The deficit

by Russ Roberts on May 21, 2009

in Stimulus

A little perspective. The deficit is expected to be $1.8 trillion this year. That's this year alone. That is $6,000 for every man, woman, and child. Does anyone think this living beyond our means is money well spent? Kind of bites into those $2800 of savings.

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{ 49 comments }

Randy May 21, 2009 at 5:42 pm

Okay, we had the tech bubble, then the housing bubble… are we now having a government bubble? If so, what happens when it breaks?

Carl Pham May 21, 2009 at 5:59 pm

But just remember, President O is going to give you $400 — that's FOUR HUNDRED dollars! OMG! — to spend any way you see fit. Don't worry about those 6 Gs. That bill will be paid by someone else. The rich. Evil hedge fund managers. Someone else. Look! ponies!

S Andrews May 21, 2009 at 6:00 pm

U.S treasury market is quietly collapsing infront of our eyes. The ETF – TLT a proxy for government bonds have collapsed from a crisis high of over $120 to about $94 today, inspite of the ZIRP policy of the Fed.

muirgeo May 21, 2009 at 6:03 pm

A little perspective.

Sure! Also about $800 billion of the current debt is DIRECTLY from obligations of the just departed administration.

Russ Roberts May 21, 2009 at 6:07 pm

Muirgeo,

And your point is?

Who cares?

I actually think it's more than $800 billion. But when you start off $800 billion in the hole, adding another TRILLION seems a bit, I don't know, irresponsible.

Bret May 21, 2009 at 6:12 pm

I personally don't think the money is being well spent.

However, I have a question on the "living beyond our means" part. Are we "living beyond our means" because there are foreign inflows of capital? If the United States was a closed system (economy) without foreign trade or investment, would it still be possible to live beyond our means?

For example, no matter how much my left hand borrows from my right hand and no matter how much interest my left hand has to pay to my right hand, in aggregate, I'm not poorer, and it doesn't mean that I'm living beyond my means.

If so, in order to ensure that we live within our means, it seems that the simplest solution is simply to stop all foreign trade and investment.

Methinks May 21, 2009 at 6:15 pm

Thanks for the perspective, Muirdiot.

Within 100 days Obama has managed to take on more debt than Bush in his entire eight year term. Wow. What an achievement. That's some perspective.

Don Boudreaux May 21, 2009 at 6:28 pm

Muirgeo apparently cannot escape the mindset of believing that Russ and I, when criticizing party D, are implicitly attempting to defend party R.

Fact is, we dislike, distrust, and despise BOTH parties. It is government – and the romance of the collective – that we fear and loathe, not simply Democrats or Republicans.

MWG May 21, 2009 at 6:36 pm

"Sure! Also about $800 billion of the current debt is DIRECTLY from obligations of the just departed administration."
-Muirdog

…with NO help from senator Obama I'm sure…

muirgeo May 21, 2009 at 7:06 pm

But when you start off $800 billion in the hole, adding another TRILLION seems a bit, I don't know, irresponsible.

Posted by: Russ Roberts

It's easy to say that but that's a discussion NOT yet settled or agreed upon by many good economist such as yourself. It's possible Russ the Keynesian's are right and a well applied stimulus will do more good then harm under the right conditions.

Do you have greater authority to call the stimulus irresponsible then some of your well respected colleagues? The most recent recipient of The Sveriges Riksbank Prize in Economic Sciences is arguing the stimulus was "irresponsibly" too little.

I at this time believe that the president has every intention of balancing the budget assuming 2 terms but to expect it to be resolved in 4 months is a bit much.

Methinks May 21, 2009 at 7:34 pm

So, Muirdiot, in light of your last comment, why are you complaining about GWB's $800 Billion again?

muirgeo May 21, 2009 at 7:47 pm

So, Muirdiot, in light of your last comment, why are you complaining about GWB's $800 Billion again?

Posted by: Methinks

Really methinks??? Do I need to answer that?

