# RTE's Freefall (13/09/10)



## Chris (15 Sep 2010)

Finally got around to watching this program, and to no surprise it was the same old tripe. But what baffled me the most is the conclusions they came to, i.e. that the crisis was a failure of the free market economy, when nothing could be further from the truth. Numerous interviewees stated this, including Bertie. But the one person, being an economist, that made the most contradictory comment was Joseph Stiglitz. His metaphor was down the line that central banks should be in charge of taking away the punch when the party got too heated, but that free markets kept topping up the punch. Either this guy is stupid, deceiving or a fraud. The one institution that can add punch to the bowl, is the central bank, as they are the ones that increased the money supply and kept interest rates low. The free market can only pyramid money on what is provided by central banks.

As for the rest of the program, I found that it focused on all the incentives given to builders and bankers, and that this fueled the property bubble. Now unless the other part of the program, which I missed, focused on the incentives to buyers, then I believe that the most fundamental reason for the inflation of the property bubble was missed. This being government intervention through reduction in stamp duty for first time buyers, followed by no stamp duty for buyers of new developments, followed by no stamp duty for first time buyers at all, followed by affordable housing schemes and joint ownership schemes, followed by ever increasing mortgage interest relief. It was these very actions by government that added ever more buyers and therefore demand to the property market.

The program did go on to to highlight and critisise the incentives given to the construction industry, investors/speculators and banks, through various tax schemes. It also briefly mentioned the facts that banks were bailed out in the 80s and 90s. But how then do they come to the conclusion that the free market failed. A free market, by definition, is a market that is not interfered with by government interventions. Yet the program accentuates some of the interventions of government over the years. 

Governments and their central banks provided the money and incentive, through low interest rates, for banks to borrow ever more amounts of money and make ever more loans. As there are only so many prime borrowers available to lend money to, it is no surprise that less attractive borrowers found credit. Then government added incentives to buyers and builders, further increasing artificial supply and demand.

The conclusion should be that government intervention to constantly tweak and twiddle the economy has failed and *not* the free market..


----------



## canicemcavoy (15 Sep 2010)

> Now unless the other part of the program, which I missed, focused on the incentives to buyers, then I believe that the most fundamental reason for the inflation of the property bubble was missed. This being government intervention through reduction in stamp duty for first time buyers, followed by no stamp duty for buyers of new developments, followed by no stamp duty for first time buyers at all, followed by affordable housing schemes and joint ownership schemes, followed by ever increasing mortgage interest relief. It was these very actions by government that added ever more buyers and therefore demand to the property market.


 
Er, hang on. *Not* applying taxes equals "government intervention"?


----------



## shnaek (15 Sep 2010)

Chris said:


> The conclusion should be that government intervention to constantly tweak and twiddle the economy has failed and *not* the free market..



Agreed. We never had a capitalist system here in Ireland. If we did, the banks would be bust now, and developers too. Instead we had a half assed system, constantly manipulated by government and government departments. Though in fairness, no country has a true capitalist system, just as no country has a true socialist system. We have a sort of mafia system here, with government, banks and developers running a sort of casino country.


----------



## sunrock (15 Sep 2010)

This is not a serious programme.


----------



## DerKaiser (15 Sep 2010)

sunrock said:


> This is not a serious programme.


 
There were about 20 shots of the dart from different angles, ridiculous...

Plus it really bugs me the way Jim Power thinks he's apologised and can move on with his life. Him and his ilk (economists who didn't understand how to read a balance sheet) were reponsible for this whole mess by purporting to be giving sound advice to Ministers & CEOs. If ever running with the foxes and hunting with the hounds were apt it would be in the case of this imbecile.


----------



## RMCF (15 Sep 2010)

It was, like all the David McWilliams docs, a case of style over substance (not saying he made this one btw).

Docs now have to be all about flashy graphics, out of focus and panning camera shots, reiterating same thing 10 times etc. All gloss. 

Could have said what they did in 20mins instead of 2hrs.

Plus, hated the way Lenihan chatted about the crisis as if it was ancient history !!


----------



## Complainer (15 Sep 2010)

I didn't see the second one, but I hated the bit in the first one where Lenihan was chuckling about missing a call from the head of the ECB for 24 hours because he was at an FF fundraiser race meeting at Kilkenny. 

