# Why Did So Many Fail To Predict The Crisis?



## wayneL (8 July 2009)

Here is an excellent article from the Pragmatic Capitalist. http://pragcap.com/why-did-so-many-investors-fail-to-predict-the-credit-crisis

A few of us here banged on about it _ad nauseam_ and suffered ridicule etc, but it was only a matter of time. It also gives Keynesianism a bloody good spray. Our governments pseudo Keynesian response to this mess will cost us very dearly in the future.

So why did so many miss the signs?



> I think about it every day: “Why did so many investors have to be hurt by the financial crisis of 2008″?   In hindsight, it seems like the crisis was so obvious.  The now infamous credit market debt to GDP chart, the parabolic Case/Shiller housing chart, the 40:1 leverage ratios, the subprime problems, etc..  Weren’t they telltale signs that something was profoundly wrong with the economy?   It would seem so, but for some reason we can count the “experts” who actually predicted the crisis on two hands.  And many are even skeptical of this small sampling of prescient economists and analysts.  Statistically speaking you could easily make the argument that most of these “experts” who got it right were anomalies or lucky.   So why were so few investors prepared for the declines in the markets?   I chalk it up to multiple flaws in the way investors have been taught to approach the investment landscape......................etc etc


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## Sean K (8 July 2009)

What crisis?


Out to buy an new plasma, need one for the toilet. Thank God for this tax rebate and 2 years interest free gig.


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## wayneL (8 July 2009)

kennas said:


> What crisis?




Funny, I keep asking myself the same question. Pub are chockers, shops are busy (but sales abound), streets are crowded. 

If you didn't read the news (and haven't lost your job) nothing seems different. Just don't look at you super/pension/401k balance.


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## It's Snake Pliskin (8 July 2009)

wayneL said:


> *Just don't look at your super/pension/401k balance.*



And to be waiting for that great payday in the future with the sole reliance of it funding a future, yes a scary account balance people must have. Time is the only thing on some people's side.


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## Sean K (8 July 2009)

Sales of scooters are down in Melbourne. That's a bad sign. People will only have to get around in their 2 cars. 

It's going to be scarey getting the Super report this year that's for sure. Perhaps people will see that, and forget about the plasma for the loo?

Is there any way this debt pilling up, to fix the debt problem, can be fixed? Maybe Africa will cancel First World debt or something.


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## ducati916 (8 July 2009)

*enzo*

Two things - first please get rid of visual verification on your blog so I can leave a comment GOOG still hates me.

Second, consumers cannot simply stop consuming necessities. However, projections are depicting a dangerous scenario.

http://leduc998.wordpress.com/2009/07/06/consumers/#respond

It is precisely this behaviour that will lead to an inflation. Then, should the inflation take hold, we will again see an inflationary depression, but potentially deeper than the 1970 -1981 variety

jog on
duc


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## theasxgorilla (8 July 2009)

wayneL said:


> Funny, I keep asking myself the same question. Pub are chockers, shops are busy (but sales abound), streets are crowded.
> *
> If you didn't read the news (and haven't lost your job) nothing seems different. Just don't look at you super/pension/401k balance. *




Exactly.  And the conspiracy theorists have been talking about how it seemed likely that the "money masters" would make a grab for pension savings at some time in the future.  If you note whose balance sheet is bolstered by this crisis (the Fed) I'd say it just happened.  14 trillion in net worth gone, the debt remains on various balance sheets, the Fed holds the property as collateral, the gov borrowed 2 trillion to keep give the collapse a bottom (with potentially more to come) and taxes will be raised to pay that down.  It might just be the greatest screwing over of the masses in history... and as you say Wayne, you'd barely even know it's occured.

Disclaimer: I don't necessarily believe all that, but I like a good conspiracy theory as much as the next primate.


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## theasxgorilla (8 July 2009)

ducati916 said:


> It is precisely this behaviour that will lead to an inflation. Then, should the inflation take hold, we will again see an inflationary depression, but potentially deeper than the 1970 -1981 variety




Are you in the inflation camp Duc?  I read an interesting article by Niels Jensen making a bloody good case for deflation.

http://www.arpllp.com/core_files/The%20Absolute%20Return%20Letter%200709.pdf


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## wayneL (8 July 2009)

ducati916 said:


> *enzo*
> 
> Two things - first please get rid of visual verification on your blog so I can leave a comment GOOG still hates me.
> 
> ...




a/ done

b/ Not only can they not stop consuming necessities, many don't see the necessity to stop spending on tat. Many also have some sort of perverse need to overpay for necessities. Housing being a case in point.

I'm only 80% convinced of the inflation scenario, but if so agree it will be disastrous.


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## ducati916 (8 July 2009)

theasxgorilla said:


> Are you in the inflation camp Duc?  I read an interesting article by Niels Jensen making a bloody good case for deflation.
> 
> http://www.arpllp.com/core_files/The%20Absolute%20Return%20Letter%200709.pdf




*asxG*

Yes, I am in the inflation camp. That is not to say that inflation is a foregone conclusion, just that if current thinking and actions continue as they are, then inflation will become a reality.

From your article:



> We are effectively caught in a liquidity trap. The Bank of England, the European Central Bank and the Federal Reserve have all flooded their
> banking system with enormous amounts of liquidity in recent months
> but what has happened? Instead of providing liquidity to private and
> corporate borrowers as the central banks would like to see, banks have
> ...




This is simply incorrect.

It is however how neo-classical economics models money and growth. This fallacy is why there is every chance many will miss the signs of growing inflation.

The link I provided, provides the reason as to why the above is incorrect, and why the early signs are already on the table.

jog on
duc


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## ducati916 (8 July 2009)

*asxG*

Reading further, you come to the circular theory of consumption, which by another name is the Keynesian _Paradox of Thrift_ This is also an insiduous fallacy.

Actually I may refute the document point-by-point on my blog...it's that bad.

jog on
duc


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## It's Snake Pliskin (8 July 2009)

ducati916 said:


> *asxG*
> 
> Reading further, you come to the circular theory of consumption, which by another name is the Keynesian _Paradox of Thrift_ This is also an insiduous fallacy.
> 
> ...



Duc,
I'll read it if you do. 
Cheers...


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## It's Snake Pliskin (8 July 2009)

theasxgorilla said:


> Disclaimer: I don't necessarily believe all that, but I like a good conspiracy theory as much as the next primate.



Do you now anything further to the Argentina thing?
http://www.financialsense.com/editorials/duarte/2008/1023.html


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## ducati916 (8 July 2009)

It's Snake Pliskin said:


> Duc,
> I'll read it if you do.
> Cheers...




*Snake*

I'll definitely be doing it. It just isn't mainstream interest, I'll provide the links so any interested can follow along.

jog on
duc


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## theasxgorilla (8 July 2009)

ducati916 said:


> This is simply incorrect.
> 
> It is however how neo-classical economics models money and growth. This fallacy is why there is every chance many will miss the signs of growing inflation.
> 
> The link I provided, provides the reason as to why the above is incorrect, and why the early signs are already on the table.




Which part is incorrect, that the banks are not providing the liquidity to private and corporate borrowers, that borrowers are not borrowing, or that by either side not acting out their role there won't be inflation? Or all of the above? 

FWIW, I've always prefered the definition of inflation that describes the supply of money in an economy increasing relative to goods and services.  Price increases are a consequence of this but not a foregone conclusion.

What kind of inflation are we talking about here anyway?  Asset, or consumer price?


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## Sean K (8 July 2009)

Right now, are we sufficiently factoring in peak (whatever number) unemployment? And, how long does it linger? Uncertainties for sure, but uncertainties. It's gonna hurt, but to what extent?


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## theasxgorilla (8 July 2009)

It's Snake Pliskin said:


> Do you now anything further to the Argentina thing?
> http://www.financialsense.com/editorials/duarte/2008/1023.html




No, and I don't think that would happen in the US.  But when 14 trillion of networth evaporates, and big, old institutions collapse, and the Fed and Government are both involved in the "rescue", and the net effect is people who thought they were going to retire either keep working or retire on less, you have to wonder who the beneficiaries are and where the money went?


