Good Layman's guide to the financial crisis

[Dayuhan]

The U.S. has a trade balance deficit that exceeds a sixth of its industrial production. It could easily have four huge growth years with frozen domestic consumption

This is really an extraordinarily bizarre statement. How is the US supposed to “easily” have four huge growth years with frozen domestic consumption? Where are all the products of this industrial production supposed to go?

Of course I know about open systems, everyone does. I also know, as does anyone paying attention, that in this case it doesn’t make any difference at all. There are only three things that can happen to the goods you propose to produce. Either they are sold domestically, or they aren’t sold at all, or they are exported.

If we assume frozen domestic consumption, the only way increased domestic output will be sold domestically is to take market share from other locally produced goods or to take market share from imported goods. The latter is an attractive option on paper, but barring self-destructive protectionism it isn’t likely to happen in the real world, unless the US suddenly discovers some miraculous and hitherto unknown competitive advantage.

Not selling product isn’t an option: the factory won’t have revenue and will be unable to cover its costs.

But of course it’s an open system, and we can export… if you’re an ivory-tower economist with no connection to real world constraints. Realistically, who is going to buy the stuff? For the US to export its way into “four huge growth years with frozen domestic consumption” there would have to be either an extraordinary increase in global consumption or US goods will have to seize market share from somebody else’s goods. Again, this would require US goods to US to suddenly discover some miraculous and hitherto unknown competitive advantage.

The export “solution” doesn’t exist, outside the realm of theory. Individual businesses will be able to find or create niches and increase market share. Other individual businesses will lose. On a larger scale, driving up US exports to the level you’re discussing is simply not going to happen. If US goods were export-competitive this situation wouldn’t exist in the first place. Classic example of the old economist joke… “assume a can opener”. You might get a competitive US export economy if you could drop the dollar another 30% and wait a couple of decades for previous distortion to unwind… but the US doesn’t even have an effective way to control the value of the dollar, which has become a global currency and is not fully responsive to US policy.

At the end of the day you can talk all you want about investing in capital plant and boosting industrial output, but you can neither compel nor persuade companies to invest in capital plant that aims to produce goods that the investors don’t believe they can sell.

Then of course you get into policies designed to increase competitiveness… but these take time, and most of the ones recommended offer a whole range of side effects and potential unintended consequences, many of them unpleasant.

You overestimate the influence on exchange rates. It's not an excuse and explanation for everything. The simple fact that all countries still export even at unfavourable exchange rates hints at the complexity.

What other country has to cope with having its currency used as the medium of international trade, completely divorcing demand for currency from domestic economic conditions or domestic policy? What other currency has had to cope with 40 years or so of being the world’s default medium for investment? There hasn’t been a currency as radically overvalued as the dollar since the British Pound of the late imperial era… and the US doesn’t have an empire to shove its goods on.

These distortions can be managed up to a point, beyond which the impact becomes overwhelming and they start to control the direction an economy takes. Why do you think the Chinese are so determined to suppress the value of their currency? Because it matters. It may not be the ony factor, but it’s the herd of elephants in the drawing room.

The U.S. could pull itself out of the mess in two decades, maybe even just one if the policy is very unusual. There are thousands of levers to be used, and new instruments can be introduced.

Possibly you should consider revealing them. We wait with bated breath.

[slapout9]

Possibly you should consider revealing them. We wait with bated breath.

I would like to see some of this new stuff myself.

[Entropy]

Fuchs,

At the risk of piling on here, you're not making much sense. Germany's economy depends on exports. If those export markets dried up (for whatever reason) you would be screwed no matter how much you invested. One might say Germany is in a worse position than we are since Germany's population is contracting which means there isn't much room for domestic growth.

