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Old 11-30-2008, 08:43 PM
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Default John Maynard Keynes

I know that there are better places to discuss economics, your colleagues, friends, family, other boards. Still it is an interesting topic IMO and if anyone wants to discuss it, I hope we can keep it about economics and not stray into the political area lest this gets shut down.

For 70 years, the questions whether Keynes's ideas work or not remain the most debatted issue in economics, probably due to the lack of clear empirical evidence. Now that the US and other countries face a crredit crunch, a recession, the risk of deflation and the fact the Fed cannot push the interest rate much lower than 1%, the question arises whether the governmet has to create additional demand by increasing its spending to get out of the crisis.

If one is not familiar with the topic, Greg Mankiw, a superb economist has a balanced view about Keynesianism:
http://www.nytimes.com/2008/11/30/bu...my/30view.html

I am interested in this because of the different perception about Keynesian measures; here in Germany the worst memory is that of hyperinflation while in the US it is that of the Great Depression, which leads to a much tighter monetary policy over here than in the US, while concerning government spending the differences seem to be less clear as the US is one the one hand on average more open to Keynesian policies but one the other hand more sceptical about government, hence my interest about opinions on this subject.

As I already said, if anyone wants to talk about it I hope we can keep it from becoming a discussion about politics.

Last edited by horatio : 11-30-2008 at 08:46 PM.
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Old 12-01-2008, 02:28 AM
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I'm afraid I don't know much about it, but in the UK the Prime Minister, Gordon Brown is also adopting the Keynsian approach of increasing, public spending to try and combat the scale of the coming recessions - though some countries are already in one. I don't know how it ties into his theories but here the concern is the future tax burden required to repay the borrowing he's done, which is built on an economic recovery by 2010 - which I don't think everyone agrees can be accurately predicted.
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Old 12-01-2008, 07:21 AM
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I think things have changed too much for the Keynsian approach to be more than just a guideline (ha) nowadays. Countries are no longer on the gold standard, treaties like NAFTA have taken the place of Hawley-Smoot tarriffs, and of course America no longer depends on it's manufacturing sector for it's economic well being.
That doesn't mean we should throw the baby out with the bathwater - but trying to solve global 21st century problems with 20th century solutions probably won't work.
Personally, I think the government does need to step in, within reason. The idea that business people will always act for the greater good is laughable, whether you're in the capitalistic USA or ex-Communist Russia. It only takes a handful of greedy people to ruin it for everyone else...
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Old 12-01-2008, 07:50 AM
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I have little clue about economics, but as far as I can see the momentary crisis has little to do with Keynes as discribed in the article you posted. That is because the problems do not really come from a decline in demand. The problems come from an absence of demand. Speculation bet a lot of money on a high demand in the future. Now this future is there and the expected demand is not. A big deal of houses was build for a demand that was not existant at that time.

In other terms, speculants sold their christmas gifts on ebay long before Santa Claus even mounted his sleigh. Others bought this hypothetical gifts and sold them further. Now its Christmas Eve and Santa was kidnapped.



What could the state do now?
Even if the state buys all the non-existant christmas gifts, the problem wont go away. Some have made a big deal of money for nothing and others have purchased this big nothing.
If the state buys the nothing then what is actually won?
I tell you whats won: The winners of the speculation keep their money for nothing (and their chicks for free), thats about it.

http://www.youtube.com/watch?v=Ehl_VQuKRTc

Last edited by Botany Bay : 12-01-2008 at 08:01 AM.
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Old 12-01-2008, 08:41 AM
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Interesting opinions. I am kinda biased on this, so I try to be short.
Demand is declining, which can be counteracted by the Fed under normal circumstances. Problem is that interest rates are currently at 1% and they can't cut them further down than to zero. Again, under normal circumstances we would go through a modest recession, eased by monetary policy. The big threat these days is deflation. When prices drop let's say by 2% per year, even at a interest rate of zero, your money becomes more valuable in the future by precisely those 2%. So no one spends their money but keeps it, investment and consumption drop further, companies lower their prices to try to sell what they produce, deflation becomes worse etc.
If the Fed can create no additional demand because interest rate are already close to zero, the government has to. Best thing is of course to invest into infrastructure, eduaction etc. earlier than planned instead of simply spending money, digging holes and filling them up again.

Kevin mentioned the long-run problem of higher taxes to repay the debt, jerhanner the problem of open borders where the effect benefits other countries as well, so not only the US but the entire world should coordinate its gov. spending.
BB, you refer to a different problem, the Paulson plan of buying junk assets. The UK's plan seems to be a little bit smarter, involving recapitalization. Mind that manager's salaries seem to get regulated under all schemes, so go easy on them. A lot of folks in the financial industry lose their job or get paid less. Those who are criminal are the ones who bribed the guys from rating agencies to give their junk assets a supreme rating. One has to solve that conflict of interest and find the black sheeps, but most sheep are white.

