You Can’t Overwork Yourself By Smoking Joints and Watching Too Many Episodes of Jersey Shore « Modeled Behavior

 Modeled Behavior:

I think people are confusing cyclical prosperity with personal luxury. ...

However, this is not how we measure the cyclical wealth of nations. We measure it by employment and production. We say the economy is “doing well” when a lot of people are going to work and making stuff.

For example, we say that Germany’s economy seems to be recovering. However, consumption in Germany is not rising. Consumption is flat. Working is rising. Employment is rising. That is what it means to be doing well. It means that more people are doing more work.

This is why it makes no sense to say that a recession is inevitable because we overconsumed. Because we bought too much it is now inevitable that we work less? Why does that make fundamental sense? Surely something is going wrong. Shouldn’t we be working more to pay for all the stuff we bought.

Some [economists] say that the “something” is structural readjustment. We have to move towards an investment based economy and there are frictions. However, that story also works in reverse. A country could be consuming too little and then has to suddenly switch away from an investment based economy and will face frictions. Recessions in that story are not a punishment for overconsumption, they are a result of suddenly realizing that you have to shift paths. There are still problems here but they are on a deeper level about more subtle things.

The overconsumption theory by contrast says that the recession is natural because we bought too much stuff during the 2000s. Too many houses. Too many big screens. That’s why you are not working now. ...It doesn’t even make basic logical sense. ...If we consumed too much then shouldn’t we need to work extra hard? Why is society working less? What about spending too much money implies that the natural reaction is that people should go home and sit on the couch?

...this [is the] key question [that any macroeconomic theory must answer, but the overconsumption theory does not]:
WHY ARE PEOPLE WORKING LESS?

 Paul Krugman called this the hangover theory of recessions.

The Washington Post Embarrases Itself Once Again - Grasping Reality with Both Hands

The Washington Post Embarrases Itself Once Again - Grasping Reality with Both Hands: "Calculated Risk watches the train wreck:

Calculated Risk: Monetary Policy Confusion: An editorial in the WaPo yesterday - and some recent emails I've received - indicate there is some confusion on the difference between monetary and fiscal policy. From the WaPo yesterday:

Kicking the Fed: [B]uying hundreds of billions of dollars worth of federal debt in a deliberate effort to lower long-term interest rates and boost employment looks to many economists, market participants and politicians like fiscal policy by another name.

Calculated Risk says:

Well, these "economists, market participants and politicians" are confused.

Me? I don't believe these economists, market participants, and politicians exist. Expansionary monetary policy is when the Federal Reserve buys government debt for cash. Expansionary fiscal policy is when the U.S. Treasury sells government bonds for cash and uses the cash to fund its operations. See the difference between "buy" and "sell"? Buying something is not "like" selling it: it is the opposite of selling it.

The Topic of Depression Economics in a Nutshell - Grasping Reality with Both Hands

The Topic of Depression Economics in a Nutshell - Grasping Reality with Both Hands:

...how you should think about the topic of “depression economics. ...Why should there be such crashes in the level of employment? How can it be that there is not enough spending, not enough demand in the system to put everyone who wants to work to work productively? Back in 1803 Jean-Baptiste Say observed that nobody makes except to use or to sell. and nobody sells except to buy. Thus, he argued there can be particular shortages of demand in some commodities balanced by excesses of demand for others. But “overall excess demand” is self-contradictory because everybody’s spending is someone else’s income and everyone’s income is then spent sooner or later on something. How is it that the economy can wedge itself into a position like it is in today? That is an important question.

Read more at medianism.org:

Ratings Agencies and Predatory Lending vs. Irresponsible Borrowing

PBS NewsHour | Nov. 18, 2010 | PBS:

PAUL SOLMAN: You frame this book as a look back at the whole financial crisis, so I thought I would frame this interview as a: Who is the biggest culprit?

JOE NOCERA: I certainly would put the rating agencies right at the top of my list of bad guys, or my list of devils.

A place like Moody's took a culture that had a reputation for some integrity, and completely corrupted it in a drive for market share and profits.

PAUL SOLMAN: So, biggest culprit, ratings agencies; you agree?

BETHANY MCLEAN: I do agree. If they hadn't taken subprime mortgages and rated enormous quantities of them AAA, meaning they gave those bonds the same credit rating as the U.S. government debt has, this -- this whole thing couldn't have happened, because debt that is rated AAA is precisely the debt that is snapped up by the largest quantity of buyers all around the world, buyers who are not capable of doing the detailed work to analyze these bonds by themselves....

BETHANY MCLEAN: ...But one of the really interesting things, if you go back to the 1990s to the birth of subprime lending, it was never about homeownership.

PAUL SOLMAN: What do you mean it wasn't about homeownership?

BETHANY MCLEAN: It was never about homeownership, because subprime lending grew out of cash-out refinancings, meaning the ability of somebody to go to a bank, refinance their mortgage, and take cash out of their house in order to live on that cash.

And that enabled consumer spending through the 1990s and through the early part of -- of this decade. Most of the business of the major subprime lenders, from Countrywide, to Ameriquest, to New Century, was cash-out refinancing. It wasn't the first-time purchase of homes by homebuyers. And this was celebrated by Republicans, as well as Democrats.

JOE NOCERA: Homeownership was a giant fig leaf, particularly for the rise of subprime.

