Bubbles and Inequality
There’s something that’s pretty . . . suggestive about the apparent historical link between huge runups in the share of income controlled by the very wealthiest people and the emergence of asset price bubbles and the subsequent crises:
But what would explain the link? Steve Randy Waldman speculates that it’s all about the difference between loose monetary policy creating consumer price inflation and loose monetary creating asset price inflation:
Whether an economy generates asset price inflation or consumer price inflation depends on the details of to whom cash flows. In particular, cash flows to the relatively wealthy lead to asset price inflation, while cash-flows to the relatively poor lead to consumer price inflation.
This is because richer people have a lower marginal propensity to consume. As Kevin Drum puts it:
So: as income inequality goes up, more money flows to the well-off, who use it to buy financial assets. Conversely, less money flows to the poor and middle class, who respond by increasing their debt level. Both of these mechanisms produce a higher demand for financial assets and therefore promote asset inflation.
This seems reasonably plausible to me.
55 Responses to “Bubbles and Inequality”
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October 28th, 2009 at 10:06 am
I wonder if a related point is that folks in the top 1% will have a much much higher risk tolerance than “regular” folks. Once you have enough money in the bank to ensure that you and your children will always lead a comfortable lifestyle, you may as well take a shot at speculative and risky investments with your excess income that might let you move from merely rich to super rich. So when too much income starts flowing to this group, it naturally ends up being gambled.
October 28th, 2009 at 10:13 am
Also, differing levels of financial sophistication, such as in 1923 in Germany, where the smart money saw inflation coming, borrowed heavily, and paid back with wheelbarrows full of paper, more or less hijacking the life savings of savers.
Of course, the concept of “smart money” doesn’t explain much about mortgage lending in 2005-2006, a fascinatingly all-around dumb phenomenon.
October 28th, 2009 at 10:18 am
Reagan won his war on the middle class and FDR’s communism. Victory!
October 28th, 2009 at 10:19 am
To state the obvious (so nobody misses it), income concentration at the top preceded (resulted in) the financial and economic crisis that followed. Or stated another way, the absence of income concentration at the top results in (relative) financial stability and economic prosperity.
October 28th, 2009 at 10:20 am
Isn’t a much simpler explanation that rich people derive a very high proportion of their income from returns on investments, and that (by definition) investments perform very well during asset bubbles? Seems to me that that’s the obvious direction the causation runs.
What am I missing?
October 28th, 2009 at 10:35 am
Although I agree with the philosophy — too much income going to too few of people increases demand for investment but decreases the demand for the products of investment, thus leading to a bubble and a crash — I think an honest look at the data does not indicate the cause-effect relationship.
It could very well be that income of the top 1% goes up during the bubble because their income is predominantly capital gains.
October 28th, 2009 at 10:35 am
Of course, the concept of “smart money” doesn’t explain much about mortgage lending in 2005-2006, a fascinatingly all-around dumb phenomenon.
Actually, it *does* explain a bit about mortgage lending in 2005-2006. The people who were generating abusive loans on commission and passing them down the chain thought the smart money saw a can’t-miss opportunity. They thought they were riding the wave and sticking someone else with the bill. Almost everyone on Wall Street thought the smart money was in real estate and mortgage-backed bonds.
The phenomenon of the asset price bubble is very closely linked to the concept of “smart money.” It’s what happens when the smart money is too clever by half.
October 28th, 2009 at 10:36 am
How does a higher debt level for the poor and middle class create demand for financial assets? If anything I would think it increases the supply of financial assets (credit card receivables, mortgages, etc.).
October 28th, 2009 at 10:38 am
So is Yglesias finally going to comprehend and concede that central bank monetary dilution is ALWAYS a process of theft and fraud? Those getting the new money are invariably stealing purchasing power from those holding the existing money. That’s the essence of your Keynesian stimulus: THEFT AND FRAUD followed by artificially stimulated investment and capital dislocations followed by economic collapse.