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## shag (8 July 2009)

i need a good plasma for my shed so i can open the doors n watch tv outside.
i dont see too many in aus who plan well hurting much.
taxi drivers complaining tho.


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## gfresh (8 July 2009)

people got lazy...


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## Sean K (8 July 2009)

gfresh said:


> people got lazy...



And, greed is good! 

'How many yachts can you ski behind?'


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## Bushman (8 July 2009)

Maybe we should replace economists with psychologists...say a Myers Briggs index that tracks the weighting of the market to bullish vs bearish personalities? Lol.


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## Aussiejeff (8 July 2009)

kennas said:


> Right now, are we sufficiently factoring in *peak (whatever number) unemployment?* And, how long does it linger? Uncertainties for sure, but uncertainties. It's gonna hurt, but to what extent?




I think peak *under-employment* is more of a concern IMO.

Many media EconExperts now seem to be crowing about how employers are cutting back workers hours rather than laying them off, thus massaging the "official unemployment" figures to "more acceptable" levels. 

However, a relative few lateral-thinking EconExperts are now starting to be far more concerned at the declining economic productivity and average per capita income caused by rapidly increasing under-employment (ie: less hours, less overtime = LESS SPENDING POWER). I'm with them.

It is leading to the somewhat absurd situation where media reported LOWER unemployment "than expected" (resulting from HIGHER under-employment rates instead) is actually no better for the economy than if there had been HIGHER unemployment rates alone. For example, if a low-paid single worker on $540 week is forced to take a 50% cut in pay for a year or so through 50% less hours of work (= $270 week, less tax) in order to "save their job", that is obviously no better for the economy from a cash flow and spending point of view than if they were made redundant in the first place and then got the current dole of approx $245 per week tax free?      

Come to think of it, with most wage earners needing near 100% pay rates to survive, you have really got to wonder how many of the growing band of workers who have had their "jobs saved" through significant hours of work cutbacks will actually go under financially, when faced with extended big reductions in their take home pay? Aren't most families maxed out on credit?

Hmm. A bit of "smoke & mirrors" stuff here by those in power and their media cronies, metinks....

The "real economy" will out in the end.



aj


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## shag (8 July 2009)

who cares about unemployment unless it threatens u or rellies. it will peak at 10pc quickly, the peopole who really were scraping to gain a job will be expunged from bussinesses, then it will go back into a 'full' employment senario far too quickly for good businesses.
im hoping for good houses to get dumped on the market from overgeared finacial field hangers on getting kicked out in east sydney.
then i can get a bigger shed with tv.


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## Sean K (8 July 2009)

Aussiejeff said:


> I think peak *under-employment* is more of a concern IMO.
> 
> Many media EconExperts now seem to be crowing about how employers are cutting back workers hours rather than laying them off, thus massaging the "official unemployment" figures to "more acceptable" levels.
> 
> ...



Lowering overall wages, instead of sacking people, could save a business. Lowering wages, instead of forcing people on to Gov unemployment benefits, saves the government money. Yes, less spending, but a better option than just sacking, perhaps. It's maybe not smoke and mirrors, but common sence. Just a pluck. I'm not an economista. 

And, your example may not be a good one. How many low paid single workers are taking a 50% pay cut?


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## noco (8 July 2009)

Peter Costello predicted it before the 2007 election. He even told the Labor Party dead heads also. 
But of course, Why would they take any notice of the best Treasurer Australia ever had.


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## Uncle Festivus (8 July 2009)

Why Did So Many Fail To Predict The Crisis?

Because they probably used the same theories/paradigms/ideas that are predicting a 'second half recovery' & 'green shoots'; & then wonder why they don't eventuate?


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## shag (8 July 2009)

kennas said:


> Lowering overall wages, instead of sacking people, could save a business. Lowering wages, instead of forcing people on to Gov unemployment benefits, saves the government money. Yes, less spending, but a better option than just sacking, perhaps. It's maybe not smoke and mirrors, but common sence. Just a pluck. I'm not an economista.
> 
> And, your example may not be a good one. How many low paid single workers are taking a 50% pay cut?




its so bloody hard to get good employees and retain them imo, so i see this short period as somewhat positive, throw out a bit of chaff, and hopefully the competition will push others to try harder plus upscale quals plus attitude. 
its counterproductive to dump good employees(for good quality bussinjesses) unless u r desperate and should b bust anyway. rehire, redundancy, reskill etc.
an extra bit of dole payments maybe a small price to pay for future growth. and prosperity.


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## Sean K (8 July 2009)

Uncle Festivus said:


> Why Did So Many Fail To Predict The Crisis?
> 
> Because they probably used the same theories/paradigms/ideas that are predicting a 'second half recovery' & 'green shoots'; & then wonder why they don't eventuate?



Tell us when you see the 'green shoots' UF! 

Unfortunately, if you're 'imminent and severe correction' thread is any guide, we'll be 7 months too late.

So, please tell me further in advance. 

Cheers,


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## moXJO (8 July 2009)

Seems confidence is high. 


> CONSUMER confidence surged in July to its highest level in one and a half years, as Australians continued to be optimistic about the outlook for the domestic economy.
> The Westpac-Melbourne Institute index of consumer sentiment rose 9.3 per cent in the month to 109.4 points, seasonally adjusted, from 100.1 points in June.
> 
> The July reading showed optimists "decisively'' out-numbered pessimist for the first time since December 2007.
> ...




But there's nothing like another market crash to put a stop to that


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## nunthewiser (8 July 2009)

what crisis ?

all sunshine and lollipops aint it ?


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## Uncle Festivus (8 July 2009)

kennas said:


> Tell us when you see the 'green shoots' UF!
> 
> Unfortunately, if you're 'imminent and severe correction' thread is any guide, we'll be 7 months too late.
> 
> ...



What, 7 months warning wasn't enough then! No pleasing some people...

If you buy me some rose coloured glasses, a case of beer and a directorship of Goldman Sachs (or a seat on the Fed, same diff?), I can see plenty of green shoots . It's just that they will all be my green shoots while I algo trade the rest of the US economy into the ground. Now only if that pesky Russian didn't steal my trading software!!


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## moXJO (8 July 2009)

Uncle Festivus said:


> Now only if that pesky Russian didn't steal my trading software!!




Hey UF you got that german torrent


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## MRC & Co (8 July 2009)

If the majority did not fail to predict the crisis.........would there have been a crisis?  

Maybe of no relevance, but a quote I love:

_This raises an interesting possibility.  Perhaps some of the developments I predicted were pre-empted by the very fact that they were anticipated by the market and the market provoked a reaction that prevented them from happening.  When I finally recognized that markets can pre-empt the catastrophes they predict, I concluded that we live in an age of self-defeating prophecies.  It is an old joke that the stock market has predicted seven of the last two recessions.  We can now understand why.  Financial crashes tend to occur only when they are unexpected._ - George Soros


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## MRC & Co (8 July 2009)

theasxgorilla said:


> Which part is incorrect, that the banks are not providing the liquidity to private and corporate borrowers, that borrowers are not borrowing, or that by either side not acting out their role there won't be inflation? Or all of the above?




Completely agree ASX.

Otherwise known as the velocity of money.


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## tech/a (8 July 2009)

*Why Did So Many Fail To Predict The Crisis?* 

Failed predictions can be Career Killers.
Simple really.


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## nunthewiser (8 July 2009)

tech/a said:


> *Why Did So Many Fail To Predict The Crisis?*
> 
> Failed predictions can be Career Killers.
> Simple really.





yep

a lot safer and easier to predict something in the various circles after its happened


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## wayneL (8 July 2009)

tech/a said:


> *Why Did So Many Fail To Predict The Crisis?*
> 
> Failed predictions can be Career Killers.
> Simple really.




Jesus! I can think of at least.... actually I can't even count the number of economists who should be out of a job then... and just about every politician.