OK I suspect you'll request that I do. I personally feel strongly about having a balanced budget. We spend hundreds of billions of dollars on interest on the debt that could be going to better things if not less taxes. Bush inherited a budget surplus. DID YOU FORGET THAT??? Then he left the new president with all sorts of debt AND the worst economy since the last Republican Lead Great Depression. And you want to assume that we I am the one being inconsistent while you ask me about grapes and watermelons much less apples and oranges. He broke the budget and the economy with it.

I would be glad to see a Republican get into office and balance the budget by cutting cost as they all claim to want to do. If they would finally just get rid of Medicare and Social security we would finally be rid of the republicans once and for all.

Finally, the cheap assumpation that the new president wants to spend endlessly is either a sign of ignorance or dishonesty because the ONLY reason to spend like he has is because of the very unique and specific economic situations in which we find ourselves.. NOT OF HIS DOING! Demand has stalled, consumers have no money and credit is frozen. The economy as it goes needs a stimulus to get it restarted and no one is suggesting this as a long term solution but simply a matter of saving capitalism from the capitalist.

S Andrews May 21, 2009 at 7:54 pm

The Sveriges Riksbank Prize in Economic Sciences

That's the communist central bank of Sweden.

S Andrews May 21, 2009 at 7:59 pm

Muirgeo says…"

Bush inherited a budget surplus. DID YOU FORGET THAT???

"

Bush is a blockhead who inherited a bursting techbubble. DID YOU FORGET THAT? He had a plenty of Keynesians advising him to stimulate the economy by ratcheting up the spending, and again by giving tax cuts and tax rebates, DID YOU FORGET THAT?

Peak of the NASDAQ bubble happened more than 10 months before Bush took office. DID YOU FORGET THAT? Can you, for a change atleast praise 5 things republicans have done in the last 8 years ( I can't ) and criticize Democrats for 5 things they have done for the last 3? Just for fun Muirgeo ( I can ).

Let me see if you have an impartial rational bone in your body.

Methinks May 21, 2009 at 8:00 pm

Muirdiot, you're always good for a laugh. I'll give you that much!

S Andrews May 21, 2009 at 8:32 pm

A simple analogy for George:

Imagine an Island with 2 inhabitants – 1 farmer who grows food and a cook who prepares meals.

Who demands the produce that the farmer grows? The cook

Who demands the meals that the cook prepares? The farmer and the cook.

What does the cook offer the farmer in exchange for the produce? Prepared meals ( his pProduction )

What does the farmer offer the cook in exchange for the meal? Produce ( his production )

So where does demand come from? Production

Both the farmer and cook produce crap on a daily basis. Can they exchange it for something else? Probably not. Who determines this? The market or free voluntary exchange between the farmer and the cook.

If farmer saves some seeds and some extra grain, where does that savings come from? Production.

If the cook borrows that savings and spoils it, will there be any credit available for the cook? No

Will printing money help? No

Modern economy with digital money is no different. Savings are real – it is not just an entry in a bank account – it represents real resources available in the economy – when the resources are used to build houses in the suburbia ( 100 miles away from humanity, like the inland empire of southern california )that no one wants – the resources have been used up for unproductive purposes – in other words the real savings is gone – poof – vanished. All the financial instruments derived from these houses and their imaginary values also goes pffftt. Because the real savings got misallocated and are now gone. Now, central planners can recreate the digits, but they can't recreate the real savings in the economy.

Where will government get additional real credit from? No where. Because it's gone pffttt…When it borrows whatever savings is left, it invariably has to drive up the cost of borrowing for individuals and businesses.

CRC May 21, 2009 at 8:53 pm

Don: "Muirgeo apparently cannot escape the mindset of believing that Russ and I, when criticizing party D, are implicitly attempting to defend party R."

I've actually found this to be an annoyingly common problem among a lot of people.

I've mostly noticed it among those who call themselves or seem to align themselves with (modern) liberal, progressive, leftist or Democratic ideas. It certainly isn't exclusive to that group nor is it everyone in that group. I'd be committing a couple fallacies myself if I said so. It's just what I've noticed.

It seems to be a form of the circumstantial ad hominem fallacy.

In any case, whoever does it, it is incredibly frustrating!

