Keynesian Economics and Recession Counter-Measures

It sounds like you are saying bonds are more secure than shares. Isn't that what I said? Shares do have a little bit of security of course, it gives a shareholder a claim on some part of what the company owns with limited liability in case of bankruptcy. Bonds are more secure because if the entity that you get a bond from goes bankrupt, bond holders get paid before shareholders (absolute priority). This usually means that shareholders get little to nothing.So yeah, the security is low, the risks are high but the expected long term return is 10-15% - assuming you diversify enough. Well yes, then again, when you put the money into a savings account it gets put to work in shares and bonds and the like. I was trying to think of situations where the money is doing as little as possible (I appreciate that the money is doing stuff even if it is sat in a standard account, but I didn't want to get bogged down in detail...).Seriously though, thanks for the clarifications.

True, though as you say, the assumption in this case has to be that you will get nothing - the shareholders are way down in the list of bankruptcy beneficiaries.But my point is more important. Security and risk have specific meanings in finance and are easily confused. Falling victim to this confusion is extremely dangerous and could easily lead to a global credit-risk-driven financial meltdown. Fortunately, this is very unlikely to happen, as most people are not at all confused by financial terminology... This whole crisis has been caused by one thing - confusion and ignorance over highly secure, yet extremely risky investments. This is exactly what happened ten years ago with the emerging market "crisis" (I don't think that word applies any more, given perspective.) Back then, it was credit linked notes. This time it's mortgage backed securities. Same old, same old. Ask me if I'm surprised Yes, but this is only one part out of the three principle components of the return: inflationary compensation, opportunity cost, and credit risk. The last is often forgotten, yet is by far the most important and accounts for the largest variation in rates across Western government and corporate issuers. No problem. Can you guess my post-academia career or should I say

OK, I concede, you've out 'yes-but'ed me. I'd appreciate some kind of explanatory expansion on this. After writing several respsonses to it, I worryingly realize that I have absolutely no clue what you just said.

I've got man-flu, so I've an excuse for being cranky - getting as anal as Rrhain Sure, and I'll try to make it understandable by everyone so please forigive if this sounds too simplistic to you.Opportunity cost is what you've already mentioned, the ability of cash to do work. If you give your cash to someones else, you need compensating for what that cash could have done for you if you'd done something else with it: started a business, invested in a growing business, gambled on a 'sure-thing', etc.Inflation works to devalue a fixed sum of money, so you also need compensating for the fall in value of the cash over the time of the bond: if $100 today will buy you a week's shopping, what you want back at the end of the bond is the sum of money that will again buy you a week's shopping, even if that is now $120.Credit risk is the risk that the issuer of the bond will default on his obligation to you - either by only paying back a fraction of what is owed, or not paying anything back. The riskier the issuer, the more he needs to pay you in return to compensate you for taking that risk. The Icelandic banks had been seriously down graded in credit worthiness by the credit rating agencies, and so to attract investors, the banks were having to offer interest rates of around 15%. That huge hike in interest is purely down to risk. You invest at your peril - as many did, not understadning that there is no such thing as a free lunch.For a sovereign triple-A rated issuer such as the US government, the credit risk is essentially zero, so the rate offered on T-bonds is just the inflation plus the opportunity cost. A smallish national bank will have a definite measure of risk, and will have to offer greater rates.ABE: for those of us in the UK who remember back to the early 90s, there can be another element to the rate offered by a state, and that is pure enticement to encourage foreign investors to buy your bonds. Because the bonds are denominated in your own currency, the foreign investors must purchase your currency to buy the bonds, thus improving the value of your currency. This is what the UK Tory government did in a spectacularly failed attempt to preserve the value of the GBP in order that we not move outside the bounds dictated by the European Exchange Rate Mechanism (ERM) - this cost us an effin fortune (billions) (a large part of this ended up in George Soros' pockets!) and is known as Black Wednesday. Edited by cavediver, : No reason given.

The coffee I buy is organic free trade coffee. I have not seen free trade chocolate for sale, on the other hand, I don't buy chocolate for
a variety of different reasons.