Bizarro


----------



## Duke of Marmalade (15 Sep 2010)

What we have witnessed is a failure of our banking system but that does not mean that system is wrong. Banking as financial intermediation performs an almost alchemic transformation. Its creditors think and expect that they can get their money back on demand or at least at the short time frame that they have lent and they think that there is no risk. The assets on the other hand are long term and risky. That is almost magic and tremenduously useful for society. Imagine if people taking out a 20 year mortgage relied on being matched with someone who could wait 20 years for their money and could accept the risk that the mortgagee mightn't be able to pay back.

Our banking system provides almost incredible maturity and risk transformation for society. But clearly this can go wrong and it did. Who's to blame? Certainly not the concept itself which properly controlled is hugely beneficial for society. The bankers? Yes. The Regulators? Yes. The government? Yes. Human nature? Absolutely yes.


----------



## Shawady (16 Sep 2010)

The programme did not mention anything about the government's decisions regards stamp duty. This certainly was a factor in house prices increasing.
I know people that bought one-bed aprtments for 317K just because that was the limit at which they did not have to pay stamp duty. They found that all apartments they were bidding on that were priced at 280-290K ended up going to 317K.
Also at the peak, all starter homes in my area were getting 381K just because stamp duty was 3% under this amount and 6% over it.

I read an article a few months back were they list 5 decisions Brian Cowen took as MOF, which fueled the bubble. Increasing the stamp duty limits was one of them and the author stated that in one year this measure alone contributed to a 10% increase in house prices.
I cannot find link for it.


----------



## Duke of Marmalade (16 Sep 2010)

Interesting points _shawady_ but the fact remains that Irish stamp duty was very high relative to other countries. The boom in property prices happened _despite_ our high stamp duty not because of it.


----------



## shnaek (16 Sep 2010)

canicemcavoy said:


> Er, hang on. *Not* applying taxes equals "government intervention"?



Yes. For example, cigarettes would be a hell of a lot cheaper if the government decided not to tax them at all. Petrol and Diesel too. When the government removes tax from something, it can be assumed that they are encouraging it, or the consumption of whatever it happens to be.


----------



## Shawady (16 Sep 2010)

Duke of Marmalade said:


> Interesting points _shawady_ but the fact remains that Irish stamp duty was very high relative to other countries. The boom in property prices happened _despite_ our high stamp duty not because of it.


 
The couple I mentioned in above example example also got 100% mortgage and borrowed probably 5/6 times their salary so certainly other factors at play. However, when they increased stamp duty limits, these became price ceilings at which people were prepared to go to.
I remember when we moved house about 4 years ago an estate agent told he had just valued a house for 340K but it sold at 381K. He was genuinely shocked at how people were bidding for houses.


----------



## Duke of Marmalade (16 Sep 2010)

Chris said:


> The free market can only pyramid money on what is provided by central banks.


I know you see the root of the whole problem as loose control of the money supply. But in fact this global crisis started from a credit explosion that bypassed the monetary mechanisms. The securitisation of mortgages involves the creation of credit without increasing money supply. Securitisation purports to enable a massive risk/maturity transformation. The assets were long term and risky, increasingly so (sub prime). The liabilities i.e. the suppliers of the funds believed that they had relatively liquid securities. They also believed that the risks were low. Clever dudes sliced and diced the packaging so that some of the securities got AAA rating and others got less but in total a delusion developed that in aggregate the securities were less risky than the assets backing them.

This was totally a failure of free market capitalism and human greed, wishful thinking and hubris. The PhDs in the rating agencies thought they were oh so clever. The mortgage brokers and banks were greedy. The sub prime borrowers wondered why they were being lent to but wanted to believe that it must be okay. Pension funds in Europe were taken in by the whole confidence trick.

A Gold Standard or other tight monetary discipline would not have prevented this massive self delusion, it would in fact have encouraged it by making people all the more keen to disintermediate away from the controlled monetary system.


----------



## canicemcavoy (16 Sep 2010)

shnaek said:


> Yes. For example, cigarettes would be a hell of a lot cheaper if the government decided not to tax them at all. Petrol and Diesel too. When the government removes tax from something, it can be assumed that they are encouraging it, or the consumption of whatever it happens to be.


 
So when government apply tax to something, they are intervening, and when they *don't* apply tax, they are intervening.

Sorry, I'm trying to get my head around that one.