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## Julia (8 July 2009)

wayneL said:


> Here is an excellent article from the Pragmatic Capitalist. http://pragcap.com/why-did-so-many-investors-fail-to-predict-the-credit-crisis
> 
> A few of us here banged on about it _ad nauseam_ and suffered ridicule etc, but it was only a matter of time. It also gives Keynesianism a bloody good spray. Our governments pseudo Keynesian response to this mess will cost us very dearly in the future.
> 
> So why did so many miss the signs?



Perhaps many didn't miss the signs at all, but it simply wasn't in their interests to warn people.  i.e. financial advisers raking in all those trailing commissions from managed funds which were/are the mainstay of the massive Super industry.

Hence all that advice to the punters (who had no idea about where their funds were or what was likely to happen to them) to just hold tight, it would all be A-OK, baby.


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## trainspotter (8 July 2009)

And here is why:

Gordon Gekko: The richest one percent of this country owns half our country's wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It's bullsh!t. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you're not naive enough to think we're living in a democracy, are you buddy? It's the free market. And you're a part of it. You've got that killer instinct. Stick around pal, I've still got a lot to teach you. 

"Greed is good" Did he really say this?


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## Mr J (9 July 2009)

nunthewiser said:


> yep
> 
> a lot safer and easier to predict something in the various circles after its happened




My answer, as usual, is because they're salesmen. Most people can't predict, they just react and put on a nice act. There's also the habit of the herd pushing independent thinkers away and laughing, even if they're warning them of impending doom. The herd just can't see beyond the **** (butt) in front of them.


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## Timmy (9 July 2009)

trainspotter said:


> And here is why:
> 
> Gordon Gekko: The richest one percent of this country owns half our country's wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It's bullsh!t. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you're not naive enough to think we're living in a democracy, are you buddy? It's the free market. And you're a part of it. You've got that killer instinct. Stick around pal, I've still got a lot to teach you.
> 
> "Greed is good" Did he really say this?




Nice.
I gotta see that movie again.


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## Aussiejeff (9 July 2009)

moXJO said:


> Seems confidence is high.
> 
> 
> 
> ...




Funnily enough, yesterday afternoon Bill Evans (Westpac's head TV media honcho in Finance) actually dismissed these results from his very own bank analysts _over the short-medium term_, stating something along the lines that Australian consumer debt was still climbing at record unsustainable levels.

I agree with him entirely on that.

Added to that, IMO, *the decision by the "Fair"?? Wage Commission to deny the lowest paid workers of Oz (approx. 1.5 million) any possibility of a catch-up payrise until at least March next year will smack down Westpac's airy-fairy "consumer sentiment" index at the next call,* since I suspect lower paid workers will be nowhere near as "confident" next time WestPacMan cometh calling.

My


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## dhukka (9 July 2009)

tech/a said:


> *Why Did So Many Fail To Predict The Crisis?*
> 
> Failed predictions can be Career Killers.
> Simple really.




You have to be kidding, it would be difficult to come up with an industry that has less accountability than economics. It's almost as if being wrong half the time is a prerequisite to being an economist. If failed predictions killed careers, you'd turn on CNBC and see a couple of reporters sitting around talking to themselves because all the so-called professional prognosticators would be out of a job.  Shane Oliver of AMP would have have lost his job a decade ago.


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## Gordon Gekko (9 July 2009)

Timmy said:


> Nice.
> I gotta see that movie again.




They are starting to make part 2!!
OLiver Stone
Michael Douglas
Shia Leblouf

Sweet!!!!


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## Knobby22 (9 July 2009)

In my opinion most economists did not see this coming because they were tied to their university teachings on "classical" economics which assumes a lot of twaddle such as market participants being informed and acting correctly.

If you look at the critics before the crash, they were mostly university professors and people more from the fringe. The IMF, who can't seem to get 3month forecasts right, pompously do not even admit to being wrong, over and over again, this last year.

I keep hearing  the latest critics who such as Misha and others who can't believe that their economic truths are bull and just attack every other view around them, especially Keynsians. They should take a good hard look at themselves and adjst their view of reality to reality rather than the fantasy world they seem to live in.


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## wayneL (9 July 2009)

Knobby22 said:


> In my opinion most economists did not see this coming because they were tied to their university teachings on "classical" economics which assumes a lot of twaddle such as market participants being informed and acting correctly.
> 
> If you look at the critics before the crash, they were mostly university professors and people more from the fringe. The IMF, who can't seem to get 3month forecasts right, pompously do not even admit to being wrong, over and over again, this last year.
> 
> I keep hearing  the latest critics who such as Misha and others who can't believe that their economic truths are bull and just attack every other view around them, especially Keynsians. They should take a good hard look at themselves and adjst their view of reality to reality rather than the fantasy world they seem to live in.




Knobby,

1/ By Misha, do you mean MISH AKA Mike Shedlock?

2/ Do you mean Misha(MISH) was/is correct or incorrect?

3/ Do you believe the Keynesian pox on humanity is the correct approach?

I'm just not clear.


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## Trembling Hand (9 July 2009)

dhukka said:


> the so-called professional prognosticators would be out of a job.  Shane Oliver of AMP would have have lost his job a decade ago.




No no. His job isn't as an economist though. It one more similar to the pied piper.


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## xyzedarteerf (9 July 2009)

Gordon Gekko said:


> They are starting to make part 2!!
> OLiver Stone
> Michael Douglas
> Shia Leblouf
> ...




yep looking fwd to this one...Feb 2010 release filming starts next month.

source

_"In the film, Gekko (Douglas) has served his prison sentence and is warning everyone about the fall of Wall Street. No one listens to him so he devotes himself to mending his relationship with his estranged daughter. LaBeouf plays an ambitious, young Wall Street trader who is engaged to Gekko's daughter.  The film spans from June 2008 to the federal bail out._


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## noco (9 July 2009)

Peter Costello, our greatest Australian Treasurer, Predicted a TSUSAMI of world economic turmoil before the 2007 election.

He even told the the Labor Party's fearless leader Kevin Rudd, BUT WE ALL KNOW what Kevvie thinks of Peter Costello. What would he know after all Peter Costello got us into this mess says Wayne Swan.


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## Temjin (9 July 2009)

tech/a said:


> *Why Did So Many Fail To Predict The Crisis?*
> 
> Failed predictions can be Career Killers.
> Simple really.




Really??

Jim Cramer is still around.  His predictions are amazingly wrong and still fail to admit he was wrong. 

And of course, we have the Yank's Chopper Ben.

http://www.boom2bust.com/2009/05/06/i’d-be-broke-if-ben-bernanke-were-my-financial-adviser/

some of the older comments from him 



> Lest we forget some of his other notable predictions, such as:
> _“*Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst*, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve._
> _U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, ‘largely reflect strong economic fundamentals,’ such as strong growth in jobs, incomes and the number of new households.”_​-_Washington Post_, October 27, 2005
> _*“A leveling out or a modest softening of housing activity seems more likely than a sharp contraction…”*_​-in testimony to a House Financial Services Committee, Thursday, February 16, 2006, (source: _Washington Times_, February 16, 2006)
> ...




Yet, amazing enough, there have been calls recently (still trying to find the posts) from other economists that Bernanke has been doing a great job and they support him to be re-elected in to the office again by next year Jan. 

His career is FAR from failing, at least in the short term.


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## Knobby22 (9 July 2009)

wayneL said:


> Knobby,
> 
> 1/ By Misha, do you mean MISH AKA Mike Shedlock?
> 
> ...




Hi Wayne.

Yes, I mean Mike Shedlock.
I find his views saying that no amount of fiscal stimulus will work is false. He is of the classical view that we  should have a scorched earth policy and whatever is left will be strong. This will cause unemployment in the US go to 25% and bring on the depression and possibly a world war. History showed it failed first time, let's not repeat it.

With point 3. We need a third way. Man is a herd animal. Once everyone is headed down the gloom or boom path we just make it worse that it needs to do. I am sort of  post Keynsian, not politician Keynsian. 

I believe that governments should run robust surpluses in good times and not run up debt to feed booming times to win an election. 

i also believe that if times get tough you encourage people to be optimistic by giving them temporary tax cuts of bonuses and they should go to everyone especially the poorer people in society who will spend it. Secondly, in the medium term start building infrastructure that makes the economy more efficient and keeps people working.