And smart rich people getting richer by gaming what in essence is a government program.
October 28th, 2009 at 10:39 am
How do we know there’s causality here? Could just as easily be that when a bubble bursts the wealthy who have most of their money in financial assets lose the most and therefore inequality is reduced even if everyone is worse off in absolute terms.
October 28th, 2009 at 10:39 am
…continuing above post, I’m now confused.
Does capital gains income really go up during a bubble? We’re looking at income, not paper wealth. Presumably during the bubble people are buying more stocks, not selling more. Dividends and such should be constant — unless the economy is actually improving as well, which defeats the thesis.
So maybe a careful analysis does reveal cause-effect.
October 28th, 2009 at 10:45 am
Presumably during the bubble people are buying more stocks, not selling more.
That’s not possible, when you buy a share of stock, by definition, someone else sold that share to you.
October 28th, 2009 at 10:47 am
I think this is very plausible and also helps bridge the disconnect between the inflation-deflation argument. Those that warn about inflation and excessively loose monetary policy are not specifically warning about CPI, although it could get there eventually. Those that say we are in deflation and inflation is impossible because of the output gap, unemployment, etc, are not usually looking at asset price inflation.
Right now there is huge flood, represented by the enormously expanded monetary base, upstream. Whether and how far it gets downstream will determine how much damage it does, or if it just waters the garden.
Pumping liquidity into the banks does not necessarily lead to inflation if the banks just hoard the money or enrich a smallish elite. It leads to something distorted though, and in fact, it is this scenario that most properly carries with it the moral aspect to the inflation complaint that might otherwise seem peculiar.
October 28th, 2009 at 10:49 am
@JMO: Not necessarily. I would guess — but don’t have any studies in front of my proving this — that plenty of companies take advantage of rising equity prices to issue stock during bubbles.
October 28th, 2009 at 10:57 am
Isn’t a much simpler explanation that rich people derive a very high proportion of their income from returns on investments, and that (by definition) investments perform very well during asset bubbles? Seems to me that that’s the obvious direction the causation runs.
What am I missing?
I’m just spit-balling here, but wouldn’t it be a self-reinforcing mechanism? A vicious circle?
If public policies are designed to concentrate money at the top, combined with easy money, you’ll get an asset bubble followed by an economic crisis.
Were interest rates low in the ’20s? In this past decade interest rates were low.
There’s the international dimsension. Mark Thoma linked to an economist yesterday who wrote:
Interest rates are low so the rich and their money managers need to speculate on riskier investments.
October 28th, 2009 at 10:59 am
That’s not possible, when you buy a share of stock, by definition, someone else sold that share to you.
You’d be surprised at what the definitions became over the last five years.
October 28th, 2009 at 11:02 am
Bob Roddis,
You are an idiot.
The Waldman thesis is an extremely useful asset allocation model.
October 28th, 2009 at 11:04 am
So the best way to stabilize the economy is to bring back strong unions, low income inequality, and higher taxes on the rich that fund more-generous social safety nets? Sounds good to me.
It’s also worth pointing out that in the long term, there is no tradeoff between growth and equality/stability. Advocates for the rich often claim that they have to keep their huge piles of money so that they can invest them in the most productive ways etc., but it’s not actually true. Long-term GDP growth isn’t hampered at all by a reduction in income inequality. That “tradeoff” only appears if you mistake bubbles for growth.
October 28th, 2009 at 11:05 am
Bob Roddis,
Here is one reason why you are an idiot. From Naked Capitalism:
We are going to see by some simple math that the only people saving money right now are the top 1% of earners.
Andrew Kaplan, a hedge fund manager, wrote:
“We find an average income of $1.36 million for 2007. These folks had an average federal tax burden of just under 33%, so their after tax income averaged $916 thousand. If you assume this group had a savings rate of 33%, you get total savings of $452 billion (remember, $171.5 bn of this comes from the top 0.01%, we’re assuming a savings rate of around 25% of after tax income for the “poorer” 99% of the top 1%) This is more than 100% of the personal savings of the entire population, according to the BEA data.”