----------



## canicemcavoy (16 Sep 2010)

> Plus it really bugs me the way Jim Power thinks he's apologised and can move on with his life.


 
It's a fair point but at least he has apologised. Many who did the same thing are carrying on blithely, and some even still won't admit there actually was a property bubble.


----------



## T McGibney (16 Sep 2010)

canicemcavoy said:


> So when government apply tax to something, they are intervening, and when they *don't* apply tax, they are intervening.
> 
> Sorry, I'm trying to get my head around that one.



When the government cuts or increases taxes or subsidies, with the explicitly stated intention of encouraging certain behaviour within a particular market, of course this constitutes intervention in the market. In my opinion, its difficult to argue otherwise.


----------



## Chris (17 Sep 2010)

Duke of Marmalade said:


> What we have witnessed is a failure of our banking system but that does not mean that system is wrong. Banking as financial intermediation performs an almost alchemic transformation. Its creditors think and expect that they can get their money back on demand or at least at the short time frame that they have lent and they think that there is no risk. The assets on the other hand are long term and risky. That is almost magic and tremenduously useful for society. Imagine if people taking out a 20 year mortgage relied on being matched with someone who could wait 20 years for their money and could accept the risk that the mortgagee mightn't be able to pay back.
> 
> Our banking system provides almost incredible maturity and risk transformation for society. But clearly this can go wrong and it did. Who's to blame? Certainly not the concept itself which properly controlled is hugely beneficial for society. The bankers? Yes. The Regulators? Yes. The government? Yes. Human nature? Absolutely yes.


We have discussed this on many threads, but I still don't see a problem with matching long term borrowing with short term lending in a non-fractional reserve system. Debentures are a perfect instrument for any-term savings and act like bonds. A bank could sell 20 year debentures and lend for 20 years on a mortgage. The owner of the 20 year debenture would not be tied into waiting for 20 years; just like bonds debentures would be actively traded.
The "benefits" of our banking system are also its most vulnerable point, and when a system can so spectacularly fail with such perfect regularity then it is clearly an inappropriate, nonfunctioning system. The only real good comment on the Freefall program was by an English economist or journalist or somethingorother, who said that the global financial system is now so large and so covertly interlaced that it is impossible to regulate. Even the task of gathering, analysing and translating monetary market data is such an impossible undertaking, that central bankers, no matter how intelligent or how many of them, cannot adequately perform, let alone protect the public from corruption or tweaking of data to suit most powerful lobbyists. 
And after every crisis they come out with the same old crap (like Ireland's own central bank), that the system of analysing and predicting the economy is going to be modified so that such a disaster will not happen again. But guess what, it always does and always will. There just is no substitute for the free market.



Duke of Marmalade said:


> I know you see the root of the whole problem as loose control of the money supply. But in fact this global crisis started from a credit explosion that bypassed the monetary mechanisms. The securitisation of mortgages involves the creation of credit without increasing money supply. Securitisation purports to enable a massive risk/maturity transformation. The assets were long term and risky, increasingly so (sub prime). The liabilities i.e. the suppliers of the funds believed that they had relatively liquid securities. They also believed that the risks were low. Clever dudes sliced and diced the packaging so that some of the securities got AAA rating and others got less but in total a delusion developed that in aggregate the securities were less risky than the assets backing them.
> 
> This was totally a failure of free market capitalism and human greed, wishful thinking and hubris. The PhDs in the rating agencies thought they were oh so clever. The mortgage brokers and banks were greedy. The sub prime borrowers wondered why they were being lent to but wanted to believe that it must be okay. Pension funds in Europe were taken in by the whole confidence trick.
> 
> A Gold Standard or other tight monetary discipline would not have prevented this massive self delusion, it would in fact have encouraged it by making people all the more keen to disintermediate away from the controlled monetary system.