I wonder how much of a role this has to play with the strengthening USD. Not that our rates are all that great, but as people were buying more bonds during the massive losses on exchanges across the world, I would think that would partially explain it. Since I've been in sweden, the exchange has moved from 1USD=6.5SEK to 1=~8. The USDX hit a low last march, but seems to be hovering in the 80s right now. Or am I totally off? At anyrate, so long as the exchange rate stays where it's at I'm happy (though I dare say it doesn't help our trade balance).

Regarding the recession, I am less interested in theory and more interested in results.What do you get when you gather the best and brightest Harvard-trained economists and bankers in Washington and ask them how to fix the economy?Answer: One hell of a mess -- $200 billion(and counting) added to the national debt without an inlking of progress.What started out as a well-intentioned, but haistily conceived plan to bail out the banking industry and spurn the lending and growth that is needed to turn the corner, has morphed into an out-of-control spending spree without accountability or oversight.The theory was, give the banks money and they will lend. You don't need any mandates or requirements -- of course they will do the right thing, with the best interest of America in mind. They won't hoard the funds and will start putting it to good use, right?OooopsWithout assurances and accountability, any such bailout is nothing but a complete fleecing of the taxpayer.Not only is the TARP program picking the winners and losers in the banking industry, they are doing so without any accountability. Funds were dispersed to the most healthy institutions(JPM, Wells Fargo, PNC) while those who could have survived with assistance were left to drown.PNC takes the funds and uses them to purchese NCC(after NCC was strong-armed by the FEDS). Wells Fargo uses the funds to purchase WaMu after screwing over Citi by cutting in and breaking up the deal. This government sponsored overthrow now has resulted in thousands of more jobs lost in the mergers, more resulting foreclosures, and more defaults. Essentially, the employees of these buyouts basically paid, with their own tax dollars, to become unemployed.Where the heck is the lending by JPM and Wells? Where is the cash flow and trickle-down? How is any of this spurning grwoth and lending, or stability? The blue chips and banks are just as unstable and more volatile than they were in July. Even with the infusion, nobody wants to invest.Now they want to shell out billions more in a similar manner, hoping things get better?Note to Congress: What the hell are you guys doing with our money? Do you know what you are doing?

These are not suggestions on my part they are invites to comment.As has been the case through most of this thread I claim to be nothing more than an interested ignoramus.Question: So if what has been done/is being done is not working what should have been done/should be done instead?1) Instead of giving money to the banking system get money moving again by giving it directly to consumers in the form of massive tax cuts.OR2) Instead of bailing out failing banks nationalise them. Then run them in the interests of the national economy rather than for a profit. These banks will lend. The cash flow will be re-ignited.OR3) Pump money into the banking system (in much the same way as has been done) but with stipulations and contractual guarantees as to how this money will be used. Thus the national interest rather than the interests of the individual banks are fulfilled. Sort of part nationalisation (we pay we say - on the part of the government)without any form of official state ownership.OR4) Something else. If so what.If anyone feels tempted to comment I am interested to know whether they think the basis for their preferred option is purely practical or if there is an ideological tinge to their answer as well.

It depends on the type of tax cut. If you do what Boehner and the other House GOP suggested, dropping every body's income tax rate, you're not helping the people who need it most. Who benefits more: the bracket that is reduced from 20% to 15%, or from 10% to 5%? The upper bracket, who to begin with is better positioned to survive the recession.Second, tax cuts aren't that great a stimulus. If it's a one off, like was passed early last year, people tend to save it or pay off bills. If it's permanent, you might see something better. However, the multiplier effect is not very good (especially when compared to government spending).Third, tax cuts are only really effective until they reach the marginal level. That is, cutting the income tax rate from 70% to 35% will have a huge effect. Cutting from 35% to 30%, meh. I know I've used marginal wrong, as that has a specific term in economics, but I hope the idea is expressed properly.So put simply, tax cuts are not going to work very well for getting the US out of the recession. The only good thing is that they are relatively immediate, so they can produce an initial small boost until government spending comes online (we hope).

