them. It actually might even be bigger than the change in the money supply by the Fed, I'm not sure of that. And I think you're dead on – the Fed should have taken that into account (I imagine they did… just not quite enough). I think CFR has a report out on this.
RE: "But, without the intervention of the Fed, any inflationary actions of savers would be self-correcting, to the extent that they pushed prices up, discouraging further saving."
I think you're being naive if you assume that the Chinese savings rate is a function of market behavior. I'm sure it partly is, but I wouldn't count on the market as the source of the massive (and still persisting) global imbalances.
dg lesvic -
RE: "The free market itself would have repaired the damage. But the political reaction to it has prevented the market from doing so. And it was Bernanke, more than Greedspan, or anyone else, who was the architect of that policy."
I agree that this was probably more what Higgs was trying to do – but if it was, I think he did it poorly because he seemed to lay the whole bubble at Bernanke's feet.
I also think if this is the argument he's trying to make, he didn't put too much effort into actually making his case! It may be obvious to him that this is true, but many economists feel that Bernanke is one of the only policy makers holding the economy together right now. Could we see some disastrous inflation if he doesn't reel back in the money supply? Absolutely – that's a very big concern of mine. I watched him speak at Moorehouse yesterday, and he made it very clear it's a big concern of his as well. I think that's a legitimate thing to address and most would agree. But if the argument is that Bernanke is actually HURTING things right now, Higgs could have benefited from actually explaining how he got to that conclusion, rather than just presenting a colorful metaphor that probably left all but his admirers scratching their heads.
Daniel,
You wrote,
"Oh I was joking around with you – don't worry. And you know I stop checking posts after they get near the bottom of the blog roll. Feel free to repose anything you want."
Taking from the rich to give to the poor does not reduce but increases inequality.
You wrote,
"I think you're being naive if you assume that the Chinese savings rate is a function of market behavior."
That's irrelevant. Since their savings and credit were not created out of thin air like that of the Fed, but were limited by actual production, unlike that of the Fed, any inflationary impact of their savings could not have outrun the market's reaction to it, unlike that of the Fed.
How odd to be talking about an inflationary impact of savings, and deflationary of spending. But that is the assumption that I have been presented with, and, to refute, must address on its own terms.
You keep attacking Higgs' for not doing what you wanted him to do rather than what he set out to do. His purpose was not to present the last but the first word on the subject, not to resolve the issue once and for all but to open people's eyes to the fact that there was an issue. And he did it magnificently.
Re Daniel:
I wish you'd check this one again:
/2009/04/more-enlightement-from-adam-smith/comments/page/3/#comments
We were discussing the dynamic market vs government intervention.
dg lesvic -
RE: "Taking from the rich to give to the poor does not reduce but increases inequality."
Always happy to rehash this! But I haven't dodged this general point of yours at all – in fact I've addressed it quite extensively, including examples. So rather than re-performing our entire, previously choreographed, argument why don't you suggest something specific about that previous argument that left you unsatisfied (hint – "your entire answer" doesn't count as "something specific").
RE: "Since their savings and credit were not created out of thin air like that of the Fed, but were limited by actual production, unlike that of the Fed, any inflationary impact of their savings could not have outrun the market's reaction to it, unlike that of the Fed."
First, we're not talking about inflation, we're talking about easy money and the build-up to the crisis. Second, we're talking about country-to-country flows. So while you're right that Chinese savings and credit is coupled with actual production, and so on net "their savings could not outrun the market's reaction to it", it's CERTAINLY possible that the flow of their savings to America could have "outrun the market's reaction to it" in America. Right? So even if there's no net, global effect, it still represents a flood of credit into the U.S. market. Third, your argument against the Fed here sounds more like a concernt with fractional banking in general than the Fed in particular.
RE: "How odd to be talking about an inflationary impact of savings, and deflationary of spending. But that is the assumption that I have been presented with, and, to refute, must address on its own terms. "
dg – I never once mentioned inflation with respect to the Chinese savings rate – that was all you. You can scroll up and check So don't project it on me! Those weren't the terms that I introduced! My point was that the crisis was caused by lots highly leveraged bad bets, which were in part made possible by the fact that credit was cheap. A big part of the reason for that was China's largely artificial savings rate (due to their export-orientation), and their largely artificial pipeline that sent a large portion of those savings to the U.S. (due to I don't know what policy goal). There were two major catalysts for irresponsible leveraging in my mind – Greenspan and China. I never once mentioned inflation with regard to either of them.