I agree that mortgage securitisation played a huge role, not so much here but in the US, which was also set up and encouraged through the US government's Fannie and Freddie.
It is however false to say that the money supply was not at the root of the evil. If the money supply had not been increasing then less money would have been available to buy up mortgage backed securities.
Banks did exactly what governments wanted them to do. In the US Clinton and Bush went public in saying that they would do everything they could to allow more poor people to own their own home. So they increased the money supply, reduced interest rates, reduced the rules on Fannie and Freddie. Then banks went off on lending sprees. This is not failure of the free market, this is total failure of government intervention. At no stage during the boom or the bust has the free market been allowed to work by keeping a balance and punishing mistakes.
People trying to "disintermediate away from the controlled monetary system", i.e. a central bank gold standard, would certainly be possible, but parallel unbacked monetary systems would only work with some sort of government guarantees, or else it would quickly fail. I'm not only opposed to fiat money and fractional reserve banking, but also opposed to central government monopoly of money, and making central bank money legal tender. In a free banking and monetary system, where government is forbidden to interfere, people would be free to use fiat currency or hard currency; paper, sea shells or precious metals. But I would be happy to start with a central bank gold standard.



canicemcavoy said:


> So when government apply tax to something, they are intervening, and when they *don't* apply tax, they are intervening.
> 
> Sorry, I'm trying to get my head around that one.


Any change in government policy, like taxation, that is done with the precise intention of stimulating a certain product, service or industry is an intervention. And the reason stamp duty was constantly modified was to allow/encourage more people to be able to afford to buy a house, which resulted in increased demand and therefore higher prices. This wasn't the only factor, but I believe a major contributing one.
If every tax in the country were reduced by the same percentage, then there would not be a favoured increase in one certain area. This would provide favourable conditions for the entire economy, without stimulation or preferential treatment of one area based on government cronyism.


----------



## Duke of Marmalade (17 Sep 2010)

Chris said:


> We have discussed this on many threads, but I still don't see a problem with matching long term borrowing with short term lending in a non-fractional reserve system. Debentures are a perfect instrument for any-term savings and act like bonds. A bank could sell 20 year debentures and lend for 20 years on a mortgage. The owner of the 20 year debenture would not be tied into waiting for 20 years; just like bonds debentures would be actively traded.
> 
> If the money supply had not been increasing then less money would have been available to buy up mortgage backed securities.


You are contradicting yourself here. Mortgage securitisation is precisely what you are advocating - the backing of long term assets by debentures. It is completely neutral on the money supply. This crisis has arisen for precisely the opposite reasons you give. The authorities had indeed got quite on top of control of the money supply as witnessed by very tame inflation in the last couple of decades. What they failed to control was this non monetary credit explosion.


----------



## Chris (18 Sep 2010)

Duke of Marmalade said:


> You are contradicting yourself here. Mortgage securitisation is precisely what you are advocating - the backing of long term assets by debentures. It is completely neutral on the money supply. This crisis has arisen for precisely the opposite reasons you give. The authorities had indeed got quite on top of control of the money supply as witnessed by very tame inflation in the last couple of decades. What they failed to control was this non monetary credit explosion.



No, I think you are misunderstanding my point, or I may not have made it that clear. My example on how to match long term debt with long term savings was merely to show how this would still allow for the advantage you see in matching short term savings with long term debt. The danger with lending long and borrowing short are very evident now, and in my opinion are one of the core failures of the monetary and financial system.
Mortgage backed securitisation was precisely a chopping up of mortgage in order to sell them on easier. While I used a mortgage in my example of the debenture, this would not be restricted, and is not securitisation of mortgages per se, but a more secure form of matching loans with borrowings.
I'm not sure I fully understand your point of the credit explosion, but banks can only build credit on money supplied by central banks. The explosion in credit happened because in some cases the reserve requirements were lowered, while at the same time the money supply was very steadily increased. This is precisely part of monetary expansion of fractional reserve banking and *not* a failure of the free market!
By inflation I assume you mean the government provided figures in consumer prices. The rise of prices in general is the consequence of the inflation of the monetary supply. And while consumer prices may have stayed "relatively" stable, this is only because the very thing that did inflate in price beyond all reason is real estate. If you were to include real estate in a price index you would see a much clearer correlation between the inflation of the money supply and overall prices in the economy.


----------



## Duke of Marmalade (18 Sep 2010)

Chris said:


> I'm not sure I fully understand your point of the credit explosion, but banks can only build credit on money supplied by central banks.


Bank lends 10 nuggets of gold to A. A buys house from B for 10 nuggets of gold. Bank securitises A's mortgage and sells it to B for 10 nuggets of gold. And so on and so on, infinite credit expansion on the same money supply.



> And while consumer prices may have stayed "relatively" stable, this is only because the very thing that did inflate in price beyond all reason is real estate. If you were to include real estate in a price index you would see a much clearer correlation between the inflation of the money supply and overall prices in the economy.


