Tuesday, November 11, 2014

A few minor changes

From QE’s Seeds are Already Sown by David Howden at bastiat.mises:

When a financial crisis or economic recession hits, it’s almost never because of some event that apparently happened at the same time. The crisis of 2008 did not occur because of the collapse of Lehman Brothers. It happened because the whole financial system and greater economy were fragile following years of cheap credit at the hands of the Greenspan Fed. If anything, Lehman was a result of this and a great (if unfortunate) example of the type of bad business decisions firms are lured into by loose money. It wasn’t the cause of the troubles but a result of them. And if Lehman didn’t go under to spark the credit crunch, some other fragile financial institution would have.

I think that's just about exactly right. If I were to change anything in it, I'd cut out "following years of cheap credit at the hands of the Greenspan Fed" and replace it with something like "because of our unrelenting encouragement of credit use and our failure to encourage repayment of debt."

I don't blame Greenspan; the problematic policy existed long before Greenspan. Anyway, the policy arises from Congress, not from the Fed.

And I don't blame easy credit; credit should be easy. I blame failure to repay, or, the failure of policy to accelerate repayment of debt enough to offset the accelerated use of credit. We borrow faster than we pay back; therefore, debt accumulates.

And it's not that "loose credit" lures people into bad business decisions. Rather, it's accumulating debt that turns good decisions into bad ones.


jim said...

"I think that's just about exactly right"

The fictional story about cheap credit is in reality exactly wrong.

What was driving the speculative bubble that burst in 2008 was 4 decades of the growing dominance of very high-priced credit. The lending that drove up the price of collateral and the loans that ended in default were expensive loans that were insensitive to monetary policy. The loans that didn't cause a problem were the ones sensitive to monetary edicts and encouraged by govt policy .
The reason the economy blew up is the balance of bad lending to good had reached a point where good loans had become so diminished they were almost irrelevant.

Here is what the people who have fed you the lie you keep repeating, want you to believe:

They want you to believe that all debt contracts are the same. They want you to believe there is no such thing as a good loan or a bad loan - that all loans are the same.

After you believe that you can move to the next step in the lie which is:

The govt has no business encouraging prudent lending and discouraging reckless lending. They want the govt to step back and let the private sector with its perfect rational knowledge determine what is a safe and sound debt contract and that the quantity of those contracts it produces be left entirely up to the private sector.

The lie has put the politicians on notice that they will successfully be demonized and driven from office if they attempt to promote safe and sound lending.

The Arthurian said...

If there are good loans and bad loans, and this is the problem, then we need people to keep an eye on that I guess. So my question to you then is:

Who watches the watchers?

jim said...

It is like there is good and bad liquor. When govt tried prohibition bad liquor proliferated.

The government does indeed have policies that promote some lending. Those policies have been successful at producing prudent lending that did not contribute to the economic meltdown. The bad lending that did contribute came from funding by private investors.

Govt sponsored mortgages has been a huge success. Private sponsored mortgages has ended in disaster every time it is tried. And yet here we go again, right after the most recent of those disasters, trying to get government out of the business of sponsoring mortgages. How does that happen?