Dan Phillips May 21, 2009 at 10:26 pm

I think Muirgeo mistakes libertarians for conservatives. It's a very common mistake by liberal statists. They are so used to debating conservative statists over who gets to make people do what they want them to do via government dictate they assume any criticism of their viewpoint is coming from another statist.

It seems that nothing a libertarian can say can divert them from this viewpoint. They are determined to believe their that everyone is a statist. Conservatives do the same thing. But in my experience they are not quite so cemented to their dogma.

mcwop May 21, 2009 at 10:33 pm

Muirgeo, again most people here do not hold neither Bush II nor Obama in very high regard. Obama will not balance the budget, unless he holds spending in check. Not in his first term nor a second – if he gets that. Under Clinton the budget balanced, because he removed the medicare tax cap, and held spending to a very low growth rate. The latter had a big effect. Obama's spending plans are the biggest we have seen since Lyndon Johnson.

The Albatross May 22, 2009 at 1:01 am

So when Bush did it it was ok? Sorry, you party stooges confuse me so–perhaps I should just limit my reading to Anne Coulter and Human Events and then just invert the bylines to save me the trouble of digging out the rebuttal..

brotio May 22, 2009 at 3:02 am

It's always amusing to see Yasafi post that the president spends all of that money without any help at all from the House of Representatives, or the Senate.

Perhaps Yasafi believes that spending bills originate in the Executive Branch, are debated in the Executive Branch, and then sent to the Executive Branch to either be signed or vetoed? It would explain a lot of the muirpidity.

Daniel Kuehn May 22, 2009 at 6:28 am

Muirgeo -
I have to agree with Russ and Don on this one. The debt is Obama's – he has to own up to it. I think there's still a case to be made that he is taking on this debt for (more or less) good reasons (I have some complaints, but generally sound).

I would blame Bush for tying Obama's hands somewhat. I don't think Bush needed the entirety of his tax cuts, and I don't think we needed Iraq at all. Without those, fiscal stimulus would be easier to swallow now – but the past is what it is and Russ and Don are right – what Bush did doesn't change the case that Obama has to make to us.

Tim May 22, 2009 at 7:42 am

One would also have to wonder why the current administration seems loathe to have various 'emergency' loans repaid quickly.

John May 22, 2009 at 8:39 am

"Sure! Also about $800 billion of the current debt is DIRECTLY from obligations of the just departed administration."

That's like saying "But Mommy! He did it first!"

I'm starting to think that for muirgeo to understand individualism is for me to understand collectivism. I can't do it. For the life of me I just can't understand group-think.
And I think that's why libertarian ideals do so poorly in modern politics. We're individuals and we like it that way. But politics requires organization to be effective. So we get run over by the better organized group-think people by virtue of being individualists.

It sucks. I'm not sure what the solution might be.

SaulOhio May 22, 2009 at 9:30 am

Muirgeo keeps repeating the same fallacies over and over and over again, despite being corrected over and over and over again. As long as he has been reading and commenting on this blog, if he were honest and intelligent, he would know that criticism of Democrats is not defense of Republicans, and that the owners of this blog do not support Bush policies. He has been told this time and time again. There are only two explanations: Dishonesty or brain damage.

Daniel Kuehn May 22, 2009 at 10:07 am

SaulOhio -
Now that's a little unfair to muirgeo. I agreed that what muirgeo was saying was a little besides the point – Bush's mistakes don't absolve Obama of anything.

But you and Don are reading a WHOLE LOT into muirgeo if you're saying he thinks Don and Russ defend Republicans. As far as I can tell, he never said anything of the sort.

Instead of browbeating him for that you and Don should be agreeing with muirgeo's criticism of Bush and then saying "but that's beside the point".

Actually, now that I think about it – it's kind of interesting that you and Don ASSUME he's saying ya'll defend Republicans. Why do you assume that? Is there some underlying insecurity behind that? :)

MnM May 22, 2009 at 10:30 am

"Actually, now that I think about it – it's kind of interesting that you and Don ASSUME he's saying ya'll defend Republicans. Why do you assume that? Is there some underlying insecurity behind that? :) "

No, it's because, on more than one occasion, he's accused us of being Republicans (or of defending criminals on Wall Street, or any number of other absurdities). Keep in my mind you're relatively new to the Cafe (at least compared to some of us). There's a history here that you (probably) aren't aware of that adds a lot of context.