I agree with the thrust of this comment but asset price inflation had little to do with money supply expansion, rather it was to do with long term credit expansion, as described above.  In simplistic terms people do not buy houses with the coins in their pocket they buy then with long term credit.

The slicing and dicing of asset backed securitistion backed by fancy PhD math was the root cause of the global financial crisis. It was a failure of the free market, of human nature, not of government intervention and certainly not of fractional reserve banking.


----------



## shanegl (19 Sep 2010)

Credit is money.


----------



## Duke of Marmalade (19 Sep 2010)

shanegl said:


> Credit is money.


Actually no, money is a liability of the banking system, credit is an asset. But credit can create money and usually does so in the first place, my point is that securitisation allowed banks to extinguish the money they had created when they extended credit for long term asset purchase.


----------



## steviel (19 Sep 2010)

Duke of Marmalade said:


> Actually no, money is a liability of the banking system, credit is an asset. But credit can create money and usually does so in the first place, my point is that securitisation allowed banks to extinguish the money they had created when they extended credit for long term asset purchase.



but the banks could only sell securitisations for hard cash.  You imply money was being created by the banks.  It was not.  It is cash elsewhere in the system (in our pension funds etc) that was used to buy the securitisations and other assets that the banks sold.  That cash (our cash)would have been invested in something - government bonds maybe.  To suggest that securitisation creates money is misleading.  It just results in pensions and other pots of money lending to mortgage holders instead of the banks, with banks effectively ending up as middlemen.  It changed where those managing our savings invested the money rather than creating money from nowhere.


----------



## Duke of Marmalade (19 Sep 2010)

steviel said:


> You imply money was being created by the banks. It was not.


This is the unsatisfactory nature of these e-debates. I am claiming the total opposite. I am claiming securitisation created credit *without* creating money and therefore _Chris'_ argument that it was failure to control money supply which caused the crisis is unfounded.


----------



## Chris (20 Sep 2010)

Duke of Marmalade said:


> Bank lends 10 nuggets of gold to A. A buys house from B for 10 nuggets of gold. Bank securitises A's mortgage and sells it to B for 10 nuggets of gold. And so on and so on, infinite credit expansion on the same money supply.


In a non-fractional reserve gold standard an extra 10 nuggets of gold would have to be produced *before* the securitised mortgage could be purchased, resulting in a backed increase in the money supply to 20 nuggets. Only fractional reserve banking allows for new money to be created out of thin air that is then used to buy a securitised mortgage fueling a credit bubble. Credit expansion beyond the money supply is *impossible* in a non-fractional reserve gold standard.



Duke of Marmalade said:


> I agree with the thrust of this comment but asset price inflation had little to do with money supply expansion, rather it was to do with long term credit expansion, as described above.  In simplistic terms people do not buy houses with the coins in their pocket they buy then with long term credit.


Of course the monetary inflation led to the inflation of asset prices. You are ignoring the most fundamental laws of economics, i.e. supply/demand relationships. An increased supply of money increased the demand for products; some more than others, with real estate and now government bonds having seen the greatest demand increase. Yes, houses are generally bought on credit, but credit expansion beyond the supply of money (backed by something) is inflationary.



Duke of Marmalade said:


> The slicing and dicing of asset backed securitistion backed by fancy PhD math was the root cause of the global financial crisis. It was a failure of the free market, of human nature, not of government intervention and certainly not of fractional reserve banking.


Yes indeed, but the slicing and dicing was done mainly by Fannie and Freddie, which are US government entities. And the purchasing of the securities was only made possible by adding money into the system that could then be used to buy them.



Duke of Marmalade said:


> This is the unsatisfactory nature of these e-debates. I am claiming the total opposite. I am claiming securitisation created credit *without* creating money and therefore _Chris'_ argument that it was failure to control money supply which caused the crisis is unfounded.


The only way that credit can expand is through a reduction in the reserve requirements or an increase in the money supply, which are controlled by governments. Both of these took place, and in regards to mortgage backed securities the leverage was allowed to drop to 2% as they were AAA rated. Your argument would only hold true if individual banks were allowed to add to the monetary base or 0% reserve banking were allowed.
Not only do I believe it was a failure to control the money supply, I believe it is a failure of the monetary system as a whole. The monetary system is enforced by government legal tender laws, and it is also necessary for governments to guarantee the system as a simple bank run would see it collapse. This is in no way whatsoever a failure of a free market.