I was stunned, in the reporting of this book, how much subprime was about predatory lending. And it was way more than I thought. And then, when you find that a company like New Century, which really, you know, 85 percent of its business is refinancing, 15 percent of its business is homeownership, that's astounding.

PAUL SOLMAN: What does predatory lending mean in this situation?

JOE NOCERA: Taking advantage of unsophisticated people to put them into loans that -- knowing, absolutely knowing, that they can never pay them back, often lying about what the interest rate hike is going to be, prodding them to lie themselves about their income, about their true financial condition.

BETHANY MCLEAN: I -- I started this book with a bias toward personal responsibility, and, if consumers got in over their head on their mortgage, that was their fault.

And one of the big discoveries to me in the course of reporting the book is the extent to which these loans were sold; they weren't bought. And one of the most telling moments were these internal documents from Washington Mutual, one of the big subprime lenders, around 2003 talking about how to get consumers who really wanted safe 30-year fixed-rate mortgages to take out these dangerous option ARMs instead.

PAUL SOLMAN: ARMs meaning adjustable rate.

BETHANY MCLEAN: Adjustable rate mortgages -- how to sell those to people, and how to confront a consumer who said, but it doesn't feel right to me.I want to pay back my mortgage every month. This is what my parents did.

How do you get these people to take out a risky mortgage instead? You told them that home prices could only go up. And the reason Washington Mutual wanted to sell these option ARMs, instead of the 30-year fixed rate mortgages, is that Washington Mutual could turn around and sell these to Wall Street for a lot more money than it could sell the old 30-year fixed-rate loans.

Yglesias » The Importance of Models

Yglesias » The Importance of Models:

Try to draw up a model—a simple one, but one where you do try to make sure that your numbers all add up—in which everyone has high savings rather than high debt. Households have high savings. Firms have high savings. The government has high savings. And the governments of your trading partners have high savings. But so do their citizens. And their firms, too. It’s the old wisdom of common sense! You’ll find that it doesn’t add up. Japanese people save by lending money to the Japanese government, which borrows. I borrow to buy a condo, and the money I’m borrowing is the money other people have saved in the bank. You put your money in the bank rather than leaving it under the mattress because the bank pays you interest. But they pay you interest because they can charge interest to other people—people who are in debt.

The old wisdom isn’t nutty or anything. Borrowing a ton of money so you can buy a fancy new car is probably a worse idea than buying a cheap used car and saving your money. But if you’re poor live in a city with bad mass transit and you borrow money to buy a cheap used car so you can make sure you’re on time for work every day, you’re making a prudent investment in your own future. Likewise, if you’ve got a successful store and you take out a loan to open a second location, you’re building the future of the American economy. Thriftiness is a good character trait because it tends to make people averse to accumulating debts for frivolous reasons. But if you try to build a systemic model, you’ll see that universal thrift doesn’t work at all.

Indeed, though thrifty people play an important role in making the economy function, they do so in part because their thrift creates resources that others can use to be venturesome and fuel innovation, entrepreneurship, and prosperity. Capitalist success stories are built on the ability and willingness of people to fail. For every hugely successful startup, you’ve got a dozen or more failures and behind those failures you’ve got bad loans. The willingness to issue those loans makes the world go ’round, and we need the savers because without them there’s no money to lend.

- Sent using Google Toolbar"

What Should Macroeconomics Do? - Grasping Reality with Both Hands

What Should Macroeconomics Do? - Grasping Reality with Both Hands:

What is wrong with American macroeconomics? In a nutshell, when 2007-9 came along every single macro textbook (including mine) and every single macro course (save possibly Perry Mehrling's) was of little or no use in helping people who had read or taken them to read publications like the FT as they chronicled the downturn or understand the policy debates hosted by the FT.

At the very minimum, a macro course should teach people enough about the macroeconomy that they can then read the reporting of the FT. And it should teach people enough about the theoretical approaches that underpin policy advocacy that they can then understand and evaluate the policies proposed in contributions to the FT.

What would such a macroeconomics course look like?

It would, I think, teach the five still-live theories of the causes of economic downturns that underpin people's analyses:

• The theory that high unemployment is produced by real wages stuck at too high a level for a full-employment economy to sustain. It must be suffered.

• The theory that high unemployment today is the unavoidable consequence of past overinvestment. It must be suffered.

• The monetarist theory that a downturn is the result of a shortage of liquid cash money which induces people desperate to build up their cash balances to try to switch their spending away from currently-produced goods and services. It is fixed by expanding the money supply or increasing velocity and so reducing money demand.

• The Keynesian--or is it Wicksellian?--or is it a Hicksian?--theory that a downturn is the result of a shortage of bonds, of vehicles that savings can use to transfer purchasing power into the future which induces people desperate to build up their assets to try to switch their spending away from currently-produced goods and services. It is fixed by expanding the supply of bonds or reducing savings.

• The Minskyite theory that a downturn is the result of an overspeculation-caused panic that generates a shortage of safe high-quality assets, of vehicles that people to park their wealth and be sure it will not melt away while their backs are turned, which induces people desperate to build up their safe asset holdings to try to switch their spending away from currently-produced goods and services. It is fixed by expanding the supply of safe assets or restoring confidence and so diminishing the demand for safety.

•