RE: "You keep attacking Higgs' for not doing what you wanted him to do rather than what he set out to do."
No, I'm saying that he did a bad job at what he seemed to be saying he was trying to do (presumably pin the crisis on Bernanke). And then I acknowledged that he might have done a better job at achieving an unstated goal of his (setting up Bernanke for an attack based on what he's doing now). I don't especially WANT him to do anything. In fact, since I disagree with him on both counts it's in my interest that he just retire from writing columns entirely!
RE: "not to resolve the issue once and for all but to open people's eyes to the fact that there was an issue"
OK, ease up
I don't expect him to resolve the issue once and for all by any means. I'm just really confused about what "issue" he's even raising. It seems to be that Bernanke got us into this, which sounds a little odd to me.
yet another Dave -
Thanks for raising it again… I've just commented on several loose ends there.
yet another Dave -
To summarize, I basically suggest that I've never advocated planning a market that is still adjusting. I've only argued for intervention when (1.) there are chronic under- and over-investments which the government does have a chance of correcting, precisely because these under- and over-investments are persistent and not transitory, and (2.) providing a positive (or negative) shock to break out of vicious cycles/feedback loops/bubbles, etc.
The interventions you've brought up seem to involve actually planning the market, which I've never advocated.
Daniel,
Please, for the last time:
There were three issues Higgs' might have addressed, the creation of the bubble, the bursting of the bubble, and the political reaction to the bursting of the bubble.
It seems to me that he was addressing the last of the three, and attacking the right man, Bernancke, as the architect of that policy.
Let's not go over that ground any more.
About redistribution, I had asked why an employer would pay a wage of $20M if he could hire the labor at $19,999.99.
It was at that point that you decided that you had had enough of the discussion, which, of course, was another great triumph for you.
On the issue of the Chinese money, I'm in way over my head, and need help.
But I can't see the Chinese money as the cause of our problem, for it was our money to begin with, and didn't become any "easier" because it had passed from our hands to theirs and then back into ours again.
The only "easy" money is that created out of thin air, and that was not the Chinese money but only the Fed's money.
dg lesvic –
On Higgs, please just reread his last paragraph. He is clearly talking about the bubble, not the reaction to the bubble. Don't try to impose on him what you wish he was talking about. Read that last paragraph and try and tell me how he's not discussing the cause of the bubble.
On redistribution… I don't see why they would pay $20"K", when he could hire the labor for $19,999.99. I'm almost positive I never said he would, and even if I did say that I'm not sure what that has to do with your redistribution theory.
On Chinese money – it's not an expertise of mine – I'm in over my head too. But the general point is, our money goes over there at market price, and comes back to us under market price. Somebody smarter than I should weigh in on this, but I think a large part of the reason why so much money has come our way from the Chinese is that their demand for American assets doesn't seem to reflect the higher returns possible from investing in the Chinese economy. This isn't like the Japanese, who plowed our money back into their economy to develop a highly advanced industrial sector, and only investing in American assets after exhausting those domestic investments. Again – totally out of my league, but I know a lot of people considered the imbalance artificial – money was coming back into the US under market price, which added to leveraging.
dg lesvic -
RE: "The only "easy" money is that created out of thin air, and that was not the Chinese money but only the Fed's money."
I'm confused – do you just not like fractional reserve banking in general? Because that's the "thin air" part, and I think that's crazy to oppose. Or do you just not like that the Fed doesn't follow a profit motive… that's a much better reason to oppose the Fed, although I still don't agree with it.
Or is it a gold standard thing?
I'm just not sure exactly where your opposition to the Fed originates.
ignores the role of export-oriented Chinese policymakers
To paraphrase:
First, let's get rid of all the policymakers.
I'm confused – do you just not like fractional reserve banking in general?
As libertarians, we oppose any connection between politicians and bankers, that is state banking, central banking, etc.
Daniel,
I don't wish you ill, but a mild case of writer's block would be nice.
Before this Higgs matter becomes another of your black holes, I will sign off with one last thought. I understand that you don't care for him, am alright with it, and were I Higgs, would positively rejoice in it.