----------



## Duke of Marmalade (20 Sep 2010)

Chris said:


> In a non-fractional reserve gold standard an extra 10 nuggets of gold would have to be produced *before* the securitised mortgage could be purchased, resulting in a backed increase in the money supply to 20 nuggets.


I mustn't have explained the example correctly. In my economy there are only 10 nuggets of gold. This is placed in a bank by its owners, i.e. it is capital. The bank lends those 10 nuggets to A on a long term loan. A gives the 10 nuggets to B for a house. The bank sells B a piece of paper promising him 10 nuggets if and when A pays the bank back. The bank is back were it started. The extra credit it has created is between two non bank agents and has nothing to do with the bank. 

In fractional reserve banking what happens is that B does not buy that piece of paper but simply deposits it back with the bank. And the point is a deposit in a bank is money i.e. B thinks he can get his 10 nuggets back at any time. The bank is in a fundamentally different position from where it started. If it wants to lend some of those nuggets a second time it will be engaging in FRB. Nothing wrong with that of course provided it is controlled.

BTW I am not saying governments and monetary authorities were not in part to to blame but I am arguing that FRB was not the root cause of this crisis.


----------



## Chris (20 Sep 2010)

Duke of Marmalade said:


> The bank sells B a piece of paper promising him 10 nuggets if and when A pays the bank back.


This is exactly where your example falls apart based on a 100% reserve gold standard. This very action you describe here is the creation of a piece of paper backed by nothing other than an assumption and promise.
But I think I know where you are trying to go.
Person A has 10 nuggets and gives them to Bank Z to invest, i.e. loan out.
Bank Z makes a loan to Person B who buys something from Person C for 10 nuggets.
Person C gives the 10 nuggets to Bank Y to invest, i.e. loan out.
Bank Y makes a loan to Person C who buys something from Person D for 10 nuggets.
And so on it goes. 
Here there are two 10 nugget loans, i.e. an increase in credit. But the important thing is that both loans are fully backed by non-demand deposits. And within a non-fractional reserve gold standard, credit expansion would not be possible on demand and demand like deposits, so the result is not inflationary. Add to that the fact that a lot of nuggets would be held on deposit and you have a perfect check on credit expansion through the gold standard.



Duke of Marmalade said:


> In fractional reserve banking what happens is that B does not buy that piece of paper but simply deposits it back with the bank. And the point is a deposit in a bank is money i.e. B thinks he can get his 10 nuggets back at any time. The bank is in a fundamentally different position from where it started. If it wants to lend some of those nuggets a second time it will be engaging in FRB. Nothing wrong with that of course provided it is controlled.
> 
> BTW I am not saying governments and monetary authorities were not in part to to blame but I am arguing that FRB was not the root cause of this crisis.


And I'm not saying that commercial banks were not to blame. But this is where we have disagreed many times, in that FRB is at the heart of the problem, as governments have proven themselves to be completely and utterly incapable of controlling FRB. 
The other side is that FRB is inflationary which means that the value of people's money is actively and deliberately debased. So my opinion is that it is devious and deceitful to the highest degree.


----------



## Duke of Marmalade (20 Sep 2010)

Chris said:


> But the important thing is that both loans are fully backed by non-demand deposits. And within a non-fractional reserve gold standard, credit expansion would not be possible on demand and demand like deposits, so the result is not inflationary.


I think we are in agreement here. What off bank balance sheet securitisation facilitated was credit expansion without iincreasing deposits i.e. money supply. This process is perfectly feasible and indeed would be encouraged by a non-FRB standard.  It was this process and not the money supply which caused the asset bubble.


----------



## Chris (20 Sep 2010)

Duke of Marmalade said:


> I think we are in agreement here. What off bank balance sheet securitisation facilitated was credit expansion without iincreasing deposits i.e. money supply. This process is perfectly feasible and indeed would be encouraged by a non-FRB standard.  It was this process and not the money supply which caused the asset bubble.



I'd say it's actually both, the money supply and the FRB. As the securitsation was FRB on newly created money that filtered through into mainly inflating the price of real estate, equities and now government bonds.


----------



## darag (23 Sep 2010)

Interesting discussion.

