Wednesday, February 11, 2009

Idiocy and ignorance

Here's some things I've seen idiots saying:

  1. This crisis is created by the Federal Reserve, a PRIVATE bank
  2. We should let the banks fail.
  3. We don't need a banking system
  4. Treasuries aren't backed by anything and are worthless
  5. We should bail out ordinary people, not banks
  6. The Federal Reserve is just *printing* money, and it's going to cause runaway inflation
Okay, so here's my responses:
  1. The Federal Reserve does not have supervisory capacity over banks to keep them from making risky loans and bad investments and such, which is the root cause of this problem. That's the Comptroller of the Currency. The Federal Reserve is "private" in much the same way that the U.S. Postal Service is "private". I.e., only vaguely and on paper. The Federal Reserve can only buy and sell assets and lend money to banks, that's the extent of their power over the economy. Blaming such a limited institution for the current problems are ridiculous.
  2. We can't let the banks fail because that would evaporate 90% of the money in the U.S. economy. Read my article on deflationary spirals (see the "Important Posts" section in the right margin).
  3. A banking system allows borrowing money to create an addition to the economy, and then use the output of that addition to the economy to pay back the borrowed money. We now have 300 years of experience to show that a banking system is necessary for a modern economy. London's banks are why the United Kingdom became the British Empire upon which the sun never set -- they were the first to create a modern banking system. The Muslim world did not have a banking system because Islamic law prohibits lending money at interest, and you know how well that worked. Without a banking system, economic activity slows down drastically, both because of the borrowing/lending aspect and because all commercial transactions must take place by moving heavy bails of physical cash around rather than via electronic funds transfers in bank ledgers. To recap, we simply do not have a modern economy if we don't have a banking system -- what we have is a Dark Ages economy where we end up reduced to poking each other with sharp sticks to steal each other's meagre rations of turnips and gruel.
  4. Treasuries are backed by the economy of the United States of America. As long as that economy is strong and can be taxed to pay off Treasuries, Treasuries have value. There has never, in the history of the United States of America, been a default on Treasuries -- even the Revolutionary War debt, which was ten times larger than the GDP of the United States of America at the time, eventually got paid off. The oanswer to the worth of Treasuries is that they are worth exactly what people will pay for them. Right now so many people want them that they're returning effectively 0% interest. This is not a sign of a worthless asset. As long as people want to pay for them, they have value.
  5. The problem is that if the banks fail, their assets get sold at auction for pennies on the dollar. Their assets including all those mortgages. Thing is, 90% of the money just evaporated out of the economy, 90% of the money that could be used to pay off those mortgages. Which means that that pretty much every house with a mortgage on it becomes foreclosed and thus the property of a small set of very wealthy and ruthless men. Now, I do agree that ordinary people need some help, but transferring their houses to a small set of very wealthy and ruthless men does not sound like the sort of help they need.
  6. The Federal Reserve is not "just printing" money. The Federal Reserve is handing out money in exchange for assets -- bonds, Treasuries, mortgages, etc. -- in an effort to prevent deflation. They have very sensitive measures of the money supply, and if their measures show inflation starting up, they can then start *selling* those assets, thereby un-printing the money. But given that tens of trillions of dollars have evaporated from the economy over the past six months due to the collapse of the mortgage industry, lockup of credit markets, collapse of housing prices, etc., the Federal Reserve's efforts are quite appropriate.
The problem is that there's all these idiotic notions out there which have some surface plausibility, but are simply ignorant. All I can figure is that these are the same sorts of people who would try to tell a heart surgeon how to do heart surgery or a rocket scientist how to design rockets. They are ignorant, they like being ignorant, and they believe that their ignorance is a strength, not a weakness, and can be used to solve all of the world's problems. And sad to say, these idiots are the ones who get elected to Congress and/or direct those who are in Congress, too... sigh.

Badtux the "We are fucking fucked big fucking time" Penguin


  1. 1) The Federal Reserve didn't cause this crisis, but they've had a hand in it. I was calling Greenspan an idiot 10 years ago, and he recently admitted that his whole economic philosophy was flawed.

    2) Letting the banks fail would be catastrophic at best, and people who say we should let them fail don't have any idea what they're saying. That said, the banks may end up failing anyway. I'm hoping this whole "economic stimulus" is going to work, but at the same time, I have a sinking feeling that we are throwing money into a black hole. Our economy has become more and more dysfunctional over the past 30 years, as the economic system has been methodically stripped of the safeguards that were put into place by Roosevelt. No amount of money is going to fix the economy; the economy itself needs to be better regulated.

    3) You're right. We need banks.

    4) People aren't that far off when they say Treasuries aren't backed by anything; they're simply underestimating the value of faith in our Treasury.

    5) No argument here.

    6) The Federal Reserve isn't "printing" money, but every time a government entity writes a check (or issues a paycheck) without the actual funds to cover that check, the check is still paid. Hence they have created money that didn't exist before the check was cashed. This could end up creating an inflationary problem.