In the UK we had VAT (the point of sales tax on all "non-essential" goods) cut from 17.5% to 15% as one of the main counter-recession measures. This cost the government billions as I understand it.The idea was that this would benefit all. In percentage terms this should also be relatively beneficial to the least well-off as compared to cuts in income tax. The least well off are also most likely to spend any additional funds locally rather than spend abroad or save.However 2.5% is 2.50 out of every hundred pounds spent.This is a pint of beer in a cheap London pub.I was broadly supportive of the measure in theory but in practise I think the amounts are so nominal that nobody's behaviour has changed in the slightest.Having said that I took advantage of the VAT cut to finally buy a car. So I am the exception that disproves my own "argument"....... Edited by Straggler, : No reason given.

The problem is that this scenario is unique and unlike any other in modern economic history -- the best anyone can do is supply their best guess as to the steps that will turn things around. There is no history to model things on. Classic charts, graphs, and models are for the most part, meaningless in this scenario.The housing buble is what started the downward sprial in credit. The problem is so bad that even the banks don't want to lend to each other. Nobody trusts anybody. We have seen a lot of big players fall to their doom in a very short period of time -- it is quite unporecedented. If you would have told someone 10 years ago that in a decade, some of the biggest names in banking would go under, they would have said you were insane. They would have said, "this can't happen.. the government wouldnt let it happen." etc..Although there were many warnings about the housing bubble being ready to burst, nobody saw this coming, this fast.Although the experts and academics may not aggree on the specifics of how to address the issue, they all aggree that until the credit issue is fixed, we aren't going anywhere. This all boils down to the availability of credit.Without credit, there is less consumer spending on autos, homes, and merchandise. The suppliers to these industries suffer, they lay off employees, and this adds to the downward spiral. Since July, investors have pulled funds from the banking industry at a near-record pace. The government infusion did nothing to increase investor confidence, as they have seen big players go down and they don't know who's next.The market is now ruled entirely by panic and fear. Until that subsides, investors are going to stay away and stocks are not going to move. Market recovery always precedes economic recovery. It is already obvious that government efforts to infuse capital does nothing to sway the current atmmosphere of panic and fear. It is obvious that 'a wish and a prayer' programs like TARP are not going to do it.

So what should now be done in your view? I love the idea of a housing "bauble". Shiny, decorative but insubstantial and packed away shortly after Christmas.A "buble" would be a cross between a bubble and bauble.

I really have no idea what should be done. I don't think anyone does. If they did, the market would be in a rebound and unemployment on the decline. Whatever decisions are made, they obviously should focus on increasing investor and consumer confidence.Until investors return to the financial sector, the banks will be short on capital and afraid to lend. It doesn't matter how much money the FEDS pump into the banks, nobody trusts anyone in the banking sector right now. They have good reason. Personally, it's not where where I would want my money sitting now. I already lost a good chunk on NCC. Nobody knows who's next to fall and there propbably are going to be another one or two major collapses before its all said and done.The fact is, investing in the banks is a major gamble right now. Stability and trust are lacking. That's not something the government can just legislate or throw a few dollars at, expecting sentiment to return to normal. This problem is likely going to slowly reverse itself and there are no easy, quick fixes. The recession is likely going to be long and protracted.

So if we can't "fix" the recession, what are some options for reducing its effect? Is reducing the effect desirable? possible?

said the chief fund manager to the quant, when the quant tried to explain why all the Mortgage Backed Secuities on the balance sheet that were paying 20% were actually a really BAD idea No-one heard you complaining during the boom. Funny how no-one asks questions when everything is *looking* good. We've had our "results" upfront and now we're paying for them. And it will take a long time to pay them off. Short-term fixes are no answer - theory is critical, otherwise it's just guesswork.The banks still have little idea of just how much crap is on each other's balance sheets - is it all that has been owned up to, is it double, is it ten times??? Would you lend to one of these banks??? What is required is published independent highly quantitative analysis of each bank, of a calibre that the banks will trust, and with sufficient enforcement by the government and regulatory bodies that it is unhindered. Throwing money at the banks is not so helpful. You don't scatter sweets on a minefield to tempt you to cross - you find out where the mines are. Then attempt to remove them.