During good times, the government should stay out of things as much as possible except to balance out distortions caused by other economies. They should also legislate to stop financiers profiteering while leaving their bank/company in a situation where they will go broke should a shock occur. 

The USA is looking at copying Australia's success in keeping real estate going by enhancing the first home buyers grant. In good times there shouldn't be a first home buyers grant but in bad times it keeps things rolling. 

We are going well in Australia, much due to good regulation and getting in stimulus before the collapse. Retail spending is actually up!! 

Look at today's unemployment figures, that the rest of the world would beg for.

Unemployment up 0.1% to 5.8%. "Basically the trend rate seems to be slowing it's rise. Even if it continues at current rate it will only be 7% by June 2010. If participation rate continues it's drop and the graph shows it peaking in May then it could be 6.5%. In any case doesn't seem to be the huge problem everyone has been saying it will be." (I am quoting Mord from Chimes in Exile here). 

Seriously, some of the hard core US economists make me want to throw a brick on their head. Example - What should happen if the US is having a surplus? Spend money on defence, infrastructure, save for a rainy day or have tax cuts. Answer: Have tax cuts. 

OK, the economy needs a boost and we are in debt. What should we do?  Have tax cuts.

Um, we are in depression now, riots are happening in the street as the populace attack the walled suburbs of the wealthy. What's the answer? Have tax cuts.

They seem pretty simple minded to me!

We need a new economic theory that realises that the simple models of classical economics don't work and realises that we tend to go over a cliff like lemmings reguarly.

Wayne, did you see the series "The Ascent of Money" ? He had it right. I love how he had Reagan and Bush say the same things and make the same mistake with US property and Fannie Mae etc. The parrallels were amazing.


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## Knobby22 (9 July 2009)

Another thing.

The banks should be allowed to go broke to scare the others into line. The government should help some of them and cull the rest. No bank or insurance company should be allowed to be too big that they destroy competition and cannot be allowed to fail. I get annoyed in the US how everyone is keen to protect bondholders. Bad luck in my view.

In other words if you are wealthy and invest too riskly then don't ask the government to bail you out. There seems to be too much socialism going on in the US and Australia and it should be stopped. It's probably in Britain too.


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## Sean K (9 July 2009)

Knobby22 said:


> Another thing.
> 
> The banks should be allowed to go broke to scare the others into line. The government should help some of them and cull the rest.



Hasn't this occurred? 

The significant thing so far, in my mind, is that the governments have saved institutions who, if completely failed, would create unknown economic hardship on the entire populace in the very short term. 

They've created a buffer. 

Now, it's time to dig themselves out of it. Somehow.

Continuing to print money may not be the answer...


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## Knobby22 (9 July 2009)

kennas said:


> Hasn't this occurred?
> 
> The significant thing so far, in my mind, is that the governments have saved institutions who, if completely failed, would create unknown economic hardship on the entire populace in the very short term.
> 
> ...





No they only let Lehman's go formally broke. A few of the others like Citibank and some of the Euro banks are just Zombie Banks- walking dead.
It didn't work in Japan, won't work now.


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## Sean K (9 July 2009)

Knobby22 said:


> No they only let Lehman's go formally broke. A few of the others like Citibank and some of the Euro banks are just Zombie Banks- walking dead.
> It didn't work in Japan, won't work now.



Ah, OK. I thought some other banks had gone broke, and they'd provided some other assistance elsewhere. My mistake.


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## Uncle Festivus (9 July 2009)

Knobby22 said:


> Hi Wayne.
> 
> Yes, I mean Mike Shedlock.
> I find his views saying that no amount of fiscal stimulus will work is false. He is of the classical view that we  should have a scorched earth policy and whatever is left will be strong. This will cause unemployment in the US go to 25% and bring on the depression and possibly a world war.




The US unemployment rate (using pre Carter methodology) is already 20%, and they are already in a depression, only no politician dares utter the word; like getting Rudd or Swan to say the R word??



Knobby22 said:


> Another thing.
> 
> The banks should be allowed to go broke to scare the others into line. The government should help some of them and cull the rest. No bank or insurance company should be allowed to be too big that they destroy competition and cannot be allowed to fail. I get annoyed in the US how everyone is keen to protect bondholders. Bad luck in my view.
> 
> In other words if you are wealthy and invest too riskly then don't ask the government to bail you out. There seems to be too much socialism going on in the US and Australia and it should be stopped. It's probably in Britain too.




So you say a scorched earth policy is wrong but it's OK to let the core of the financial system to collapse, just to scare them in to line? 

The AU gov has just 'allowed' the 4 pillars of our banking system to have the best competitive advantage in  a generation ie no opposition now. In fact now they are too big too fail also. Quite a dilemma if/when the stimulis drip runs out and bad loans, which are already increasingly being provisioned for, start to increase at a faster rate? We are setting ourselves up for the same bubbles down the track with our own pretend government sponsored sub-prime fiasco. 

Deja vu -  a government backed entity who helped first home buyers, now gone broke - Freddie Mac? Only our Freddie Mac is _the_ government! So why are we now failing to see what is imminent in the property market?


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## shag (9 July 2009)

kennas said:


> Hasn't this occurred?
> 
> The significant thing so far, in my mind, is that the governments have saved institutions who, if completely failed, would create unknown economic hardship on the entire populace in the very short term.
> 
> ...




im pretty sure u r correct. some smaller banks did go bust in states, plus the fed said this would be so.
re banks this is interesting.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10583310
it worked well in nz, no fees, profit for gov, brought competition back a little(all bar kiwi and pidly southland etc r aus owned in the place and being made to recoupe loses from here, out of the nz public).
i found kiwibank a useless mess, but thats me. no base fees and my mates swear by it.
it only has 5 or 6pc of population but its growing. bugger paying fees and 1pc over market for morgages. it would b grt for aus. the model would work well here too.
the only good thing the decade of labour did for nz.

as an example of how they rort the shaky isles, i was paying 10.95pc on morgage there, while only 6.7pc here, and the rates were typical. it would have been worse without kiwibank.


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## Temjin (9 July 2009)

Knobby22 said:


> Hi Wayne.
> 
> Yes, I mean Mike Shedlock.
> I find his views saying that no amount of fiscal stimulus will work is false. He is of the classical view that we should have a scorched earth policy and whatever is left will be strong. This will cause unemployment in the US go to 25% and bring on the depression and possibly a world war. History showed it failed first time, let's not repeat it.




The view of "fiscal stimulus" will NOT work is not only shared by Mike Shedlock alone, but by many other "alternative thinking" economists who have long predicted this crisis prior to its collapse. 

Remember, Mike Shedlock IS NOT AN AUSTRIAN economist. He is aware of their theories but do not actively promote it. He does not see the possibility of hyperinflation anytime in the near future. His views are strongly in line with Steven Keen's thesis on debt deflation. 

With regards to the scorched earth policy. This is how free market should work. Let bad business FAILs and let the GOOD business take over the mess and buy the good parts of the bad. Yes, unemployment will go sharply up, and yes, people will suffer.

The BIGGEST problem with the banking system is that we still have too much BAD DEBT in the system. Do you realise how much are still there even after so many write downs have occured in the last 2 years? There will be NIL economic recovery as long as these debt are in the system.

The moral of the story is that if there are anything that is too big to fail, then they are too big already. Businesses who become insolvent through bad commercial practices SHOULD BE FORCED TO FAIL, period. Using tax payer money to reward those who "failed" is certainly not the answer to a sustainable economic recovery.

Just look at Japan as your example. How much bailouts have they done with respective to their economy? (amount of $$$ over their GDP) It's at least a few times over what US have done thus far, and still they are facing a deflation after over a decade. 



> We need a new economic theory that realises that the simple models of classical economics don't work and realises that we tend to go over a cliff like lemmings reguarly.
> 
> Wayne, did you see the series "The Ascent of Money" ? He had it right. I love how he had Reagan and Bush say the same things and make the same mistake with US property and Fannie Mae etc. The parrallels were amazing.