On a lighter note, did you know that the guy from Dire Straits heard this dialogue in a more or less similar form from some workers in an electronical store and immediately tried to remember and write up the words? Back to the "bad guys in the banks", anyone can try to work as rockstar or hedgefonds manager if he or she thinks, that you get money for free there
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Old 12-01-2008, 08:52 AM
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Well again, in the UK Gordon Brown is a proponent of using the current crises to develop a globally co-ordinated approach, which may be similar to what you mention. Although I think he also has the ambition of restructuring the global system as a whole for the future, not just to ride out this particular problem.
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Old 12-01-2008, 08:59 AM
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While you current prime minister is not very popular, I think he is a much smarter guy than his sunnyboy predecessor
All big problems of this century, global heating, financial order and overpopulation/food scarcity can only be solved by working together IMO.
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Old 12-01-2008, 09:05 AM
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Honestly, Horatio, I do not care about the managers salaries. Managers are nothing more then high paid employees of the according shareholders.

The point I am making is: Every good gouvernment on this globe should invest in infrastructure, health systems, public services and so forth. By this two things are achieved: The services increase everyones living standard and the money is circulating among all classes of the society, from the low paid housecleaner in the hospital to the nurses, the doctors and the managers.

What you say is the gouvernment should increase its spending, while not increasing the taxes. Money flows and all the nurses and doctors keep consuming and jobs are safe, the circle of exchange of goods and services is kept closed and spinning.

Now, compare an economy with a whirlpool. Water flows through the tubes into the pool and back through the tubes again. You propose the state should pump more water into the pool. Why? Is the damn thing leaking somewhere? Is to much water vapourizing?

Thats the explanation given. To much money vapourized at Wall Street. But is that really the case? Does money vanish, burn, vapourize? No, it doesnt! What vapourizes are expectations. If I expect to win in Lotto and never do, my expectations vapourized, not the money in the pot.

So, who has the "vaporized" money? Seems, someone took water from the pool. What gouvernments worldwide are doing now is to pump water into the system and... yeah... and what?

The pool is obviously leaking somewhere. But where? Thats what puzzles me.

Last edited by Botany Bay : 12-01-2008 at 09:09 AM.
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Old 12-01-2008, 09:21 AM
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I read somewhere, don't remember where that the financial sector contributed to about .4 of the US's GDP during one of the last years. I could not believe the number myself, it might not be precise, but it is clearly too high given what the financial sector's primary duties are: checking who should get a credit and who should not and managing risks. So your point is basically right, some people earned a lot of money in the last years. But please don't forget that everyone played that Ponzi game, not only banks and hedgefonds but also houseowners who thought that rising house prices is something liek a natural law. A good reason to never look at any past data but always at fundamentals, don't look how house prices develop but how many people really demand houses and how much it costs to build one.
My humble opinion about the financial crisis is that the aforementioned interest conflict between rating agencies and banks as well as the fact that banks don't have to underlie their credits with equity if they convert them into assets and repurchase them later (this is technical and boring). So IMO regulation has to be changed and rating agencies eitehr have to be socialized or regulated. You get a lot of different opinions on the financial crisis by the way, this is just mine.

Just like this virtuous cycle of the Ponzi scheme of financing houses ... via themselves because their prices continue to rise ad infinitum lead to an extreme boom, the vicious cylce of falling demand, falling prices, bad expectations leads to a bust. The only player who can transcend this game of booms and busts is the government because it is large enough to do so. Drawing yourself out of the swamp like Munchhausen, can it work or not, that is the question. I would feel ambigious about giving a clear answer to that, but given the risk of deflation, something that endurered for over 10 years in Japan, I think that governemt debt is the smaller price to pay.
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Old 12-01-2008, 09:31 AM
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I remember we had debates like this one earlier, Horatio. And it seems you are as then assuming I where trying to put blame on people to ignite a clishee class warfare. Just to make my viewpoints on this clear: First, the system is what it is, everyone is free to play in it according to the rules. I personally find many of these rules highly imoralic and designed to invite reckless ignorant people to act reckless and ignorant, but thats capitalism, we all like capitalism, capitalism is good and who says A must say B. Some times you loose, sometimes others win.

I am also not seeing any use in deviding the world into innocent good hearted poor people and evil stone hearted rich people. The only difference between a poor worker and a super rich billionair is the ammount of money on his bank account. Was Elvis Presley a different man when he was rich then when he was poor? Barely.

The point is solely: We have a global economic system and this system leaks. Some lucky bastards have an advantage of the leak, others pay the bill.

And thats fine. Is it moralic? No, of course not. But hey, didnt our societies decide to have an economic system without morale? Doesnt every economist say in every interview economics where not about morale? So, what do we complain about? Seriously, I am not ironic or sarcastic in any way.

We say we want a system of opportunitiy. And thats what we have: opportunity to get rich and opportunity to stay poor. Some win, some loose. Sucks to loose though.
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