Daniel Kuehn May 22, 2009 at 10:52 am

MnM -
Oh I figured he's said stuff in the past – but it's an interesting response to a muirgeo comment that you would think (judging by his protests) Don would have agreed with muirgeo on!

I guess when you're the poster that everyone loves to hate, you can't even achieve that common ground :)

Daniel Kuehn May 22, 2009 at 10:53 am

I just find it interesting – don't worry about it MnM

MnM May 22, 2009 at 11:03 am

Daniel, neither Don or Russ disagreed with muirgeo.

They ask him what point he was attempting to make. Don inferred, from past experience, that Russ was being accused of defending GW Bailout.

I don't hate him (others might). I don't think that Don or Russ do either. He is, however, immensely frustrating. He seems to willfully miss the point and construct ridiculous straw-men. It's the same pattern with him.

I was surprised by the hostility (as displayed by other visitors) to him when I first got here too. Just give it a minute, trust me. You'll have some profound disagree with the current president, you'll give voice to it here, and he'll accuse you having come out of the closet for the GOP. :o )

MnM May 22, 2009 at 11:04 am

Oh, I don't worry about, believe me. I used to find it just as odd. Emphasis: "used to".

;o)

Methinks May 22, 2009 at 11:20 am

Daniel,

You think we're unfair to Muirdiot because you're new to the blog. Trust me, everyone here has mashed everything up and spoon fed it to this moron over the two years he has been looking for attention here. The result is that he just keeps repeating the same crap on every thread. There's never anything new.

Speaking of Bush vs. Obama spending….how much of Bush's contribution to the deficit was the war and tax cuts for the evil rich and sainted middle class and how much of it was stimulus? Just wondering if you know off had. I'm assuming that since you like Obama's stimulus spending, you like Bush's. I like neither man nor their spending plans, but that's just my nihilistic little self coming through ;)

Methinks May 22, 2009 at 11:41 am

"You'll have some profound disagree with the current president, you'll give voice to it here, and he'll accuse you having come out of the closet for the GOP. :o )"

Or he'll call you a useless Wall Street paper pushing asshole criminal. Derivatives are created by the devil (read Wall Streeter) to rain terror on the unsuspecting saintly masses. Although, truth be told, Morongeo doesn't actually know what a derivative is. Etc. Etc.

Plus, I think there's only so much fire and brimstone stupidity anyone can tolerate. You remember Mesa and me trying explain derivatives to this idiot, MnM? I think that happened when you first started reading this blog. We'd start with the basics (an option is the right but not the obligation to..etc.) after he begged us to explain it to him instead of "shouting him down" and he'd respond with an incoherent tirade against Wall Street and Bush and an assortment of unrelated crap. Over and over again. That's when we realized he just lacks basic intelligence – as he is happy to remind us of daily.

Daniel Kuehn May 22, 2009 at 11:41 am

Methinks -
RE: "Speaking of Bush vs. Obama spending….how much of Bush's contribution to the deficit was the war and tax cuts for the evil rich and sainted middle class and how much of it was stimulus?"

I don't know offhand. Did he give tax cuts to the evil rich? Because I STRONGLY disagree with tax cuts for the evil rich, but could be convinced on occassion to cut taxes for the plain, old rich ;-)

Adding up in my head from this source: (http://www.usnews.com/features/opinion/george-w-bushs-ballooning-budget-deficit.html), Bush's deficits seem to add up to $2.162 trillion (I'm guessing these are nominal dollars, though – but an OK rough estimate). His tax cuts were one trillion and change, weren't they?

This (http://zfacts.com/p/447.html) suggests another $660 billion in Iraq.

So take out most of the tax cuts and the Iraq war alone, and you'd eliminate a huge chunk of the Bush deficits, and put us in a safer position to run deficits now. I'm in agreement with muirgeo and I think everyone here that Bush was irresponsible on the budget. After all, while you and I may disagree on whether COUNTERcyclical fiscal policy is appropriate, neither of us support PROcyclical fiscal policy!!! :)

Daniel Kuehn May 22, 2009 at 11:45 am

RE: "and how much of it was stimulus? Just wondering if you know off had. I'm assuming that since you like Obama's stimulus spending, you like Bush's."