There are plenty of economic theories around that clearly explained the cause of the crisis and how it should be solved. Unfortunately, political and social pressures have prevented these "alternative" thinkings from becoming mainstream. 

If I was in classical economics and am in a position of power, and that my career and life is DEPENDANT ON IT, do you think I would NOT abuse my power to prevent those "alternative" thinking a--holes from ruining my life? No way, I would denial every theories they put out until I'm dead.


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## Julia (9 July 2009)

shag said:


> as an example of how they rort the shaky isles, i was paying 10.95pc on morgage there, while only 6.7pc here, and the rates were typical. it would have been worse without kiwibank.



Ah, but how beneficial for depositors.   As usual, all the emphasis is on the borrowers and little recognition of the need to reward people who have been prudent enough to save.


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## shag (10 July 2009)

Julia said:


> Ah, but how beneficial for depositors.   As usual, all the emphasis is on the borrowers and little recognition of the need to reward people who have been prudent enough to save.




true but they do try to keep the spread low. if u want better deposit rates, go to another bank if they actually offer ok rates on top of hi morgage rates.
but most dosh comes friom overseas, like aus, but worse to support a property rush/greed.
i like it but im still with national in nz, which is anz owned now.
id rather have morgage plus stock portfolio myself. bugger banks. i could pay off both morgages i guess.
ive never had dosh in bank deposit, despite having plenty. dont like banks, rather own part of a company.


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## shag (10 July 2009)

with respect julia that is a bit naive and paranoid. kiwibank was set up for the vunerable this including beneficiaries/welfare, lower decile people etc, and also including people who relied on savings payments for income. 
more importantly it was set up in a period of a very overheated property market, worse than here(see the bluechip saga-elderly taking out morgages for dodgy property investments like storm but far more corrupt and damaging). the reserve bank was doing all it could to keep inflation down due to this property bubble, and wasnt about to design a state owned bank that helped this sector of the market, ie morgages.
i only noted morgages as its all i am involved with, no fees helps savers too.

sorry guys to get off topic, but i believe this model would be good for us as *ironically* it turned a healthy profit as well as prividing competition and the other less obvious benefits. this shows how much fat is in the banking sector.

i was also supprised by how many people i knew liked it for their bussinesses and complemented it, and these were the upperdecile group.


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## Buckeroo (10 July 2009)

Julia said:


> Perhaps many didn't miss the signs at all, but it simply wasn't in their interests to warn people.  i.e. financial advisers raking in all those trailing commissions from managed funds which were/are the mainstay of the massive Super industry.
> 
> Hence all that advice to the punters (who had no idea about where their funds were or what was likely to happen to them) to just hold tight, it would all be A-OK, baby.




Couldn't agree more Julia - and they are all at it again, spouting off how things are improving on the back of excessive Government spending.

The government with the most money will last the longest - but as soon as the money runs out & governments are maxed out with debt, what then? There is no magic green shoot - its all fake.

Debt will bring down the western world and this delaying action will only ensure that Governments won't have any money left to feed their people when it finally collapses

By all means, keep listening to these idiots at your peril, because as sure as hell, they still can't see whats coming

Cheers


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## Knobby22 (10 July 2009)

Temjin said:


> The view of "fiscal stimulus" will NOT work is not only shared by Mike Shedlock alone, but by many other "alternative thinking" economists who have long predicted this crisis prior to its collapse.
> 
> Remember, Mike Shedlock IS NOT AN AUSTRIAN economist. He is aware of their theories but do not actively promote it. He does not see the possibility of hyperinflation anytime in the near future. His views are strongly in line with Steven Keen's thesis on debt deflation.




I agree with them both on that also. However it is what you do that I differ on.



Temjin said:


> With regards to the scorched earth policy. This is how free market should work. Let bad business FAILs and let the GOOD business take over the mess and buy the good parts of the bad. Yes, unemployment will go sharply up, and yes, people will suffer.




You can't let the populce suffer too much or they will revolt. You can't let the economy go into a continuous downward spiral or the good businesses will go broke also! There should be intervention!



Temjin said:


> The BIGGEST problem with the banking system is that we still have too much BAD DEBT in the system. Do you realise how much are still there even after so many write downs have occured in the last 2 years? There will be NIL economic recovery as long as these debt are in the system.
> 
> The moral of the story is that if there are anything that is too big to fail, then they are too big already. Businesses who become insolvent through bad commercial practices SHOULD BE FORCED TO FAIL, period. Using tax payer money to reward those who "failed" is certainly not the answer to a sustainable economic recovery.
> 
> ...




I agree. Public money should not be used to prop up bad businesses. What I wrote above says that. More banks should have been allowed to go broke. More people who invested poorly should lose their money. What I am saying is that the money  should be used to make the country more efficient and amelieorate the wost excesses of the crash. That doesn't mean you can't have a macro policy to help the banks but it means that banks that are broke should be made to go broke. We don't want zombie banks.
I don't think we are very far apart on this.




Temjin said:


> If I was in classical economics and am in a position of power, and that my career and life is DEPENDANT ON IT, do you think I would NOT abuse my power to prevent those "alternative" thinking a--holes from ruining my life? No way, I would denial every theories they put out until I'm dead.




I agree. But the thing is they really believe it. Theysay in many people, the mind flexibility goes when they hit 50 and yet these guys are making decisions for the world. And as for Fox, what a bunch of dicks.


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## Knobby22 (10 July 2009)

shag said:


> with respect julia that is a bit naive and paranoid. kiwibank was set up for the vunerable this including beneficiaries/welfare, lower decile people etc, and also including people who relied on savings payments for income.
> more importantly it was set up in a period of a very overheated property market, worse than here(see the bluechip saga-elderly taking out morgages for dodgy property investments like storm but far more corrupt and damaging). the reserve bank was doing all it could to keep inflation down due to this property bubble, and wasnt about to design a state owned bank that helped this sector of the market, ie morgages.
> i only noted morgages as its all i am involved with, no fees helps savers too.
> 
> ...




The trouble with the words "with respect" is that it implies the opposite.

I saw the comedians on the ABC Clarke and Doyle last night and they were talking about setting up a peoples bank and how profitable will it be. 
Clarke playing the prime minister then said when it becomes profitable we can sell it off!


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## MRC & Co (10 July 2009)

Knobby22 said:


> You can't let the populce suffer too much or they will revolt. You can't let the economy go into a continuous downward spiral or the good businesses will go broke also! There should be intervention!




Couldn't agree more Knobby.

The problem is, Government intervention should look to pre-empt a crisis, not lag it.  To do so, I believe it needs to be more flexible and involve far more market players, not ivory tower academics.  

But to let all the major banks collapse, would be catastrophic to the global economy.  THEN, you would have a deep deep depression, such as the 20s, where liquidity is nowhere to be found. 

The problem now, is even if banks are guaranteed and stabilized, the fundamental structural problems of the US are huge.  The massive deficit, both trade and budget, mean stimulation of consumption is almost impossible, hard to move credit.  This goes back to banks unwilling to lend and nobody wanting to borrow.  Falling velocity of money.  No multiplier effect.

Growing household savings as they do their own 'balance sheet deleveraging' will further cause a drop in employment which is already struggling.  Not only the fall in employment, but falling incomes and growing underemployed lower ability for recovery and will result in a further fall of collatoral values and trigger further financial instibility (2nd round of stimulus down the track..........?  Possible if the Government has to ensure further defaults + lack of ability of bank lending to add 'strong' assets to their balance sheets).  

The US has absolutely no way out of this recession, but to pay back their debt, continue to devalue their dollar over the next several years and take no growth for decades.  

Trouble is, Asia does not have the same consumption mentality and this will make it very hard for the region to pull us out of this recession.  Add to that the Chinese casino mentality, using stimulus more to try to make cash than create production + consumption, does not help the cause.  

I see more chance of a double dip and second round of selling, than I do of any form of rally back to previous highs over the next few years.  But probability definately favours an L shape recovery.  In this manner, you have to adjust your trading style accordingly, jobbing the edges of the ranges.  Buy and hold is long gone.

