These government bailouts are a very disturbing trend

[maxiep]

I posted this over in the Religion/Politics board, but I'd be happy if everyone read it.

http://freakonomics.blogs.nytimes.c...nd-kashyap-on-the-recent-financial-upheavals/

I'm just gonna post the whole thing because it's a really good article to get a handle on why these bailouts are happening:

LOL, Doug and Anil are two former profs of mine. They're both depressingly smart--by that I mean they unintentionally make you feel like a knuckle-dragger. Doug Diamond may know more about bankruptcy than any other living economist, especially when it comes to financial institutions. Diamond/Dybvig was written almost a quarter century ago, but has stood the test of time and circumstance.

Kashyap badly wants to be on The Fed, and I've never met anyone who hates inflation more. I'm convinced that he would happily suffer a deep recession/small depression to wring out every last bit of inflation in the economy. He's one of those folks that is so smart, his solutions aren't all that realistic.

Thanks for the link.

 

[MikeDC]

LOL, Doug and Anil are two former profs of mine. They're both depressingly smart--by that I mean they unintentionally make you feel like a knuckle-dragger. Doug Diamond may know more about bankruptcy than any other living economist, especially when it comes to financial institutions. Diamond/Dybvig was written almost a quarter century ago, but has stood the test of time and circumstance.

Kashyap badly wants to be on The Fed, and I've never met anyone who hates inflation more. I'm convinced that he would happily suffer a deep recession/small depression to wring out every last bit of inflation in the economy. He's one of those folks that is so smart, his solutions aren't all that realistic.

Thanks for the link.

De nada. That's interesting. Did Kashyap ever give a good explanation for why inflation is bad? One of my profs pointed out once that he doesn't think anyone has a really legitimate explanation for why it's bad (at low levels... obviously nobody wants Zimbabwe), and I've come to the conclusion he's probably right.

 

[bbwchingy0007]

In other words, change basic human nature. Good luck with that.

I don't think it is to change basic human nature, I believe that we need to change the way society operates. Too many things point us towards making our own life better at the expense of others, which is not the way society should be.

 

[Denny Crane]

De nada. That's interesting. Did Kashyap ever give a good explanation for why inflation is bad? One of my profs pointed out once that he doesn't think anyone has a really legitimate explanation for why it's bad (at low levels... obviously nobody wants Zimbabwe), and I've come to the conclusion he's probably right.

Depends on the tax code, right?

People need a COLA to their paychecks keep up with inflation (don't lose buying power). If those pay raises bump people into the next higher tax bracket, they can end up with even less take home pay.

Otherwise, I've never seen a good argument against low levels of inflation.

 

[maxiep]

De nada. That's interesting. Did Kashyap ever give a good explanation for why inflation is bad? One of my profs pointed out once that he doesn't think anyone has a really legitimate explanation for why it's bad (at low levels... obviously nobody wants Zimbabwe), and I've come to the conclusion he's probably right.

His basic thesis is that economies run on predictability of input costs. There are plenty of greeks to add up to calculate your risk; having a currency or inflation risk should be unecessary. Bottom line. inflation is corrosive.

 

[MikeDC]

His basic thesis is that economies run on predictability of input costs. There are plenty of greeks to add up to calculate your risk; having a currency or inflation risk should be unecessary. Bottom line. inflation is corrosive.

So they don't teach much Knightian uncertainty there anymore? Heh, I wouldn't presume to be as sharp as Kashyap but it seems to me that inflation generally reflects unpredictable changes in the costs of inputs rather than vice versa. Of course I have little evidence to base that on

 

[MikeDC]

Depends on the tax code, right?

People need a COLA to their paychecks keep up with inflation (don't lose buying power). If those pay raises bump people into the next higher tax bracket, they can end up with even less take home pay.

Otherwise, I've never seen a good argument against low levels of inflation.

But a COLA to everyone's paycheck is inflation. If no one received a COLA, the argument goes, you wouldn't need a raise to keep up with inflation because there'd be no inflation to keep up with.

 

[AgentDrazenPetrovic]

so what now, they want a trillion dollar bailout? holy hell.

 

[maxiep]

So they don't teach much Knightian uncertainty there anymore? Heh, I wouldn't presume to be as sharp as Kashyap but it seems to me that inflation generally reflects unpredictable changes in the costs of inputs rather than vice versa. Of course I have little evidence to base that on

I'm not explaining myself well. When he speaks about inflation, his POV is monetary policy and money supply, not exogenous variables.

 

[MikeDC]

I'm not explaining myself well. When he speaks about inflation, his POV is monetary policy and money supply, not exogenous variables.

OK, this was two years ago, but it popped into my mind today as I've been mulling over a debate I've been having with a couple of my grad school friends. I'm still trying to understand the "Grim Death" fight against inflation view. In fact, I'm really trying to understand it because I increasingly see the guys who actually have meaningful stuff to say on the Fed putting forth the Kashyap via of things.

From a big picture view, I get the idea. That is, a price index is composed of a basket of goods, and the prices reflect our relative average valuation of the stuff in the basket. In theory, it shouldn't matter if the basket were always valued at 100.

But any price stability is an aggregate phenomenon. The basket of goods is continuously changing over time. And even if one is moderately skeptical of price stickiness, change is costly, the time value of money changes (especially as written in contracts) and the relative valuations of goods are going to shift a lot. Moderate price inflation, I'd argue, provides a certain amount of grease for these shifts in a growing economy. Without them the dislocations and various mistakes folks make are that much harder to overcome.

In a nutshell, if you were to think of economic growth in terms of Schumpeter's "creative destruction" idea, mild inflation somewhat soften the destructive blows, thus allowing the creation to move forward. Without it, folks just get hammered.

 

[MARIS61]

In a nutshell, if you were to think of economic growth in terms of Schumpeter's "creative destruction" idea, mild inflation somewhat soften the destructive blows, thus allowing the creation to move forward. Without it, folks just get hammered.

I say let's just get hammered then.

All inflation is in reality is another bailout from the poor to the rich (banks) through higher interest and higher prices instead of higher taxes.

The goal is to keep the middle-class in their place, in servitude.

 

[MikeDC]

I say let's just get hammered then.

All inflation is in reality is another bailout from the poor to the rich (banks) through higher interest and higher prices instead of higher taxes.

The goal is to keep the middle-class in their place, in servitude.

This seems sort of muddled to me. Most folks who are poor to middling borrow from folks who are rich. If you want to consider it as a class warfare thing, imagine Rich wants to keep Poor in "servitude" with debt.

Rich lends $100,000 to Poor, who makes $10/hr ($20800/yr). If it's your standard amortized, fixed rate mortgage, the more inflation there is, the more Poor is helped. After 10 years of say, 4% inflation, the worker who makes $10/hr today will make $29,000 or so in 10 years. Other things will cost more too, but Poor still doesn't have to pay back more than the original $100,000.

In short, contracted loan amounts stay the same, but inflation pushes other prices (including the cost of labor) up. This generally helps borrowers (who don't have money) and hurts lenders (who do have money).