tag:blogger.com,1999:blog-17232051.post4138597628366688749..comments2024-03-18T22:32:52.802-04:00Comments on Noahpinion: The hard-money people throw Gene Fama under the busNoah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger62125tag:blogger.com,1999:blog-17232051.post-35286192762197314782013-10-29T16:29:23.796-04:002013-10-29T16:29:23.796-04:00This set of replies shows a massive misunderstandi...This set of replies shows a massive misunderstanding of what the financial system is and what the benefits are. You know those little things like credit cards, financing for cars, mortgages, putting money in a bank, cashing checks? That's the financial system. The financial system involves facilitating the flow of money. We can go without it, assuming you're willing to return to a barter economy. That would only take us back around 8,000 years. Probably not a good idea.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-42396640314796506382013-07-22T14:14:30.649-04:002013-07-22T14:14:30.649-04:00(sorry, posted to wrong page, meant to go here: ht...(sorry, posted to wrong page, meant to go here: http://noahpinionblog.blogspot.com/2013/07/when-have-econ-blogs-changed-your-mind.html but there's no delete)Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-57479188031511562312013-07-22T14:00:38.698-04:002013-07-22T14:00:38.698-04:00Most economics blog posts, at least on the more se...Most economics blog posts, at least on the more serious blogs, don't so much convince me of anything as introduce me to something I didn't know much about or give me more understanding about some phenomenon. I don't come away convinced so much as thinking, well that's an idea to keep in mind. Over time, a general image starts to materialize.<br /><br />tl;dr => if you take a sponge approach, you're less sensitive to individual data points.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-35666216191432257412013-07-22T13:54:09.630-04:002013-07-22T13:54:09.630-04:00If there is expected inflation then lending long t...If there is expected inflation then lending long term gives you real losses. So perhaps they realize inflation is coming and are avoiding long term loans.<br /><br />If most of the new money is staying inside the Federal Reserve Building, for whatever reason, doesn't this explain the lack of inflation?Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-65612512558652128172013-07-22T13:37:00.759-04:002013-07-22T13:37:00.759-04:00So while off it would not be inflationary but when...<i>So while off it would not be inflationary but when it came back into circulation it would be. Right?</i><br /><br />If so, the expected future inflation should cause the expected real IROR to go strongly negative, even if the nominal IROR is pegged at 0.25%. Right?<br /><br />Which should strengthen the incentive for banks to lend now and avoid those losses, right?<br /><br />Which should then cause the very same inflation the expectation of which caused the expected real IROR to go negative, right?<br /><br />That's called an "equilibrium".<br /><br />And THAT is what Keynesian theory says should be happening.<br /><br />Only, it is not.<br /><br />But the lack of inflation that is a problem for Keynesian theory is also equally troubling for AustroDerp and RBC type theories.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-50893705655938696872013-07-22T12:19:14.484-04:002013-07-22T12:19:14.484-04:00One thing I've never understood in this "...One thing I've never understood in this "debate" is how to tell "reaching for yield" from recovery. Isn't one of the points of monetary policy to create an environment in which banks are more comfortable lending, thus implying that they will take on more risk?Adamhttps://www.blogger.com/profile/00848821084269314215noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-7693131860417680562013-07-22T12:05:46.061-04:002013-07-22T12:05:46.061-04:00The question of why banks don't invest in long...The question of why banks don't invest in long-term projects and instead buy short term Treasuries or earn interest on excess reserves is an interesting and important question. But I don't think we need to answer that to see my point. Whatever the reason, it works the same for short term Treasuries and excess reserves vs long term loans.<br /><br />Let me try another way. If Bernanke did not pay interest on excess reserves and instead of putting $2 Trillion to earn 0.25% interest in excess reserves banks put this $2 Trillion in 3 month Treasuries that paid 0.25% do you think there would be any real difference for the banks or the economy? The same amount of money would be "off the street" but at the risk of flooding back at some point. So while off it would not be inflationary but when it came back into circulation it would be. Right? <br /><br />The Keynesian theory is that by having the central planners lower interest rates they can encourage more investment and make more jobs. The reality is that low interest rates make buying robots and replacing workers more attractive. Obamacare also encourages robots. Central planners don't usually see all the side effects of their actions.Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-37604120202253612902013-07-22T09:48:25.988-04:002013-07-22T09:48:25.988-04:00You think it is just a coincidence that after he s...<i>You think it is just a coincidence that after he started paying interest the quantity of excess reserves shot way up?</i><br /><br />Yes.<br /><br /><i>Excess reserves really competes with very short term government debt. Both are "risk free" and both are very liquid. As long as Bernanke is able to keep the interest rate on short term government debt is less than what he pays on excess reserves, it will continue to be rational for some banks to keep money as excess reserves. </i><br /><br />No, because you're only comparing reserves to Treasuries. Compare them to the long-term risky projects in which banks are supposed to invest.<br /><br />Banks are not supposed to make their profit on the spread between cash and Treasuries. We do not need a banking sector to do that. Banks are supposed to invest in long-term risky projects. And a 0.25% opportunity cost is not, by itself, enough to stop them from doing that!<br /><br />DON'T YOU SEE???Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-62316785215760298992013-07-22T08:38:18.648-04:002013-07-22T08:38:18.648-04:00Excess reserves really competes with very short te...Excess reserves really competes with very short term government debt. Both are "risk free" and both are very liquid. As long as Bernanke is able to keep the interest rate on short term government debt is less than what he pays on excess reserves, it will continue to be rational for some banks to keep money as excess reserves. <br /><br />http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield<br /><br />Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-23773214961440022442013-07-22T08:30:05.449-04:002013-07-22T08:30:05.449-04:00Banks never left huge amounts of money as excess r...Banks never left huge amounts of money as excess reserves before Bernanke started paying interest. You think it is just a coincidence that after he started paying interest the quantity of excess reserves shot way up?Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-26849025919399959632013-07-22T07:30:16.219-04:002013-07-22T07:30:16.219-04:00Banks should loan money out when the expected retu...Banks should loan money out when the expected return is greater than the opportunity cost plus a required spread S. With a 0 interest rate on reserves and a 0% rate on T-Bills, the opportunity cost is 0%. With a 0.25% IROR and a 0% rate on T-Bills, the opportunity cost is 0.25%. You're telling me that there are a huge ton of projects out there that have expected returns between S and S+0.25. To me that strikes me as absurd!Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-32376831686084099052013-07-22T07:19:38.073-04:002013-07-22T07:19:38.073-04:00This was a period when Bernanke also kept all kind...This was a period when Bernanke also kept all kinds of other interest rates at crazy low levels. Recently interest rates have been going up. We will see if Bernanke has to raise this 0.25% or if banks start loaning this money out to others.<br /><br />In any case, they really did leave their money at the Fed in huge amounts, which they never did when there was no interest on excess reserves.Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-7344319511938563462013-07-22T06:07:46.738-04:002013-07-22T06:07:46.738-04:00Yeah, a 0.25% interest rate on reserves is keeping...Yeah, a 0.25% interest rate on reserves is keeping banks from pumping all that money into new loans...gimme a break!!Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-66249882471258516842013-07-22T04:42:07.447-04:002013-07-22T04:42:07.447-04:00Bernanke came up with a new trick to let him make ...Bernanke came up with a new trick to let him make new money but not cause inflation, for awhile. He makes the money and then pays people not to take it out of his building. He does this by paying banks interest on "excess reserves". Like any good new trick, it will fool people for awhile. In the short term it decreases inflationary pressure but in the long term it increases the risk of hyperinflation.