This is my macro outlook of which I structure my individual trade ideas and strategy around.


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## nulla nulla (10 July 2009)

kennas said:


> And, greed is good!
> 
> 'How many yachts can you ski behind?'




Is that a trick question?


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## Buckeroo (11 July 2009)

MRC & Co said:


> Couldn't agree more Knobby.
> 
> But to let all the major banks collapse, would be catastrophic to the global economy.  THEN, you would have a deep deep depression, such as the 20s, where liquidity is nowhere to be found.




Maybe, if we did allow the insolvent banks to fail, the future would be much brighter even if a depression did occur? As with any free market correction, they must be allowed to run their course without interference - corrections are there to take out any excesses in the market & re-balance the unbalanced. What we have done is to delay & make much worse the eventual collapse. 

I haven't heard yet, a viable plan of how all this will pan out. How for instance, through higher taxes that we will all have to eventually endure, our economies are going to recover? 

There are many people now struggling with the official interest rates of 3% and lower in other countries. If any recover begins, it will immediately be killed off once inflation & interest rates begin to rise.

Incidentally, the only liquidity left in the world is whats being created by Governments. Once this is turned off, there will be nothing but insolvency. At the moment all we are getting is spin - no one is talking about how these problems are going to be addressed.

It maybe that we are headed towards total Socialism - you work & are fed by the state. Seems far fetched - yes at the moment it does, but the foundations are being built as we speak.

Cheers


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## Temjin (11 July 2009)

Knobby22 said:


> You can't let the populce suffer too much or they will revolt. You can't let the economy go into a continuous downward spiral or the good businesses will go broke also! *There should be intervention*!




What intervention? Have they really worked? Have they worked in the past before? 

The biggest SCAM coming out of these central governments and classical economists are that they actively promote the NEED for government intervention (must do something) to save the economy or else there will be a global war! It's all scare mongering. What EVIDENCES do they have that we will go into a never-ending spiral of depression where society has collapsed and we will suffer another global war? 

You need to be fully aware of the "intentions" behind those policy makers for encouraging such interventions. Their goal is to BAIL OUT their banker friends and uses "society collapse" as an argument for intervention. 

I'm sure you know what CAUSED this economic crisis in the first place, right?

That's right, failed policies. Massive leverage allowance on the investment banks, unbacked fiat money, unprecedented ease of monetary policies (i.e. low interest rate, low lending criteria), etc. Most of the problems were CREATED by the VERY SAME economists / policy makers who think they can FIX it by more "interventions".

Do you think we can rely on them??

Austrian economists say that ANY FORM of government intervention is a total waste of money. The government, or rather, central economic planning, WILL NEVER (and have NEVER in the history) able to allocate resource more effectively than the free market do.

And good businesses WILL NOT go broke. Why would they if they are "good" in the first place? They will simply buy off the good parts from those "bad" businesses, throw away the bad ones and go back into the market with a much larger share. 

Another biggest problem with most people is that they believed the free market IS NOT CAPABLE of self-regulating. Kevin Rudd has been actively promoting that the free market is dead and that central planning (communist style) is the way to go. 

As soon as the debt are defaulted or repaid, it will create a new foundation with more savings for investment opportunities. This will be the driver for a faster recovery. Unfortunately, the government DO NOT want these debt to go away because they are afraid of the consequences, or rather, their SEATS. 

One way or the other, these debt will have to be paid down or defaulted on. And either way will lead to an economic downturn. The faster they are paid down, the faster we will go back into recovery. 



> I agree. Public money should not be used to prop up bad businesses. What I wrote above says that. More banks should have been allowed to go broke. More people who invested poorly should lose their money. *What I am saying is that the money  should be used to make the country more efficient and amelieorate the wost excesses of the crash.* That doesn't mean you can't have a macro policy to help the banks but it means that banks that are broke should be made to go broke. *We don't want zombie banks. * I don't think we are very far apart on this.




Yes, we aren't very far apart on this too, except for the "need for macro policy". 

I already said it, what is the CORE PROBLEM with this crisis? Massive toxic debt. How do you solve this problem? The only way is to have the market to REVALUE them to original value (which is impossible), or write them off at a loss. There is no other way. You cannot make an "asset" to increase in value just by saying it has. 

Of course, the mainstream economists would have you believed that to do so would effectively bankrupt the banking industry and cause a Greater Depression. (along with all these scary predictions of global wars and massive social unrest) Thus, to solve it is to USE TAXPAYER money to force them to BUY these debt at a much higher price than the market would. And in addition, create new accounting rules so that these assets can be revalued to whatever value the "banks" deemed they to be (based on PHD-style models) and/or move them off to another balance sheet hidden from the public and "guaranteed" by the government. And of course, reward the bankers with more bonuses too. 

All they are doing is just hide the problem or force it onto others. It does not solve anything. 

You already said it too, the banks that are broke should be MADE to go broke. Unfortunately, that is not happening right now. 

If you read the financial statements from those very banks who are holding these toxic debt, you would have find them pretty much TECHNICALLY INSOLVENT since 2007. That is if you used the precious accounting rules and did not include any of the "government intervention" policies to hide those debts. Those banks are still heavily leveraged that any write down based on REAL market value would immediately bankrupt them. 

In essential, we already have zombie banks because they still have too much toxic debt with them. Exactly what the Japanese banks are in right now. They wouldn't write down the losses in their book. 


So let me conclude this. I agree with everything you've said in your previous post, except the part where you think the government should step in and "ease" the downturn and make people suffer less.

Unfortunately, they are making it WORSE because they are only delaying the inevitable. Using taxpayers' money to soften the losses from the banks means they are using FUTURE resources to solve today's problems.

And since the US government is already broke and they must sell more bonds or print money to keep the interventions up. There are simply TOO MUCH debt in the system that needs to be removed.

Either the world will suffer an immediate greater depression or an extremely prolonged greater recession/depression span over a decade or two. NEITHER options can be avoided DESPITE what the mainstream economists are telling you.

If anyone here thinks we will get out of this with government interventions, and that we will experience pre-bust growth rate (4% p.a.+) in 2 years time or so (expected by Rudd government in their latest budget forecast), then they really have underestimate the seriousness of the situation out there.


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## Knobby22 (11 July 2009)

MRC & Co said:


> Couldn't agree more Knobby.
> 
> The problem is, Government intervention should look to pre-empt a crisis, not lag it.  To do so, I believe it needs to be more flexible and involve far more market players, not ivory tower academics.
> 
> ...




You make a lot of sense MRC. You are right, we couldn't let all the banks go broke, and the multiplier effect is a good point. I don't think all the banks are basket cases though.

A double dip seems a pretty easy bet.

What annoys me about the USA is the giant debt they rung up under Bush hich has effectively meant that the company has to go further into hock just to servive and also needs to print money. Also the relaxation of rules that let the banks get to where they are today. 
They have really let the world down.


----------



## Knobby22 (11 July 2009)

Buckeroo said:


> Maybe, if we did allow the insolvent banks to fail, the future would be much brighter even if a depression did occur? As with any free market correction, they must be allowed to run their course without interference - corrections are there to take out any excesses in the market & re-balance the unbalanced. What we have done is to delay & make much worse the eventual collapse.
> 
> I haven't heard yet, a viable plan of how all this will pan out. How for instance, through higher taxes that we will all have to eventually endure, our economies are going to recover?
> 
> ...




Well that is the alternative. If you let the world collapse you will have to go back to giving the population food rations. Call it socialism if you like but it is what has happened throughout history. The Romans had to feed the populace in bad times otherwise the people would revolt. You can't the extremely wealthy and powerful living their life when people are suffering.


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## Knobby22 (11 July 2009)

Temjin said:


> What intervention? Have they really worked? Have they worked in the past before?
> 
> 
> 
> ...




To me the Austrians are a an extreme form of traditional economists, not really a new strand but a substrand who believe despite evidence to the contrary that governments have no good effect on economies. They do! Public consumption and taxes do have an effect and to say the government should be tiny and try to ignore it doesn't in my mind answer everything.