I'm not convinced that securitization is such a fundamental reason for the current mess even if it seemed that way in the immediate aftermath of start of the credit crunch.  The state of Iceland, Ireland, Spain, Portugal and Greece, for example, can hardly be blamed on securitization.  These bubbles were all inflated by traditional banking activities conducted very imprudently.  I don't have numbers but my feeling would be that in the overall scheme of things the amount of credit created this way would dwarf that created through securitzation.

But I also struggle to accept that FRB is a completely flawed concept; it would be hard to understand why the world is so much better off than it was say 40 years ago if its practice were so damaging.  Not that 40 years is completely arbitrary.  Some random figures I found comparing 1970 to 2010: world GDP has increased over 20 fold since 1970 in USD PPP.  Funnily enough gold costs over 20 times as it did then.  As does oil.  However in terms of consumer purchasing power the dollar has only dropped to under a fifth of its 1970 value.  So yes fiat money looks like a poorish store of value compared to gold but it's use hasn't destroyed the world economy.


----------



## Chris (24 Sep 2010)

darag said:


> I'm not convinced that securitization is such a fundamental reason for the current mess even if it seemed that way in the immediate aftermath of start of the credit crunch. The state of Iceland, Ireland, Spain, Portugal and Greece, for example, can hardly be blamed on securitization. These bubbles were all inflated by traditional banking activities conducted very imprudently. I don't have numbers but my feeling would be that in the overall scheme of things the amount of credit created this way would dwarf that created through securitzation


Securitisation is what spread the US housing debt problem abroad, which caused the global melt down even in countries like Germany that had no housing bubbles. Iceland was affected as it bought too much into the US mortgage and international debt market. Ireland, Portugal and Spain ended up in a mess because their citizens could suddenly borrow huge amounts of money at interest rates way below what was paid prior to the euro. Greece created its own mess through government debt and fiddling the books (very entertaining article by Michael Lewis here: http://www.vanityfair.com/business/features/2010/10/greeks-bearing-bonds-201010)
On a global scale I believe securitisation played a huge role, but it was not the source of the problem in every country.



darag said:


> But I also struggle to accept that FRB is a completely flawed concept; it would be hard to understand why the world is so much better off than it was say 40 years ago if its practice were so damaging.  Not that 40 years is completely arbitrary.  Some random figures I found comparing 1970 to 2010: world GDP has increased over 20 fold since 1970 in USD PPP.  Funnily enough gold costs over 20 times as it did then.  As does oil.  However in terms of consumer purchasing power the dollar has only dropped to under a fifth of its 1970 value.  So yes fiat money looks like a poorish store of value compared to gold but it's use hasn't destroyed the world economy.



According to the Fed's own website the dollar has devalued almost 6 fold since 1970, which makes the 20 fold increase in GDP only a 3 fold increase, which is about 2.7% per annum. And that is far far less than what politicians like to pat themselves on the shoulder for.
Now take into account that fractional reserve central banking based on fiat currency has always been at the heart of financial crises and that there have been at least 4 major crises in the last 40 years. It is a constant centrally created boom bust cycle that causes hardship mainly to the taxpayer, especially the average person on the street.
If you compare say the last hundred years of fiat currency to the hundred year period of the non-fiat currency of the industrial revolution you will see a far greater increase in the overall wealth of people in real terms. And this in a much more stable and sustainable economic environment.
I would highly recommend you read Rothbard's "What has government done to our money" before you make up your mind on the fallacy of FRB: http://mises.org/money.asp
And also the more in-depth "The mystery of banking": http://mises.org/mysteryofbanking/mysteryofbanking.pdf


----------



## darag (24 Oct 2010)

Chris said:


> Securitisation is what spread the US housing debt problem abroad, which caused the global melt down even in countries like Germany that had no housing bubbles. Iceland was affected as it bought too much into the US mortgage and international debt market. Ireland, Portugal and Spain ended up in a mess because their citizens could suddenly borrow huge amounts of money at interest rates way below what was paid prior to the euro. Greece created its own mess through government debt and fiddling the books (very entertaining article by Michael Lewis here: http://www.vanityfair.com/business/features/2010/10/greeks-bearing-bonds-201010)
> On a global scale I believe securitisation played a huge role, but it was not the source of the problem in every country.