<br /><br />http://howfiatdies.blogspot.com/2012/10/faq-for-hyperinflation-skeptics.htmlVincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-26132902037083380522013-07-21T23:55:09.651-04:002013-07-21T23:55:09.651-04:00Two things, however: first, increasing inequality...Two things, however: first, increasing inequality (and climate change) are going to cause social breakdown, no matter whether you believe in them now, or not. And second, social breakdown will harm the rich as much as the poor, because social breakdown will be violent, dangerous, entirely uncertain. So they can't let the crisis go as far as it is going to go, without putting themselves in danger. Long before that prospect though, they will be outvoted.Lee A. Arnoldhttp://www.youtube.com/user/leearnoldnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-82176153591149716682013-07-21T20:52:30.448-04:002013-07-21T20:52:30.448-04:00Noah, I believe there is plenty of anecdotal evide...Noah, I believe there is plenty of anecdotal evidence that QE, especially rounds 2, 3 and 4EVER, which was deliberately executed by the FED to artificially boost housing prices, has sent the necessary price signals to spark another bubble, particularly in certain markets, such as California (Median Home Prices in Los Angeles are up 30% yoy in July 2013!). <br /><br />People have different definitions of a bubble (Asset Manager Jeremy Grantham has studied bubbles extensively and defines them as a 2-sigma or 2 standard deviation from historical price/cash flow ratios), but the one I think is intuitively most compelling is a market in which market participants are buying assets simply because they believe that prices are going to go up, which keeps driving prices up in a reinforcing spiral, as new market participants hear stories of huge windfalls reaped by others.<br /><br />Evidence of this is in housing what I would call "beta flipping" where people are buying homes in the open (non-distressed) market and are reselling them for a profit in short time period without increasing the value of the homes through renovations. This is different than what I view as "alpha flipping," where professionals or semi-pros acquire distressed properties at foreclosure auctions, fix them up, and re-sell them for retail prices. <br /><br />Beta Flipping was a force that drove the last bubble, along with NINJA loans and bad underwriting that enabled both beta flippers and end buyers to purchase over-inflated assets. Today it has been caused by the massive boost in marginal demand due to the sharp fall in 10 Year interest rates that occurred in late 2011 after QE 3. You can read many examples of this kind of flipping behavior on housing blogs, such as Dr.HousingBubble and others. The other side of this equation in today's market is that there is almost no supply, which ironically is a product of many people are still in negative equity or near-negative equity positions in their homes (35+% of the non-distressed housing inventory, which is HUGE).<br /><br />However, this time around today's beta flippers will likely be in trouble now that interest rates have gone up. The ability for end buyers to stretch will be limited, unless the banks want to relax underwriting standards again. My hope is they won't, especially because there are still 4.5 million properties in the distressed pipeline, and the banks themselves probably realize it is time for them to start liquidating more as they have got the most paper gains they are going to get from the FED's largesse.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-76059437469396826472013-07-21T20:35:21.858-04:002013-07-21T20:35:21.858-04:00I'd go a bit further and conclude that tighten...I'd go a bit further and conclude that tightening monetary policy is unlikely to deflate asset bubbles. Contractionary policy would eventually lower asset prices, no doubt, but it would reduce all other prices as well--I see no reason why the relative price would change. <br /><br />The same "reach for yield" argument applies to a deflationary spiral at least as well: ie, "With all these assets declining in value, investing in subprime CDOs is guaranteed to preserve your hard-earned wealth better than bonds..."Matthew Martinhttps://www.blogger.com/profile/10254244795963585737noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-80636201919187222022013-07-21T14:24:29.557-04:002013-07-21T14:24:29.557-04:00Great article. I have two minor notes though.
1)...Great article. I have two minor notes though. <br /><br />1) Soros basically supports the unorthodox actions of Japan. I was actually there and listening in as he gave that interview and have heard him speak on the matter a few other times. Not surprisingly however all of the media outlets latched on to his aside or bit of qualification that "of course it is not without risk". People hear what they want to hear, and most of the media wants to focus on the fear of possible fall outs from deficits, QE etc. rather than the non-hypothetical problem of the long term unemployed (the cynic in me knows this media fixation corresponds to the interests of the wealthy and excuses to cut the social safety net). Soros is most definitely not arguing that central banks and governments in the developed world should be doing less, like the hard money types are. <br /><br />2) If housing prices had not been measured as renter's equivalent in the price indexes, that bubble would have been quite apparent even through the broader inflation measures (and monetary policy and credit would have tightened sooner). Similarly, the deflation during the outset of the recession would have been much greater as well. There is nothing even remotely like that going on with housing prices now. I don't think we need to replace the NAIRU type views of monetary policy, but it is possible we need to revise our measures of inflation.