October 28th, 2009 at 11:07 am
Hey i just wanted to add that maybe the graph should show the stock market bubble prior to the 1986 crash… it wasnt a crisis in the real economy per se, but it was a shocking example.
October 28th, 2009 at 11:08 am
chris,
So, if we paid everyone exactly the same and had zero inequality that wouldn’t impact growth? That doesn’t seem very logical.
October 28th, 2009 at 11:09 am
By “smart money” Steve Sailer of course means “Jews”
October 28th, 2009 at 11:13 am
So, if we paid everyone exactly the same and had zero inequality that wouldn’t impact growth? That doesn’t seem very logical.
There is probably some ideal level of income inequality. If everyone makes the same, then there is no motivation to work. However, if only one person earned everything, you would have the same problem.
Wallstreet’s ideal would be for everyone to make $X, then pay out for for mortgage, health insurance, and credit card interest payments, and other economic rents leaving them with nothing all of which provides wallstreet with money for doing zero labor.
October 28th, 2009 at 11:14 am
A phrase Matt might find handy: “Correlation is not Causation”. It makes perfect sense that the wealthiest benefit most from a bubble; they have the assets to invest, and tend to be insiders, so they can get out before things blow up.
However, what you decry here is a side effect, not a cause.
October 28th, 2009 at 11:17 am
chris,
So, if we paid everyone exactly the same and had zero inequality that wouldn’t impact growth? That doesn’t seem very logical.
That’s a stupid, weak trollish argument. No one’s arguing everyone should be paid exactly the same. You need to go back and do your homework.
The boot-licking synchophants like you and Rush Limbaugh like to argue that the rich are rich because they are smart and hard-working, etc. It’s true in some cases, but why all the asset bubbles and crashes? Because there’s a ton of fraud and deceit and dodgy behavior the rich and their money managers are dodgy. We saw that play out last year.
October 28th, 2009 at 11:18 am
Mike S:
Your post completely ignores the truism that creating fiat money out of thin air transfers wealth. It is stealing and it is fraudulent. However, who gets what and when depends on the various facts and circumstances of each specific event and concerns a separate line of inquiry.
You idiot.
October 28th, 2009 at 11:21 am
Your post completely ignores the truism that creating fiat money out of thin air transfers wealth. It is stealing and it is fraudulent.
Should we force Barrick Gold to shut down its mines? Every gram of gold that comes out of the groud dilutes the value of all the existing gold.
October 28th, 2009 at 11:40 am
Should we force Barrick Gold to shut down its mines? Every gram of gold that comes out of the groud dilutes the value of all the existing gold.
What the gold bugs refuse to admit (and my father was one of them) is that all gold does is change who has the power to manipulate the monetary supply. People lost a lot of money in the 1980s because they did not understand this.
October 28th, 2009 at 11:41 am
And misguided tax cuts to the wealthy worsen the problem by diverting resources from vital needs such as infrastructure, health care, clean energy, and the environment to the mindless inflation of asset bubbles.
October 28th, 2009 at 11:58 am
Bob Roddis — Your post completely ignores the truism that creating fiat money out of thin air transfers wealth. It is stealing and it is fraudulent.
This is not a truism. It is not a self-evident truth. It is not an accepted truth among mainstream economists. It is a fringe argument that you personally find convincing, no more, no less.
Fiat money is not created out of thin air. It is generated by governments as a means for conducting business. When paper money is printed, the people who possess other assets have the ability to possess the most paper money. They are free, just like everyone else was, to acquire currency. Nothing is stolen from them.
If they choose to hoard gold or other assets instead of converting their wealth to currency, it is possible that their wealth with diminish over time, just like anyone else who makes a poor investment decision. Them’s the breaks.
October 28th, 2009 at 12:00 pm
Minderbender – a higher debt load necessitates an increase in demand, because people are taking on more debt – their demand for finance is increasing. Supply either expands to meet it, or the price rises.