They also say all the bad things happening are due to government intervention which is what the traditional economists think when in fact they are due to government abrogating their role to make and enforce laws to control bad behaviour and perform some regulation of financial entities. Bush got rid of many of the laws that were put in after the Great Depression because he and his foolish economists believed the market will act rationally. How wrong was he?

If you look at history, the President in the USA did very little for the first 2 years of the depression and let it get worse. 

An uncontrolled depression could last 20 years. Earlier MRC & Co mentioned the multiplier effect. In a Depression it becomes the opposite, a divider effect.
I agree that governments can't hold it up but they can cushion the effects, especially if they had of being run in surplus. Unfortunately most haven't been so it has got much harder. 

I think of government intervention - DONE Properly - like Tamiflu for the flu. It will lessen the effects of the sickness and may speed up the recovery. We have to go through the sickeness to clean out the financial system unfortunately.

I agree the money is not being spent as well as it should and people in the US government seem to be doing their best to help vested  powerful interests instead of spending the money wisely. They should have been spending the money at a lower level and let the finaciers go to hell. They are starting to realise that at present and are changing tack. I don't see why the government can't moderate a recession. The economy is made up of a lot of feedback loops and as an engineer I know that damping of the system can stop runaway. That is what a depression would be, runaway. The Austrian route would lead to socialism.

History doesn't repeat but is sure does rhyme - Mark Twain


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## Buckeroo (11 July 2009)

Nicely rounded up Temjin.

Obviously, as has been in the last 12 months, there are two camps on how to fix this mess. Interventionists & Market believers.

At the moment, the interventionists have the court, but I hope our leaders eventually wake up & allow the market to correct the past excesses regardless of consequence. I don't see any other way back.

During the last depression Knobby22, capitalism didn't die and democratic countries didn't revolt. In hard times, societies like ours pull together & help each other out.

Where as Socialism & communism is a creeping disease that spreads via Government mis-information and buying up or controlling important institutions. The propping up of insolvent individuals is also beginning to happen (unemployed people with mortgages) and their vote in the next election is thus given for fear of financial collapse.

Cheers


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## Buckeroo (11 July 2009)

Knobby22 said:


> I think of government intervention - DONE Properly - like Tamiflu for the flu. It will lessen the effects of the sickness and may speed up the recovery. We have to go through the sickeness to clean out the financial system unfortunately.




Bad analogy there Knobby22 - I heard Tamiflu is becoming less affective - its pretty close to useless now & we are stuck with the bill for the 15 million doses still in storage. No sign of recovery either.

Cheers


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## Knobby22 (11 July 2009)

But Government did intervene, Buckaroo. It was called the New Deal. And Australia has similar programs. It had faults but it did help.

From 1933 to 1936 President Roosevelt argued a reconstruction of the economy would be needed to prevent another, or avoid prolonging, the current depression. New Deal programs, such as the National Recovery Administration (NRA), sought to stimulate demand and provide work and relief for the impoverished through increased government spending. A series of panels comprising business leaders in each industry set regulations which ended what was called "cut-throat competition," which kept forcing up prices and profits for everyone.[8]

The NRA, which ended in 1939, had these roles:[9]

Setting maximum prices and wages and competitive conditions in all industries. (NRA) 
Encouraging unions that would raise wages, to 93% increase the purchasing power of the working class. (NRA) 
Cutting farm production so as to raise prices and make it possible to earn a living in farming (done by the AAA and successor farm programs). 
These reforms (together with relief and recover measures) are called by historians the First New Deal. It was centered around the use of an alphabet soup of agencies set up in 1933 and 1934, along with the use of previous agencies such as the Reconstruction Finance Corporation, to regulate and stimulate the economy. By 1935, the "Second New Deal" added social security; the Works Progress Administration (WPA), a national relief agency; and, through the National Labor Relations Board, a strong stimulus to the growth of labor unions. Unemployment fell by two-thirds in Roosevelt's first term (from 25% to 9%, 1933 to 1937) but then remained high until 1942.[10]


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## MRC & Co (12 July 2009)

Yeh, I agree with nearly all you say Knobby.

'Free markets', do not work.  There was too much freedom allowed in this mess, which is what caused it in the first place.  But it is very hard to find any kind of balance, regulatory authorities really do need to be more proactive, automomous and dynamic.


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## It's Snake Pliskin (12 July 2009)

MRC & Co said:


> Yeh, I agree with nearly all you say Knobby.
> 
> 'Free markets', do not work.  There was too much freedom allowed in this mess, which is what caused it in the first place.  But it is very hard to find any kind of balance, regulatory authorities really do need to be more proactive, automomous and dynamic.




MRC,
To what extent do you feel government control should be allowed in a general sense?


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## Sean K (12 July 2009)

MRC & Co said:


> Yeh, I agree with nearly all you say Knobby.
> 
> 'Free markets', do not work.  There was too much freedom allowed in this mess, which is what caused it in the first place.  But it is very hard to find any kind of balance, regulatory authorities really do need to be more proactive, automomous and dynamic.



The Fed leaving interest rates at extremely low levels for too long might not have helped but.


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## MRC & Co (12 July 2009)

It's Snake Pliskin said:


> MRC,
> To what extent do you feel government control should be allowed in a general sense?




Obviously the collection of taxes and distribution of public goods.  

But the main Government intervention as far as the financial sector, should be in the control of bubbles.  The derivative and credit expansions are really the main problems here and could have/should have been contained in the first place.  

Why weren't they contained?  There is no excuse, except that guys like Greenspan believed that even after a bubble bursts, the economy would have generated enough growth (in the bubble phase) to offset the negative impact of that burst (at least that is how these guys justify it after the fact).

Then you have protectionism allowing 'sunrise' industries.  Such as South Korea and their shipping industry.  In a traditional sense, that would be blocking comparative advantage, but perhaps that is needed at times, if an economy has the potential to eventually hold a comparative advantage in a given industry.  

In my opinion, there are many more reasons for Government intervention in an economy, but of course, there is also a fine line before you cross to the other end of the spectrum of too much intervention.  

In the end though, there are multiple ways of a Government aiding to run an economy, the means and ends need to be determined by the society.  Amongst it all, you have complex industrial relations systems, which can dramatically effect the entire process and outcome.  

No right or wrong, but pure 'free markets' would be a disaster scenario IMO and is one reason this crisis crossed the point of no return.  

Many I am sure will disagree, but I can't really be bothered debating it.  Each to their own.


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## Smurf1976 (12 July 2009)

Julia said:


> Perhaps many didn't miss the signs at all, but it simply wasn't in their interests to warn people.



It's human nature that people tend to expect the recent past to continue into the indefinite future. We see that everywhere from whatever happens to be the current growth industry at a state / national level (mining boom will never end, house prices will keep rising at 10% pa foreve and so on) to personal situations.

Very few will, in any situation, predict a turn for the worse. Witness for example the outright denial of most over peak oil despite it having _actually happened_ in a majority of oil producing countries. People don't like change and they especially don't like forecasting "bad" change no matter what the actual issue.

Ask most people what everyday life will be like in 50 years time and they'll predict a few technological advances but that's about it. 

If you'd asked the same question 50 years ago then few would have predicted that casual employment, defacto relationships and obesity would be common in 2009 since all mark a major change from the prevailing situation in 1959. Even fewer would have predicted a black US president, Green politics or the increased acceptance of homosexuality.

Humans always seem to miss the major turning points.


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## Buckeroo (12 July 2009)

Knobby22 said:


> But Government did intervene, Buckaroo. It was called the New Deal. And Australia has similar programs. It had faults but it did help.
> 
> From 1933 to 1936 President Roosevelt argued a reconstruction of the economy would be needed to prevent another, or avoid prolonging, the current depression. New Deal programs, such as the National Recovery Administration (NRA), sought to stimulate demand and provide work and relief for the impoverished through increased government spending. A series of panels comprising business leaders in each industry set regulations which ended what was called "cut-throat competition," which kept forcing up prices and profits for everyone




Your right Knobby22, they did intervene eventually. But the difference is that the free market correction had already occurred. Bankruptcies had wiped out much of the debt, so by that stage, economies were ready for stimulus.