But, thanks to you, we have an excellent discussion going here, the Chinese role in fueling the bubble. So, let's not interrupt that here. If you would really like to continue the redistribution debate, why not where you left it, at the Keynesianism vs Coordination thread below, and my last comment:
"It looks like this argument is over, the bad guys have retreated with their tails between their legs, and we can get on with reason, science, and economics, and freedom, peace, and progress."
Oh,yes, there was one last comment after that:
"Now watch the Bandini hit the fandini."
But it didn't. It just dumped on Higgs.
Daniel,
I don't know what you mean by the Chinese money coming back here under market price.
Do you mean the price of money? Do you mean the Chinese were paying more for US Treasuries than others were paying?
The question of the Chinese is really this.
Assuming an American free market, without an American "government" to "protect" it, how could the Chinese bring it down?
In other words, how could any but its political "protectors" bring it down?
It's the fault of the Chinese because their cheap production costs obscured the FED's inflationary policies.
The prices of many products dropped more than the value of the dollar, perhaps leading many to think that the U.S. was experiencing significant gains in productivity and that the dollar was gaining rather than falling.
Yeah, it's their fault.
dg -
This is a really good explanation of the role of global imbalances – better than I could provide. It mentions Sam's point about cheap goods as well.
Re: "In other words, how could any but its political "protectors" bring it down?"
You're right that the Chinese were paying more than they had to for US treasuries in the sense that their were higher returns possible from investing domestically. Their demand was based on export-oriented growth and the security of US treasuries. They "brought it down" (not sure if those are the words I would use, but good enough) because they fueled much of the asset bubble here.
RE: "If you would really like to continue the redistribution debate, why not where you left it, at the Keynesianism vs Coordination thread"
I've said all I can think of to say, unless you have other specific points you'd like to talk about. I don't want to keep going back to that post. I guess I would just say I've pretty much closed my argument, unless you bring something new to the table.
RE: "Before this Higgs matter becomes another of your black holes, I will sign off with one last thought. I understand that you don't care for him, am alright with it, and were I Higgs, would positively rejoice in it."
Not being convinced by someone is very different from not caring for them. I thought he was a fine writer – I just didn't quite buy it. If I had to be convinced by everything that I enjoy, I wouldn't be on here much at all
Sam -
RE: "As libertarians, we oppose any connection between politicians and bankers, that is state banking, central banking, etc."
Well that's what I'm trying to understand… that I completely get, but dg lesvic seems to be mad about something more fundamental – almost like he doesn't approve of fractional reserve banking or something, I can't tell – that's completely independent of state involvement in banking. But maybe it's just that.
I think dg is bothered by government doing this.
Why?
Because it does so for political reasons, to manipulate, not to accommodate market demand (because it cannot).
Daniel,
The author you linked us to referred to “the brutal dangers of accepting capital from foreigners (Mexico in 94, SE Asia in 97-98, Russia in 98, Brazil in 99, Argentina 2001-02).”
Here was what I thought of that notion:
The Curative Global Money Market
Blaming Argentina's economic collapse on the global money market is like blaming the woes of a wastrel on a rich uncle's refusal to go on supporting him.
According to the anti-market jeremiad, it was not Argentina's own profligacy but an ill wind from abroad blowing down its house of cards. But for rising interest rates in the United States, draining Argentina of its vital monetary reserves, there would have been no day of reckoning. Wild public spending and inflation could have gone on indefinitely.
There would have been no monetary shock for a completely free market Argentina. It would have been as attractive to investors as any other part of the world. The anti-market choices making it less so were not the fault of the market. Steering capital away from wastrels is what the market is supposed to do; and, condemning it for that, shooting the doctor.
Flight from weak currencies is not the cause of the problem; inflating and weakening them is the cause, and, flight, the solution. Inflation is like drug addiction: the pleasure of the artificial boom today must be paid for by the pain of depression tomorrow; and, the sooner the depression, the lesser the pain. Withdrawal from the squandering malinvestments and overconsumption of the boom period is an essential step on the road to recovery; and blaming the market for the pain of it blaming the cure rather than the disease.