[slapout9]

Interview of the naked capitalist on the max keiser show. Slide the bar over to around the 15 minute mark to fing her interview. Really good stuff in the interview. Brings out good points about how there are NO truly private companies. I doubt she has ever read Karl Marx on economics but what she is talking about and maybe not realizing it, is that Marx said long ago that you cannot separate politics from economics... the 2 are intertwined.


http://www.nakedcapitalism.com/2010/...iser-show.html

[Ken White]

in the broadest sense. Thus morality as seen by many and politics as practiced by an equal or greater number will always include economic aspects and concerns. Everything does. Even warfare -- to include well beyond my favorite "'economy of force' and 'flexibility' will almost always defeat Mass." (Note the 'almost' -- that's allowing for the invisible foot / the penalty of the tragedy of the commons, squared...)

I think the Pharoahs figured that out before Karl and Fred (LINK) got around to it and that link proves that Karl's guesses weren't always correct...

Tha's life...

[slapout9]

in the broadest sense. Thus morality as seen by many and politics as practiced by an equal or greater number will always include economic aspects and concerns. Everything does. Even warfare -- to include well beyond my favorite "'economy of force' and 'flexibility' will almost always defeat Mass." (Note the 'almost' -- that's allowing for the invisible foot / the penalty of the tragedy of the commons, squared...)

I think the Pharoahs figured that out before Karl and Fred (LINK) got around to it and that link proves that Karl's guesses weren't always correct...

Tha's life...

Sorta, his diagnoses of the problem(his original book(On Capital) Das Kapital) was correct...however his solution.... well frankly Scarlett it sucks

[bourbon]

Why Isn't Wall Street in Jail?: Financial crooks brought down the world's economy — but the feds are doing more to protect them than to prosecute them, by Matt Taibbi. Rolling Stone, March 3, 2011.

Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world's wealth — and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con artist, whose victims happened to be other rich and famous people.

The rest of them, all of them, got off. Not a single executive who ran the companies that cooked up and cashed in on the phony financial boom — an industrywide scam that involved the mass sale of mismarked, fraudulent mortgage-backed securities — has ever been convicted. Their names by now are familiar to even the most casual Middle American news consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP Morgan Chase, Bank of America and Morgan Stanley. Most of these firms were directly involved in elaborate fraud and theft. Lehman Brothers hid billions in loans from its investors. Bank of America lied about billions in bonuses. Goldman Sachs failed to tell clients how it put together the born-to-lose toxic mortgage deals it was selling. What's more, many of these companies had corporate chieftains whose actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured investors they would not lose even "one dollar" just months before his unit imploded, to the $263 million in compensation that former Lehman chief Dick "The Gorilla" Fuld conveniently failed to disclose. Yet not one of them has faced time behind bars.

Instead, federal regulators and prosecutors have let the banks and finance companies that tried to burn the world economy to the ground get off with carefully orchestrated settlements — whitewash jobs that involve the firms paying pathetically small fines without even being required to admit wrongdoing. To add insult to injury, the people who actually committed the crimes almost never pay the fines themselves; banks caught defrauding their shareholders often use shareholder money to foot the tab of justice. "If the allegations in these settlements are true," says Jed Rakoff, a federal judge in the Southern District of New York, "it's management buying its way off cheap, from the pockets of their victims."

To understand the significance of this, one has to think carefully about the efficacy of fines as a punishment for a defendant pool that includes the richest people on earth — people who simply get their companies to pay their fines for them. Conversely, one has to consider the powerful deterrent to further wrongdoing that the state is missing by not introducing this particular class of people to the experience of incarceration. "You put Lloyd Blankfein in pound-me-in-the-a** prison for one six-month term, and all this bulls**t would stop, all over Wall Street," says a former congressional aide. "That's all it would take. Just once."

But that hasn't happened. Because the entire system set up to monitor and regulate Wall Street is f***ed up.

Just ask the people who tried to do the right thing.

Unfortunately, I believe the problem is actually worse than he describes; which, if you read the article, is hard to fathom. He doesn’t get into the public corruption issue, which is lingering in the background here.