But what was Bush's spending meant to stimulate?!?!?!? You know – maybe a tax cut in 2001 could be justified, but most of it wasn't stimulus by virtue of the fact that there was nothing to stimulate! The economy was growing. A little anemic… certainly credit-fed… but growing. There was no strong case to stimulate then! If anything they should have reigned things in by running surpluses.

And as for the stimulus that was argued for and provided – the consensus as I understand it is that tax cuts and rebates are great because of their speed, but don't provide as much bang for the buck in terms of actual stimulus. I think an appropriate stimulus response in a deep, long recession like this one is a combination of public works type stuff and tax cuts/rebates. The former to prevent a sharp wage-price spiral, and that later to provide a more immediate stimulus.

MnM May 22, 2009 at 12:03 pm

"You remember Mesa and me trying explain derivatives to this idiot, MnM? I think that happened when you first started reading this blog"

Your memory is incredible! That thread was the first one that I ever commented in. Sometime in '07 I think…

Sam Grove May 22, 2009 at 12:26 pm

What is the REAL difference between tax cuts and monetary/credit stimulus?

On the one hand government takes less money out of the economy and on the other, puts more into the economy.

What is the difference in the net effect of either?

MnM May 22, 2009 at 12:37 pm

Continuing that thought, I remember that conversation quite well, Methinks. I was fascinated by it because I knew, and still know, very little about derivatives. I learned a lot. I couldn't understand why someone wouldn't want to learn something from a primary source (like you and Mesa, in this case).

Daniel Kuehn May 22, 2009 at 12:48 pm

MnM -
RE: "I was fascinated by it because I knew, and still know, very little about derivatives. I learned a lot."

It's very rare to find someone that says "I know a lot about derivatives", isn't it? It's usually either "I know nothing about them" or "I know a little about them". Always good to come across someone who does know a lot, but their relative obscurity might explain part of the reason why we got into this!

Sam -
That's a REALLY good question. I think a lot of people assume monetary policy first, tax cuts/rebates second if it looks a little worse, and fiscal expansion if it looks really bad – but you don't often hear why.

I would assume it has to do with:

1. Monetary policy (all concerns about the "capital structure" aside) doesn't pick winners in the way that fiscal policy does.

2. Monetary policy can be reversed in a way that fiscal policy can't, if necessary.

3. Monetary policy can be rolled out quicker than fiscal policy.

4. Monetary policy doesn't leave the state indebted – although it does obviously create an inflation risk, and finally

5. Since people who worry about these things (ie – maybe not this crowd) worry about deflation, the policy route that might guarantee some moderate inflation (ie – monetary policy) would probably be the better one to go to first, and finally

6. Similar to #1 – monetary policy is less susceptible to corruption than the political process (unless you worry about Illuminati European bankers or that sort of thing :) ).

There has got to be a decent macroeconomic argument besides these more common-sense "it seems safer and more easily reversed" arguments – I'd be interested in hearing such an argument if anybody has one.

Methinks May 22, 2009 at 12:48 pm

MnM,

Traders have a memory for certain things – prices, for instance. Also, I remember smart people. They are logged into a special part of my brain. You came on the scene around march of last year with some really good posts and that hasn't changed.

Daniel,

Have you learned NOTHING? There ARE no plain old rich. All the rich are evil – except no-taxes-are-to-high-for-you-but-not-me Buffet, you-can't-eat-gdp Gates and The Oprah. I read somewhere recently that you're 25. Hopefully, by the time you reach my advanced age and start to actually pay attention to wrinkle treatments, you will finally understand the evil of those who dare to create wealth.

"maybe a tax cut in 2001 could be justified, but most of it wasn't stimulus by virtue of the fact that there was nothing to stimulate!"

We had a dip. The stock market bubble burst, then 9/11. The tax rate cuts were prophylactic – as was torturing the interest rate to historically low levels. He got an early start on the recession and avoided it. You, know – jobs SAVED or created logic. Yippee. That worked well.