See Mises, Human Action, P 575
It was not the market's fault that politicians embarked upon a policy of inflation, and the cycle of boom and bust, nor that their continuing interference with the market made recovery more difficult than necessary. But it was to the market's credit that it brought the process to a halt before it could lead to an even harder fall, and its discredit only that it didn't do so sooner, and ever invested at all in the currencies and promises of politicians.
Rather than wantonly pulling the plug on them, the market bought additional time for them to put their houses in order. If they squandered the opportunity, why blame the market, and lock the squandering in and recovery out?
The difference between the Chinese money coming into the American economy and the Fed's money coming into it is the difference between real and funny money coming it, money that represents genuine saving, and a real, market preference for deferred over present consumption, and money that falsely signals such a preference, and that the market will not sustain.
That, in a crude nutshell, is the Austrian Theory of the Business Cycle, and explains why the Chinese money fueld investment and only the Fed's money fueled the bubble.
As for fractional reserve banking, I would let the market decide for or against it.
Daniel,
About redistribution, you wrote:
"I guess I would just say I've pretty much closed my argument, unless you bring something new to the table."
You didn't close my argument. You just slunked away from it. Answer my last question, and then we'll see if I need to bring anything new.
I meant slunk, not slunked, though, knowing Daniel, he probably did both.
From Mises on the Business Cycle by Murray Rothbard.
"Into the smoothly functioning and harmonious market economy comes the expansion of bank credit and bank money, encouraged and promoted by the government and its central bank. As the banks expand the supply of money…and lend the new money to business, they push the interest rate below…the free market rate which reflects the voluntary proportions of consumption and investment by the public. As the interest rate is artificially lowered, the businesses take the new money and expand the structure of production, adding to capital investment, especially…in lengthy projects…The new money is used to bid up wages and other costs and to transfer resources into these…'higher' orders of investment. Then, when the workers and other producers receive the new money, their time preferences having remain unchanged, they spend it in the old proportions. But this means that the public will not be saving enough to purchase the new high order investments, and a collapse of those businesses and investments becomes inevitable."
In other words, "The inflationary expansion of money by the governmentally run banking system creates over-investment in the capital goods industries and under-investment in consumer goods."
The Chinese money doesn't do that, for it is the money of real actors in the market implementing their real time preferences.
FWIW, Higgs' article does touch on the impact of the Chinese, albeit obliquely. Notice the link in the last paragraph, under the word "role".
"As libertarians, we . . ."
Who's the 'we', Sam?
Iohannes,
Thanx for pointing out that link. Unfortunately, it was more economic history than economics proper, and would have left me as confused as before, without the pure economic insight of Mises and Rothbard.
I just noticed that Roberts had posted a conversation with Boudreaux on the Austrian Theory of the Business Cycle just below. Hope he'll repost it in text for those of us who can't access audio.
In the meantime, hope this makes it a little clearer:
The money that the Chinese make available for investment represents a real time preference in the market, for future over present consumption, and therefore for more capital than consumer goods.
The money that the Fed makes availaable for investment does not represent a real time preference in the market, and therefore allocates resources away from what the market wants to what it doesn't want.
Since the Chinese money is allocated to what the market wants, it fuels sustainable growth.
Since the Fed money is allocated to what it doesn't want, it just fuels bubbles that must burst.
When Daniel has recovered from his Saturday night, and returns to his more serious dissipations, this is what he will say.
The Chinese money does not represent the time preferences of the market, but of a poltical authority, and is as apt to fuel bubbles as the Fed money.
Good point, Daniel, but still not right.
The Chinese money is still real money, and its availability for investment still represents a real time preference, whether of public or private individuals.
That last statement of mine was not exactly correct.
It would have been so given a completely free market in America. But, with American public policy channelling the Chinese money to our housing market, there is some truth to saying that the Chinese money contributed to the fueling of the housing bubble.
But that is a half-truth. Saying that by itself implies that the Chinese money by itself was to blame. It wasn't the Chinese money that was to blame but its misallocation by American public policy.
The fault was still with public policy, not with the free market.
So, even if you can exonerate the Fed, you can't implicate the free market.
The fault was still entirely that of public policy, whether of the Fed or of some other public agencies.
Who's the 'we', Sam?
All who identify themselves as libertarian. I think that describes many who post here.
I don't usually think about "Gil".
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