Chris – quite right. What people like Bob Roddis forget is that poor(er) people are consumers – when money gets redistributed to them (oh noes, theft!), they go out and spend it. This increases consumption, and thus the revenues and profits of businesses, which in turn get passed on to those rich people who get their income from investments.
Essentially, what we’re fighting over is the age old debate between high profit margin/low volume and low profit margin/high volume – and the ironic thing is that the low profit margin system actually works out great for worker/consumers AND businesses and investors. U.S capitalism didn’t collapse in the 1940s-1970s when the system was much more economically redistributive than it is today, there were still plenty of rich people doing quite well; they weren’t doing as relatively well as they were doing in the 20s/00s, but they had much more stability of wealth than they do today.
Incidentally, a great way to redistribute some income right now would be a jobs program…
October 28th, 2009 at 12:04 pm
Walker – hell, a lot of people in the 1880s lost money because they didn’t get this. Seriously, gold bugs need to take a second look at economic history – the gold standard did not provide economic stability. What it gave us was constant deflationary pressures (which are BAD for a developing economy like the U.S), mixed with sudden massive spikes in inflation whenever a gold rush dumped a huge amount of gold into the economy.
A true asset-backed currency, which can move in concert with the pace of economic growth, and which moreover holds out the possibility of human control over the business cycle, is an enormous advance for civilization.
October 28th, 2009 at 12:08 pm
Also @JMO, during the bubble, more people are *trying* to buy than are originally willing to sell. It’s the disconnect between demand and supply that causes the price to increase.
October 28th, 2009 at 12:18 pm
If you entire economy is based on consumer spending, and the bottom 85% of the population owns just 15% of a nation’s wealth, AND the bottom 85% also owns 85% of the nation’s private debt, your economy is unsustainable. There is no way around it.
You can argue, ineffectively in my opinion, that the rich don’t hoard their money. Even if they didn’t, it wouldn’t matter. The rich cannot drive a consumer based economy. That is not their function.
Also, every recession since 1973 coincided with an oil price spike, including when the tech bubble popped in 2001; and last summer, when the price of oil hit $147/barrel shortly before Wall Street blew up.
Economists are in agreement about one thing, it seems, if the price of oil rises above a certain threshold, usually pegged between $80 and $85/barrel, then the US economy heads into a recession. If we are already in a deep recession when this happens, then we are in big trouble.
And if oil is continually a factor and often the main cause of recessions, and a sustained oil shock could easily be the Black Swan event the sends the world economy into a second Great Depression, wouldn’t it be logical for economists to focus on oil independence, instead of monetary policy and interests rates? An oil free economy could quite possibly be an economy that is recession free. Wouldn’t that be a chief goal of an economist? A recession free economy?
One more thing, if the top 15% of the population owns 85% of the wealth and almost none of its debt, isn’t that the very definition of 3rd world country?
October 28th, 2009 at 12:21 pm
If everyone makes the same, then there is no motivation to work.
Bzzt, wrong, you’re thinking like a freshwater economist. There would be no *money* motivation to work (assuming that “everyone” in your example includes part-timers and the completely unemployed, which nobody actually suggested here, but you seem to have assumed it anyway). There would still be the status/social capital motivation, the personal achievement motivation, the fact that some people actually like their jobs, and many others. Real economies are built of human beings, not idealized mathematical abstractions, and the motives of human beings are more complex than a dollar figure.
Also, the possible desirability of income inequality between working and not working (or between working more and working less) doesn’t justify wage/salary inequality between two different working people, let alone decide what is a more desirable degree of such inequality. You need a more complex argument for that.
Note that the actual best-paid jobs are not the ones that nobody would do if they were paid slightly less. They are the jobs that lots of people are trying to break down the doors and get into. Most income inequality is not being deployed to ward off a shortage of garbage collectors.