I'm not convinced.  First of all you will have to be more specific about what you mean by the word "securitization".  Since we're discussing banking, I assume you mean the securitization of debt?  But to make sense of your statements above, I have to assume you don't want to blame certain forms of debt securitization (various flavours of bonds) which have been traded for centuries?


> According to the Fed's own website the dollar has devalued almost 6 fold since 1970, which makes the 20 fold increase in GDP only a 3 fold increase, which is about 2.7% per annum. And that is far far less than what politicians like to pat themselves on the shoulder for.
> 
> Now take into account that fractional reserve central banking based on fiat currency has always been at the heart of financial crises and that there have been at least 4 major crises in the last 40 years. It is a constant centrally created boom bust cycle that causes hardship mainly to the taxpayer, especially the average person on the street.


2.7% growth over 40 years is not at all a shabby performance.  It has led to a dramatic improvement in the quality of life as measured by every major quality of life index.  The ups and downs are not very comfortable but perhaps that (volatility) is the price that has to be paid.


> If you compare say the last hundred years of fiat currency to the hundred year period of the non-fiat currency of the industrial revolution you will see a far greater increase in the overall wealth of people in real terms. And this in a much more stable and sustainable economic environment.


Despite its popular association with Dickensian images, I view the industrial revolution as one of the most uplifting and glorious developments in human history. I doubt there had been such a spurt in economic growth and improvement in the human condition since the discovery of agriculture.  (Before that perhaps since our evolutionary ancestors started exploiting fire.) The discovery of agriculture did not lead to everlasting economic growth but resulted in a massive spurt (or spurts as it's practice spread around the world).  Similarly it is unreasonable to expect the industrial revolution to deliver everlasting growth.

In addition, I don't see the grounds to credit the use of commodity based money for the industrial revolution since humankind had based their money on metal commodities for perhaps 10,000 years before the industrial revolution.


> I would highly recommend you read Rothbard's "What has government done to our money" before you make up your mind on the fallacy of FRB: http://mises.org/money.asp
> And also the more in-depth "The mystery of banking": http://mises.org/mysteryofbanking/mysteryofbanking.pdf


I will have a look if I get the chance.


----------



## Chris (26 Oct 2010)

darag said:


> I'm not convinced.  First of all you will have to be more specific about what you mean by the word "securitization".  Since we're discussing banking, I assume you mean the securitization of debt?  But to make sense of your statements above, I have to assume you don't want to blame certain forms of debt securitization (various flavours of bonds) which have been traded for centuries?


Yes, I meant the packaging of debt to be sold on as an "investment" grade product. Bonds are indeed a completely different thing.



darag said:


> 2.7% growth over 40 years is not at all a shabby performance.  It has led to a dramatic improvement in the quality of life as measured by every major quality of life index.  The ups and downs are not very comfortable but perhaps that (volatility) is the price that has to be paid.


Actually it is quite abismal when you compare it to the improvements enjoyed during the industrial revolution. The ups and downs were not as profound during the industrial revolution, and more importantly you did not have to fear the devaluation of your savings in your lifetime.
Could you provide more info on what idices you are referring to?



darag said:


> Despite its popular association with Dickensian images, I view the industrial revolution as one of the most uplifting and glorious developments in human history. I doubt there had been such a spurt in economic growth and improvement in the human condition since the discovery of agriculture.  (Before that perhaps since our evolutionary ancestors started exploiting fire.) The discovery of agriculture did not lead to everlasting economic growth but resulted in a massive spurt (or spurts as it's practice spread around the world).  Similarly it is unreasonable to expect the industrial revolution to deliver everlasting growth.
> 
> In addition, I don't see the grounds to credit the use of commodity based money for the industrial revolution since humankind had based their money on metal commodities for perhaps 10,000 years before the industrial revolution.


I agree with you on the importance of the industrial revolution on the wellbeing and wealth of people in general. It is now often stated that the industrial age was followed by the information age of the 20th century. The important thing to note is that these "revolutionary" times were not brought on by governments. In the case of the industrial revolution it was an even more hands off time where there was little to no government intervention.
I was not trying to credit the gold standard for the iundustrial revolution. All credit for this lies in the skills of inventors, entrepreneurs and industrialists. But the gold standard ensured that the economic growth was sustainable and put severe restraints on governments to artificially inflate. The major ups and downs during the industrial revolution were linked to wars and supsensions of specie payments on money, which were always government actions.


----------