    Here's something truly idiotic: the state of California is issuing IOUs for tax refunds (state governments don't have the same magical bank accounts as the feds). What I'd like to know is; will California be accepting IOUs for tax payments?

    I get what you're saying about leaving expert matters to the experts, but look at all the so called "experts" who didn't see this crisis coming (including Greenspan). They'll say no one saw this coming, but that's not true. I saw this coming. I have people I haven't talked to in 8 or 10 years come back and say, "You were ranting and raving about the economy collapsing... about overextended credit and overinflated property values... I thought you were nuts!"

    And there were plenty of experts who saw this coming, but nobody wanted to listen to them either.

    You should never put too much trust in experts (doctors or economists). They're just people. If you're an intelligent person, there's nothing wrong with questioning experts. If they really know their stuff; they should be able to justify their position.

  2. I'm not saying trust the experts. I'm saying that you're an idiot if you don't even listen to the experts because your secure in your "knowledge" that your ignorance is actually a strength. When it comes to the economy, I read a variety of sources, I don't depend on any single expert for my view of what's happening. For example, I'll go look up actual economics statistics and their implications, read various economics theory from a variety of sources, etc. and make my own conclusions based on those, conclusions which do change as more information comes in. The problem is that the ignorati do none of this. They instead believe that their ignorance is actually a strength because it allows them to "see" things that all those fancy-pantsy experts don't see. And their conclusions never change, because they're never looking for new information to test their conclusions with -- they have faith that their ignorance means their conclusions are right, and thus the ignorati continue to be the ignorati.

    - Badtux the not-ignorati Penguin

  3. Oh yeah, Greenspan. Greenspan said a lot of things, and people took those things seriously. But Greenspan didn't force banks to give out bad loans. You're giving Greenspan and the Federal Reserve too much credit for the current problems. I thought Greenspan was an idiot, myself, when he stated that he thought people should take out variable-rate mortgage loans, and utterly ignored him. Which everybody had the power to do, Greenspan may have been Federal Reserve chairman, but his utterance had no power of law behind it. Yet people willingly chose to believe him to be this oracular presence who should be followed, and utterly discarded all thoughts that economists know about asset bubbles. Inexplicable.

    - Badtux the Economics Penguin

  4. You're right that Greenspan didn't make laws, but he was an adviser to the people who made laws. He wielded a lot of influence.

    They instead believe that their ignorance is actually a strength because it allows them to "see" things that all those fancy-pantsy experts don't see.

    Ugh... I hate anti-intellectualism. I lived in Southern Ohio for a large portion of the Bush II era, and I like the term ignorati because it soooo fits the majority of Cincinnatians. Willfully, religiously, wholeheartedly ignorant! Unfortunately, the fact that NONE of the recognized economic "experts" saw this crisis coming reinforces a lot of anti-intellectual sentiment. Thankfully, we no longer have a freakin cowboy in the White House.

  5. NONE of the "recognized experts" saw the current situation coming? My lass, you simply have been reading the wrong journals. Krugman was predicting the current meltdown five years ago, when he noted that housing prices had gone far beyond what was sustainable by people's incomes. Others, such as Brad DeLong, Bruce Webb, Robert Waldmann, Chris Whalen, etc. were also talking about it. But they were being drowned out by our overlords because our overlords were profiting greatly from the misdeeds.

    Don't confuse the fact that the experts who knew better were being drowned out by our overlords, with the notion that somehow "all the experts were wrong". Because that is a lie. It isn't true. There were many experts who were right. Unfortunately, nobody listened to them. Except me and a handful of other bloggers, such as the guys at Calculated Risk and Naked Capitalism.

    - Badtux the Economics Penguin

  6. When people like Greenspan were saying that he did not see this coming, I was thinking that either they were lying or they are idiots (maybe both). I remember rumblings about the real estate bubble years before it started to pop. I was seeing the home pricing in California and thinking overpriced.

    I had resigned myself to the fact that I was the only person who thought that Greenspan was not the genius that everyone was making out to be. Good to know that I'm not insane :)

    In respect to the people who are saying that we should let the fail, those people are typically the ones who blindly follow the free market ideology. Helping the banks does not fall within the ideology so their answer is to let them fail. The only thing they understand is to be fearful of government trying to help.

    Tux, have you ever put together book list? Something like a top ten list for armchair economy geeks/wannabes should read.

  7. BadTux,

    You misunderstood my meaning, or I wasn't clear.

    By "recognized experts" I meant the people who were being listened to; which are the only experts the ignorati would be aware of; which would thus lead them to conclude that their anti-intellectual sentiment is justified.

    Of course there were experts who were right-on; I'm no economist, so my own knowledge of our impending doom came from reading those experts.

    Dude, you are blogging machine. I was just here yesterday, and this post is already way down on the list.

  8. Yep, the Busheviks are good at crapflooding the networks with pseudo-experts. But it's easy to tell the crap from the good -- what have they done in the past? See my current post :).

    Some weeks I'm just "on". This is one of them, probably because it's the first time in a month that I've been relatively pain-free. Sorry if I've been too verbose lately :).

    - Badtux the Wordy Penguin


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