No civilization in the history of humankind has ever actually been threatened by mass idleness. (Idleness and dissipation among the inherited wealthy are common, but usually there are too few to make a systematic threat.) Speculating about it with no supporting evidence based on a strawman position doesn’t make you look good.
October 28th, 2009 at 12:25 pm
Sure. This was not known to MY?
The problem here is the presumption that there has to be significant inflation of one type or the other. While there is a systematic imperative for some inflation that doesn’t mean it has to be strong.
Who wins, workers or asset holders is determined by politics. It is about power. Citizens now have no power. Capital is in total control. However we are past the point where the power to inflate assets works. Thus those in power will be exposed as powerless and it will be the biggest crisis in American politics since the Civil War.
One additional note. The inflation of residential real estate was designed to placate the middle class. To give them their share of the asset inflation. It was also designed to put them into debt so when the deflation came they would be helpless. Most cannot imagine that such dark plans could possibly have animated our elites for the last 20 years. Let me put it this way. The few and most powerful did. The rest pretended not to.
October 28th, 2009 at 12:40 pm
@31: “a higher debt load necessitates an increase in demand, because people are taking on more debt – their demand for finance is increasing. Supply either expands to meet it, or the price rises”
You have to define “finance” if you want to say how demand for it is affected. Imagine this transaction: a consumer buys something on credit. The retailer now has a receivable from that consumer. The retailer bundles it with a bunch of other receivables and sells the resulting financial asset (perhaps a new security, so the receivable has been “securitized”) to a rich person who is seeking return on his money.
The retailer is a middle man here – effectively the rich investor is lending money to the consumer. In an asset bubble, financial assets like the receivable are overpriced. But what is the effect if more people finance their purchases (perhaps because their incomes are not keeping up with their expenditures)? In your view, this increases the demand for “finance.” But in fact it generates more receivables, which are the financial asset for which there is allegedly excessive demand. The increase in consumer borrowing generates increased supply of financial assets.
Of course you could talk about the supply of loanable funds and the demand for them. But the point is, a financial asset bubble may induce more consumer borrowing, but it’s hard to imagine the causality running the other way.
October 28th, 2009 at 12:43 pm
@30 Fiat money is not created out of thin air. It is generated by governments as a means for conducting business. When paper money is printed, the people who possess other assets have the ability to possess the most paper money. They are free, just like everyone else was, to acquire currency. Nothing is stolen from them.
How about when the Fed or the Treasury pay full nominal value in newly created money for an asset that no one else wants to buy? Or how about when the Fed agrees to lend newly created money to a bank below a rate that any private lender would be willing to lend? The vast majority of people do need to generate real value or possess something of real value in order to obtain currency. Some do not, but they can still use this currency to obtain things of real value, which you are right is a deal the folks with things of real value are free to accept or reject.
But that is the essence of the “theft.” Most everyone needs to exchange valuable things for currency in order to acquire other valuable things. Some do not and obtain currency cheaply or from the Federal Reserve.
The other aspect of the “theft” is the steady reduction in value of savings held in the form of money or fixed interest savings or pensions or salaries.
October 28th, 2009 at 1:00 pm
@32 A true asset-backed currency, which can move in concert with the pace of economic growth, and which moreover holds out the possibility of human control over the business cycle, is an enormous advance for civilization.
I agree with you on this, but you are not saying this is what we have are you? The only “asset” backing the dollar is the taxing authority of the United States government. Recent history though and the enormous unfunded liabilities of the government should give anyone reason to consider whether this “asset” is up to the task.
October 28th, 2009 at 1:23 pm
Roddis is probably correct that creating new fiat money represents a form of wealth transfer. The bizarre question is why he thinks it represents a form of theft. If the US government changes the tax law on property, it changes the value of property. For those long or short property holdings, this represents a wealth transfer (direction depending on the law change). It certainly doesn’t represent theft.