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-72609215633632186742013-07-21T13:13:26.230-04:002013-07-21T13:13:26.230-04:00I think monetary policy created the housing bubble...I think monetary policy created the housing bubble because of the GSEs. We wanted to treat housing investments as completely safe, but we ignored the financial aspect of the market. So while monetary easing did cause the housing bubble, it only did so because of the guaranteed mortgages. Safe investments that forgot that the price of the home matters, not just the mortgage rate.<br />Davehttp://www.rationalconversation.comnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-1024114084198865772013-07-21T12:44:54.821-04:002013-07-21T12:44:54.821-04:00whaaaaaaaaatwhaaaaaaaaatNoah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-10604382229874905402013-07-21T12:39:39.705-04:002013-07-21T12:39:39.705-04:00"But then again, I don't see a lot of ane..."But then again, I don't see a lot of anecdotal indication that QE is creating Housing Bubble, The Sequel"<br /><br />How about "The Dead House Bounce"? , Act 2. or the new wave: "The locked-in to labor deficit location, under-funded bargain for the tax-roll , tied to underwater mortgage collapse"?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-38012682433817431082013-07-21T10:08:36.777-04:002013-07-21T10:08:36.777-04:00Lee Arnold writes "For people actually follow...Lee Arnold writes "For people actually following the real world, the next self-contradictions for the austerians to bridge will be things like capital-biased technological change, increasing inequality, the need for the welfare state, regional climate change dislocations, etc."<br /> <br />My impression is that the austerians come in two varieties, those who think this is a list of non-issues and those who see all of these not as crises but as Good Things.<br /> <br />The economic situation here is an epiphenomenon of a vicious class war, which the middle class is losing.<br /> <br />-dljDavidLJhttps://www.blogger.com/profile/04477517602668340521noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-25749544100828742482013-07-21T02:00:57.524-04:002013-07-21T02:00:57.524-04:00Am I out of line with the above paraphrase?
Well,...<i>Am I out of line with the above paraphrase?</i><br /><br />Well, I agree with this part:<br /><br /><i>The Austrians and Post-Keynesians might actually be right, that monetary policy is causing financial instability and that this is a serious problem. I really don't have a strong feeling one way or the other, but the models I use are too crude to even handle this sort of thing</i><br /><br />But I think this is too strong:<br /><br /><i>even though I admit it's a problem in the real world</i><br /><br />Better to say that I'm not sure if it's a problem. Not sure if monetary policy is a big driver of financial inefficiency/irrationality.<br /><br /><i> I'm just going to mock the Austrians and Post-Keynesians on the point</i><br /><br />No, that's not right. If I mock Austrians and Post-Keynesians, it will be for other reasons, not this. ;-)Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-30121773264541460342013-07-21T01:12:24.533-04:002013-07-21T01:12:24.533-04:00I support the QE b/c the incapability to enact fis...I support the QE b/c the incapability to enact fiscal stimulus means it's the last bullet in the gun for unemployment, which remains job one (pun not intended).<br /><br />However, the usual suspects of flipping houses are at it again:<br /><br />http://www.bloomberg.com/news/2013-07-19/gorilla-flipping-homes-as-rebound-revives-rapid-trades.html<br /><br />We need to eliminate the mortgage interest tax deduction as the most unstable market has been the housing market.Anonymoushttps://www.blogger.com/profile/07944928931697915829noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-20124160863104291102013-07-21T00:41:07.558-04:002013-07-21T00:41:07.558-04:00If I didn't know better, Noah, it sounds like ...If I didn't know better, Noah, it sounds like you are saying: "The Austrians and Post-Keynesians might actually be right, that monetary policy is causing financial instability and that this is a serious problem. I really don't have a strong feeling one way or the other, but the models I use are too crude to even handle this sort of thing, even though I admit it's a problem in the real world. So, in lieu of me taking a firm stand on the issue, I'm just going to mock the Austrians and Post-Keynesians on the point."<br /><br />Am I out of line with the above paraphrase?Bob Murphyhttps://www.blogger.com/profile/04001108408649311528noreply@blogger.com