Actually, just to ignore my deep dislike of Bush (I & II, actually), I prefer tax rate cuts to spending. This leaves investment decisions in the hands of private individuals. Government spending out of recession leads to misallocation of resources. Always. If for no other reason than resources are allocated by political fiat. However, if you don't cut government spending, you haven't really cut taxes, have you? So, chimpie never really did cut taxes. He should have cut government spending, but that's no way to keep your special interest groups happy, now is it?

"I think an appropriate stimulus response in a deep, long recession like this one is a combination of public works type stuff and tax cuts/rebates."

Daniel, I realize you're a young man and you've never actually seen a real recession, but this one is neither long nor deep. It's just the longest and deepest in a while. Let's not exaggerate.

It's only a rebate if you are the one who actually paid in the first place. The problem with these "rebates" is that they were means tested and ended up being a redistribution of wealth from the more productive to the less productive. So, we go some temporary spending but provided disincentive to invest. That whole exercise was a scam.

Public works projects have to be funded, which means there's no tax cut, right? Private investment is crowded out by public spending. If tax cuts (particularly for the evil rich) are used to invest, more jobs are created without public works projects.

S Andrews May 22, 2009 at 1:00 pm

DK says…

But you and Don are reading a WHOLE LOT into muirgeo if you're saying he thinks Don and Russ defend Republicans. As far as I can tell, he never said anything of the sort.

I have been a regular visitor of Cafe Hayek since 2007. Muirgeo has been a regular here before that time. You don't need to tell me what muirgeo is saying and what he is not. You are better off treating us like normal adults. He is a Democrat first and a human being last. It is very clear to anyone with an IQ over room temperature. You don't need to baby sit any of us.

Daniel Kuehn May 22, 2009 at 1:10 pm

Methinks -

I like how Oprah gets her own definite article!

RE: "I prefer tax rate cuts to spending."

I do too. I think we've had an odd combination of a major recession after a long period of public disengagement with macroeconomic policy (ie – the "Greenspan fixed that, didn't he?" effect). Spending is by no means the first resort. I think it is almost universally considered the third and last resort. I think the public was more aware of this in the middle of the century when the demand management strategy was discredited but the business cycle was wilder. For the last twenty years there haven't been any particularly major disturbances to focus people's attention – so when we (rightfully in my mind) dig up Keynes people make the mistake of thinking counter-cyclical spending is the first resort. It absolutely isn't.

RE: "However, if you don't cut government spending, you haven't really cut taxes, have you?"

Sure you do! How do you conclude this? Maybe you adjust when taxes are paid, but you're certainly still cutting taxes in the present. That's the point – fighting recessions is more about smoothing the business cycle than it is anyone expecting a free lunch.

RE: "Daniel, I realize you're a young man and you've never actually seen a real recession, but this one is neither long nor deep. It's just the longest and deepest in a while. Let's not exaggerate."

My age aside, I'll have to disagree with you on this strongly. It's the worst since the Great Depression, even if it's nowhere close to the Great Depression – and on some indicators things are falling apart faster than they did in the Great Depression. And remember – we're still in 1931 in realtive terms. We won't hit the depression bottom, of course, but the fact that we haven't reached it yet – only a year and a half in – isn't exactly cause for relief. The only recessions that can rival it (80s and 70s) were either manufactured by the Fed or caused by external shocks. This one is neither manufactured or a random shock – it's caused by fundamental dislocations, it is teetering on deflationary, it is debt based, and it's global – which means it's going to be harder to climb out of. Unless you're in your 80s or 90s, you should be concerned about the scope of this recession too.

RE: "It's only a rebate if you are the one who actually paid in the first place. The problem with these "rebates" is that they were means tested and ended up being a redistribution of wealth from the more productive to the less productive."

I thought we were refering to the Bush checks – that's what I was refering to.

Re: "Private investment is crowded out by public spending."

Not in a liquidity trap – which is the whole point of this exercise.

Daniel Kuehn May 22, 2009 at 1:12 pm

RE: "Unless you're in your 80s or 90s, you should be concerned about the scope of this recession too. "

in other words – only if you're in your 80s or your 90s does the "tut tut young man" argument you make hold water.

