26 September 2008

Video: Keynesian Economics & the Great Bailout of 2008

Again, I try the video experiment.

As I videoed this, the negotiations for some kind of intervention seemed to be stalled or even breaking down. I completely support the notion of debating and challenging the Paulson plan. I cringe at the thought of the free market advocates just derailing any kind of plan, as if there is not some financial system that we need to protect. The neoconservatives convinced that this problem can be left to markets are the same ones who saw nothing wrong with the invasion and occupation of Iraq.

12 comments:

texasholly said...

Hi,
I watched the video and wrote a comment, then re-wrote it and re-wrote it and re-wrote it. I seriously would be better off if I could just draw it in markers...

I don't think I have anything to add except I am skeptical of those trying to solve this. Many of those are the same people that wrote laws rewarding and promoting crap loans and accepted HUGE political donations from these institutions.
hh

exskindiver said...

First, if you want to be taken seriously as an economist, you should wear a bow tie. Second, ... secondly .. I can't remember right now but I'm sure it was insightful.

Ron Davison said...

Holly,
I don't blame you. I guess I just think that we don't have a choice at this point - we have the players we have, even if Paulson himself earned nearly a billion as the CEO of one of these financial institutions.

Chesca,
That makes a lot of sense. From now on, every time I write a post, I will don a bow tie. I am sure that from now on policy makers from around the world will begin reading R World. Thank you for that.

Lifehiker said...

Nice job, Ron.

I liked your use of the old analogy about baseball rules; it really applies here. If we don't do the bail-out, there's a good chance the economy (the game, itself) could be over for awhile.

Most people don't have a clue about how important liquidity is, so the bail-out is a mystery to them. It's a hard sell, since they are truly innocent victims (like you and me, and most others).

I've not had the guts to check my IRA for about four days, now. I was only down 7% (net) from 1/1/08 a week ago, but it could be much worse now. I just don't need the stress, so I'll check it again a few days after the bail-out is concluded.

I wish we could selectively go after those who created,abetted, and benefitted from all the shenanigans with sub-primes and the bogus financial instruments...something like a Stalinist purge (without the killing) sounds appropriate. But it's wishful thinking, I know.

Keep up the video - you're a believable character!

David said...

I was with you entirely right up to the Iraq War analogy. We're not the same people.

Ron Davison said...

LH,
Thanks for the encouragement. And we can hope now that folks get the importance of liquidity. Better to have a a market "correction" than a depression. We hope.

Davos,
Not the same. Which is a good thing because then you'd be with me everywhere I went, which could be awkward.

Ben said...

Great video, Ron.

I think David's point was, and I agree, that it probably doesn't help to lump the war-supporters and free-market believers together. Very different issues.

Ron Davison said...

Ben,
I guess for the me the connection is that we're talking about a policy decision (invade Iraq or leave the financial system on its own) that will take years to properly appreciate and will be, by the time it is obvious, too late to change much. In that sense I think that the two issues are very much alike. And probably about as many people are against the bailout (recovery act?) as were for the invasion. There are parallels.

David Lee said...

Ron,

I disagree with your analogy of the baseball game. You relate games without rules to neocons and games with rules to the keynesians. For one, who is to say the rules for this game are just*** rules? Or perhaps there are too few or too many rules for the referee to make any sense out of them.

I also do not think it is right to disregard fiscal conservatives in favor of neoconservatives for the sake of the argument. Not all conservatives strongly opposed to this bill are neoconservatives.

I am a fiscal conservative opposed to the occupation and invasion of Iraq (and hundreds of other countries we militarily occupy) but I also believe in the free market.

If I recall, it was the Keynesian regulations of the Federal Reserve that played a very big part in the initial credit problem in the first place. For a long while they have been devaluing the US Dollar by magically increasing the money supply, borrowing from China (China, by the way is a non-Keynesian economy with a surplus of money). Then within the last year or so the Fed has been slashing interest rates left and right encouraging bad credit. Eventually the market caught up with the effects of these "rules" and now we see the failures of a managed economy.

So, what did the bailout do? Spend one of the largest sums of money ever passed through congress with money we do not have to prop up a bad credit system with more credit. More of the same only will make the problem worse.

To make matters worse, the Senate version of the bill (HR 1424) added financially related pork. Do recall that the Constitution specifically prohibits the Senate from introducing anything relating to raising revenue (like that tax incentive amendment).

A better alternative to the bailout would have been to have the federal government stay out of this issue and let the free market take care of liquidation. What I mean by that is to have people with actual money on hand buy up this bad debt from these lending companies. I believe this is how the Great Depression was resolved.

Anyway, it is past my bedtime. But arguing over the internet is great, isn't it?

*** just as in justice, you know, like Plato and his cronies.

Ron Davison said...

Arggh! David,
This is a perfect example of how Keynesian economics has been maligned. You're likely smarter than me but because politicians without will have put their bad habits under the umbrella of Keynesian economics, people reach a conclusion like yours. Keynesian economics does encourage deficit spending and loose monetary policy - during a downturn. It actually encourages higher taxes or less spending or tighter monetary policy during booms. You are right that this problem has been brought on - at least in part - by government policies. And you are right to question rules. What I think is absurd is to leap to the conclusion that today's legislators or Greenspan understand policy principles better than Keynes. And it is absurd to think that we can have a financial market without rules or regulations anymore than we can have traffic without rules or regulations.
A free market is not a market free of rules.

David said...
This comment has been removed by the author.
David Lee said...

I don't think I expressed my concern of your baseball analogy very well.

Baseball cannot be applied as an analogy to this political "game" because the rules in baseball are implied whereas government constantly creates, interprets, and implements these rules dynamically. For instance, you would not see a baseball game with four plates, a pitcher, outfielders, etc. one year but the next year a game with twelve plates, two pitchers, no outfielders, but an additional wrestler wandering the field. The latter (with arguably the same amount of organization) is akin to the effects of the government policies.

You can hardly call the latter game baseball, but the rules do exist. There is a right way to play both versions of the game but one will be much more satisfying to both the players and watchers. (the former baseball for this analogy--I'm not saying the latter version of the game wouldn't be entertaining).

Likewise, you can have a government that plays by the rules it makes, but that does not mean the rules are right. What we do have is a Constitution. The high law that all citizens uphold as a document will not change unless dire circumstances allow for those amendments.

Economically, the Constitution has key elements that today are largely ignored. For one, only gold and silver are legal currency. For two, Congress is the only body allowed to regulate the value of the dollar, but today we see a non-elected Federal Reserve chairman printing money and regulating the value thereof without the expressed consent of the elected representatives.

The list goes on... but clearly these rules have been broken, mutated, and disregarded. We are looking at the latter baseball game and very few enthusiasts. Which is the answer as to why you are seeing so much opposition to the bailout bill.

What needs to be said for fiscal conservatives, or the fiscally responsible platform is this: We need to have a baseball game where the referee ensures the players are following the rules AND that there is a rule preventing rules from being tampered with unless a large enough consent is agreed upon to make the smallest change.

Simply put, we need to follow the Constitution.

I don't know if I made this more confusing than it should have been. Probably.