What Roddis doesn’t get is that if you want to participate in the wealthiest society in the history of human civilization, you have to accept certain terms. Fiat money is one of them. Only an idiot would claim that well known and agreed upon in advance wealth transfers represent theft.
October 28th, 2009 at 1:25 pm
39: The taxing authority of the United States government is the most valuable asset that has ever existed. We are currently leveraging it more than usual, but it’s still a reasonably low risk bet. Which is why you see a flight to dollars during an economic panic such as we saw last year.
October 28th, 2009 at 1:45 pm
“The other aspect of the ‘theft’ is the steady reduction in value of savings held in the form of money or fixed interest savings or pensions or salaries.”
But pensions and salaries are typically indexed to inflation, and long-term savings accounts generally pay an interest rate that is above the rate of inflation. Only money that’s buried in the back yard will always see a “steadily reduction in value.” I would generally agree that it’s bad policy for government economic policies to perpetually incentivize stock market speculation and disincentivize savings. But it’s hardly “theft” for the value of a saved dollar to decline in value, any more than it’s theft when a real estate investment declines in value.
“Objects of real value” change over time. Nothing is worth more or less than what someone else is willing to pay for it. Gold has historically always been seen as a valuable commodity, but its relative value waxes and wanes like anything else. If gold jewelry becomes less fashionable, then your gold is worth less than it was before. I chose to buy a platinum wedding ring. Does this mean that I stole a fraction of a cent from the value of your gold brick?
October 28th, 2009 at 2:49 pm
Doug:
Recent history though and the enormous unfunded liabilities of the government should give anyone reason to consider whether this “asset” is up to the task.
I just don’t buy this argument at all. Not one iota. Where’s the proof? People have been saying this for a while now. This doesn’t mean the government should go hog wild or if it does it better be for a good reason, like staving off Great Depression Part Deux.
My view is that people who make this argument don’t like certain types of government spending like spending on social insurance or investment in human capital. And they resent having their “hard earned” money taxed.
If they were serious about balancing the governments budget, they’d be for higher taxes on those who can afford it and they’d be for health care reform and lower spending on defense.
The counter example is the following: where did all the money rush to when the Great Panic hit last year? To U.S. Treasuries.
October 28th, 2009 at 3:13 pm
This is what I’ve been saying for years. There’s only so many good private investments out there, and for decades, we’ve had far, far, far too much money chasing them. This breaks Wall Street.
The practical impact of stagnant middle and lower-class wages, as well as government borrowing, has been to put more and more wealth in the top earners’ hands. This is functionally equivalent to flooding the capital markets with cash (and the fed reinforced this trend by keeping interest rates low).
This leads to worse than a simple asset bubble. We literally had a situation where capital funds were being transformed into consumption–rich people were lending poor people money to buy houses they couldn’t afford to make the payments on. And then they’d let them borrow money against the value of the house to make the payments. It was INSANE, and it was only possible in a market so disgustingly flooded with extra money from rich people who demanded they be able to turn it into more money. The huge salaries of Wall Street workers weren’t a cause of the crisis, they were evidence of its existence. If you can skim literally hundreds of millions from a transaction, that transaction is fundamentally over-valued. Your system is BROKEN. It is not efficiently allocating capital when people can skim so much off every transaction!
Leverage was one of the many tools that made our crisis possible (along with a lax regulatory regime), but bad regulatory/leverage/compensation policies were NOT the root cause of this problem. Inequity was. The libertarians are profoundly, fundamentally wrong. You can’t sustain, much less build a society on private investments alone. And when private investors get too large a share of the national wealth, the system binges and then it collapses.
Fixing our current situation means we need much more money going to consumption and to public capital investment. People need to be able to BUY stuff, not charge it using money borrowed from private capital holders. Government needs to be able to SPEND to build bridges, not deficit finance them by borrowing money from private capital holders.
If we don’t address this fundamental issue (which we address by strengthening unions, by increasing marginal taxes on the wealthy and on capital investments, by paying down the debt, by building up the safety net for middle class and lower class workers (uh, paid childcare, anyone? Better schools?), and by jacking up things like inheritance taxes, charitable foundations made up of stock, etc.), we are screwed to repeat this again.