Daniel Kuehn May 22, 2009 at 1:15 pm

S Andrews -
RE: "You don't need to baby sit any of us."

Hyper-sensitive since 2007, huh?

I wasn't baby sitting anyone – I was pointing out that people were ganging up on muirgeo for something he never said. Maybe you feel justified because of what he said in the past but the whole thing just seemed petty to me. If me accusing you of being petty bothers you that's unfortunate – but it's certainly not baby sitting.

Btw – I like that "IQ above room temp" line :) I'm gonna have to remember to use that places.

Methinks May 22, 2009 at 1:20 pm

It's very rare to find someone that says "I know a lot about derivatives", isn't it? It's usually either "I know nothing about them" or "I know a little about them". Always good to come across someone who does know a lot, but their relative obscurity might explain part of the reason why we got into this!

Equity options are obscure? Futures are obscure? Since when? Yes, the structured derivatives in fixed income can be harder to understand because unlike equities which are only subject to price risk, fixed income securities are not that standardized and are subject to more than one risk factor and the derivatives used to hedge them are more complex. That means that you often have to look at every derivative structure individually. Lucky for me, my partner used to be an interest rate derivatives trader at a big evil Wall Street bank.

Derivatives really are not at all hard to understand and they are not obscure. What got us "into this mess" goes way beyond derivatives. But, to the extent derivatives were involved, it was teeny options in fixed income that blew up. A well known Achilles Heal of the BS options pricing model is in pricing way out of the money options.

Daniel Kuehn May 22, 2009 at 1:23 pm

Methinks -
OK, OK – you can stop bragging now! I should take a finance class at some point. I have a friend that's an investment banker, and it's amazing – we took a lot of the same econ classes, but that world is still completely different from the economists world.
:-D

RE: "What got us "into this mess" goes way beyond derivatives."

Yes, I agree – wasn't doing a detailed analysis there.

S Andrews May 22, 2009 at 1:29 pm

muirgeo for something he never said

Hyperbole much Mr. Hyperbole?

Hyper-sensitive since 2007, huh?

Just normal sensitivity. When the same inanity is repeated adnauseaum, it gets tiring after a while.

I can confidently use the word NEVER when I say that muirgeo has never criticized democrats for anything on this blog. I will not be exaggerating a bit if I say, every other post of his is an accusation of republicans. I am talking about party, not the purported ideologies of the two groups.

Muirgeo has trashed many thead on this blog by hijacking the comments section. Last thing we need is somebody trash this blog by making it a discussion forum about a certified nitwit.

Daniel Kuehn May 22, 2009 at 1:36 pm

S Andrews -
RE: "Hyperbole much Mr. Hyperbole?"

OK – I think you're overusing this complaint which is especially distressing to me because I like to use this complaint and if you tarnish the legitimacy of it, that makes it less useful for me and I have to come up with a new way of phrasing the same concern.

No – not hyperbole. Never in that exchange did he indicate he thought that Don was defending Republicans.

RE: "I can confidently use the word NEVER when I say that muirgeo has never criticized democrats for anything on this blog."

I don't think anybody is accusing him of not being a Democrat.

RE: "Muirgeo has trashed many thead on this blog by hijacking the comments section. Last thing we need is somebody trash this blog by making it a discussion forum about a certified nitwit."

I was done discussing him, but it's a lot of fun to pick at you. I'll stop now unless you give me something really juicy to respond to.

Methinks May 22, 2009 at 1:41 pm

Dan,

In terms of GDP shrinkage and unemployment, this recession is not severe. In terms of financial dislocation and government intervention it is off the post war charts.

Speaking of which…The unemployment rate in the 1980's recession reached 10.8% Good thing Fed's stress tests modeled an 8.9% unemployment rate and a decline in GDP which has already been exceeded as a "worst case" scenario, huh? I'm sure those banks that passed are totally sound.

I thought we were refering to the Bush checks – that's what I was refering to.

That's what I was referring to.

Not in a liquidity trap – which is the whole point of this exercise.

Are we in a liquidity trap?

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