The capital markets will ALWAYS find regulatory loopholes to make insane bets when they are flooded with rich people’s money. The way you fix this is not just by tightening the regulatory spigots. It’s also by draining the swamp–give the markets less money to play with, so they can return to efficienctly allocating private capital.
But Reagan was wrong. Libertarians are wrong. Bush was wrong. Private capital alone does not create wealth. You can, in fact, break the economy by sending too much money to Wall Street.
October 28th, 2009 at 4:23 pm
Yeah but the person selling the stock could be the company whose stock you are buying. Otherwise buying stock isn’t an investment at all, it’s just swapping paper.
October 28th, 2009 at 6:14 pm
Whether or not you want to consider it theft, central bank monetary dilution is a process of wealth transfer and is simply a stealth tax.
The important point is that the only real effect of printing more money is to take purchasing power from one person and to give it to another. The government printing out money does not create wealth. Whether inflation is good or bad depends on whether you think that the transfer is from unproductive things to more productive things. I would argue that this is generally not the case.
October 28th, 2009 at 6:31 pm
I think it’s clear that fiat money creation causes a wealth transfer.
Whether you think this is moral or not, or efficacious in alleviating or causing poverty depends, I suppose, on your own version of morality and economic analysis.
Tiny baby steps……..
October 28th, 2009 at 6:35 pm
Whether inflation is good or bad depends on whether you think that the transfer is from unproductive things to more productive things. I would argue that this is generally not the case.
Yes, truly, deflation has been a wonderful boon for economies throughout history.
October 28th, 2009 at 7:10 pm
mpowell:
Actually, deflation is always helpful if prices have been ARTIFICIALLY bid up by fiat money. The deflation of the early 20s quickly cured the post WWI depression thereby allowing prices and wages to quickly reconfigure to reality.
October 28th, 2009 at 9:48 pm
Man, this sounds too obvious to not have been thought through before. If the state of play in economics is so primitive, where are we on everything else? Pretty scary.
October 28th, 2009 at 10:09 pm
Doug:
The assets in question are whatever are held in reserve in banks – property, stocks, bonds, stamps, gold, silver, baseball cards, whatever people value. Hence, banks are allowed to lend what they have on account, minus a reserve amount set by the Fed.
The problem of course being that banks decided to buy a lot of derivatives, and loan money to people buying derivatives…
October 28th, 2009 at 10:18 pm
Re: Some do not and obtain currency cheaply or from the Federal Reserve.
What you are missing is that the Fed is choosing to “buy” those assets which no one else may want. You are treatibng the Fed as if it were an alien, inhuman entity, foreign to economic activity, and its actions are therefore some sort of cheat or crime. Why not just see it (and really, the whole government) as one more economic actor, making decisions for its own reasons which lie outside the bounds of the field of economic science and as such cannot be judged on economic grounds any more than my decision to buy a Jeep rather than Honda can be.
October 29th, 2009 at 12:58 am
China has a much higher savings rate than we do. I.e., their MPC is much lower than ours. And yet, no giant asset bubble.
If the US had (leaving interest rates and inequality unchanged)
- Raised down payments for subsidized (GSE and FHA) mortgages
- Reduced the tax breaks on mortgage interest and capital gains (btw making the tax code more progressive)
Voila…no bubble. It’s not about inequality.
October 29th, 2009 at 9:08 am
Re: – Raised down payments for subsidized (GSE and FHA) mortgages
It wasn’t the GSE and FHA mortgages that had the trouble. It was the non-government sponsored subprimes and alt-A’s.
October 30th, 2009 at 3:24 am
GSE and FHA mortgages are crashing and burning with the best of them. The GSE’s are slated to be the biggest burners of TARP money, until FHA fails. Its default rates are more than double what they were two years ago, verging on 10%.