We still haven't got rid of the underlying causes of last years market fall - nothing has changed except higher Government debt.

That's why I reckon no one has yet come up with a viable exit plan except hope & pray that extraordinary economic growth occurs for the next 10 years.

Cheers


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## Buckeroo (12 July 2009)

MRC & Co said:


> Obviously the collection of taxes and distribution of public goods.
> 
> But the main Government intervention as far as the financial sector, should be in the control of bubbles.  The derivative and credit expansions are really the main problems here and could have/should have been contained in the first place.
> 
> Why weren't they contained?  There is no excuse, except that guys like Greenspan believed that even after a bubble bursts, the economy would have generated enough growth (in the bubble phase) to offset the negative impact of that burst (at least that is how these guys justify it after the fact).




No good blaming the fall guys - the momentum for continued credit growth was because of us, the general public. If Governments tried to curb people spending because they were racking up debts, they would be voted out. Treasury, even though Governments say they are independent, always take into account the party line.

And yes regulation was & still is, very poor, but still no Government wants to tackle it. Even our own Government, knowing the consequences, has set up its own sub prime lending risk just to keep the construction industry happy during the downturn. They don't want to upset anyone and that's the problem.

As I said, I still reckon the only way out is to allow a free market correction. This way, Governments aren't responsible and their role would be to ensure that our social system is maintained to assist people who fall on hard times.

Cheers


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## MRC & Co (12 July 2009)

Buckeroo said:


> No good blaming the fall guys - the momentum for *continued credit growth was because of us*, the general public. If Governments tried to curb people spending because they were racking up debts, they would be voted out.




So how are free markets going to work if credit growth is because of greed?  

If the Government reigned in credit, they would not be voted out, they have altered credit conditions numerous times without 99% of folk even noticing.  

Anyways, not really a debate I want to get into.  

Cheers


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## Mr J (13 July 2009)

Buckeroo said:


> As I said, I still reckon the only way out is to allow a free market correction. T*his way, Governments aren't responsible* and their role would be to ensure that our social system is maintained to assist people who fall on hard times.




The public as a whole does not understand this, which is why all governments are trying to play 'hero' and save the world from the 'GFC'.


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## wayneL (13 July 2009)

FYI

The current meme is that the free market has failed, that laissez faire economics is responsible for the current malaise.

That's total nonsense.

http://mises.org/Controls/Media/MediaPlayer.aspx?Id=3952 (audio file)

More at http://mises.org Do a search.


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## Mr J (13 July 2009)

Wayne, you may as well just write the rest in French. :


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## wayneL (13 July 2009)

A real free market in action:

http://en.wikipedia.org/wiki/1921_recession



> La rÃ©cession 1921 Ã©tait une rÃ©cession dÃ©flationniste extrÃªmement pointue aprÃ¨s la PremiÃ¨re Guerre Mondiale. Elle a durÃ© jusqu'en 1923. L'ampleur de la dÃ©flation Ã©tait non seulement grande, mais grande relativement au dÃ©clin de accompagnement dans le produit rÃ©el. [citation requise] les Ã©conomistes et les historiens autrichiens d'Ã©cole arguent du fait que la rÃ©cession 1921 Ã©tait une correction nÃ©cessaire du marchÃ©, exigÃ©e pour machiner les rÃ©alignements massifs exigÃ©s de l'affaire privÃ©e et de l'industrie suivant la fin de la guerre (qui avait marquÃ© une pÃ©riode des dÃ©formations de masse de gouvernement aux marchÃ©s libres). L'Ã©pisode 1921 est choquant en termes de sÃ©vÃ©ritÃ© de la diminution et pour la nature rapide du rÃ©tablissement.



::

I bet nobody heard of the 1921-23 depression. More details in the audio file I posted.


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## Temjin (13 July 2009)

MRC & Co said:


> Yeh, I agree with nearly all you say Knobby.
> 
> 'Free markets', do not work. There was too much freedom allowed in this mess, which is what caused it in the first place. But it is very hard to find any kind of balance, regulatory authorities really do need to be more proactive, automomous and dynamic.




Most people seem to think "free market" as in that there are absolutely no "regulatory" body and that every businesses would do everything in their power to fraud or monoplise everyone else at their expense for their own good. 

That is just plain wrong.

A free market, in which the Austrian economists believed, (and based on my interpretion) is that the process of price discovery is totally free and unhindered. There should be no protectism or flavourism of ANY KIND, period. And that all prices, wages and profits are determined not by the arbitrary whim of the rich or the poor, or not by anyone's greed or needs, but by the law of supply and demand. Voluntary participations amoung all participants who would seek mutual benefits from the decisions they are making. 

However, a free market will still require a regulatory body to oversea the rules and laws needed to prevent acts of fraud. That is, acts that violate the principle of personal liberty in which a person's own rightful property is unlawfully "stolen". The rules and laws SHOULD BE determined by democratic means. 

Now heading back to reality, do anyone of you see this in practice in real life?? 

Of course no, there are far too many vested interest parties (both on government, corporate and individual levels) who would DO ANYTHING to maintain their "properties" at the expense of others. Pure greed.

Now we get to the point of those blaming free markets for the GFC. For example, how the free market let loan apprasiers to skip diligence standards and provide loans to people who certainly would not be qualified for it under "normal" circumstances. Or how investment banks are allowed under the "free market" to lend out so much and under-estimate the risk while holding very little equity and in addition, becoming so big that they represent systematic hazard to the financial industry. Or maybe how the free market allowed speculators to play on the stock/future markets that pushed up or down the market in an irrational way (oil price shock, blaming short sellers). 

However, EVERY EXAMPLES OF THESE "free market failures" are merely a consequence of something bigger. That is, the free market was NEVER ALLOWED practised in the first place. 

The government regulatory bodies had DIRECTLY intervened with the supply and cost of money by allowing businesses to borrow at a rate that would otherwise be considered "too low" under freely market determined rates. This create so much distortion to the market that people have totally miscalculate the level of risk they should be taking and ultimately, used the "cheap" money on something that would not have been profitable at all, and/or sustainable in the long term. This of course, distort other market players who would otherwise think it's "normal" because the opportunity was available to them. (i.e. young 18 yrs old kid borrowing few hundred ks with only $20,000 deposit with little work history or market speculators who borrowed huge on margin to play on ever rising asset prices)  

In essential, and to repeat this again, the free market DID NOT FAILED because there was never a free market in the first place. At least not in the modern economy. 

There will never be a set of "perfect" regulations that would totally get rid of frauds and thieves. This is because we are all humans and greed has always been with us.

The saddened fact is that the governments continue to attack the "free market" for problems that they intentionally (or unintentionally) created themselves. They would then intervene with what the free market would have done by rewarding those who fail to utilise the resources in an effective way and punish those who can. 

Again, I am not saying we should NOT regulate the economy and let frauds to run rampage. What I am saying that the intervention policies that are being used right now to "solve" the crisis is nothing more than creating even more distortions to the market and prolonging the downturn. 

The next thing we should do is to jail all those bloody central bankers who KNEW they are committing fraud at the highest level but are getting away because they are in a position of power. (It makes Madoff's fraud pales in comparsion)


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## Knobby22 (13 July 2009)

Temjin

What do think of the freeing up of the banks under Bush that allowed banks more financial freedoms that were limited after the last depression?


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## Buckeroo (13 July 2009)

MRC & Co said:


> So how are free markets going to work if credit growth is because of greed?
> 
> If the Government reigned in credit, they would not be voted out, they have altered credit conditions numerous times without 99% of folk even noticing.
> 
> ...




Moderation my dear Watson. 

If Governments don't want bubbles, then they have to regulate. Back in the 80's when I purchased my first home, I had to save 30% of the value of the house. It was the only way the banks would give me a loan and it ensured that I had equity to help buffer the economic ups & downs. Who saves for a house these days?

If Rudd decided to apply this same principle, would people still vote for him. The first thing you would hear is housing affordability has gone through the roof blah blah blah.

Anyway, greed is ok, but you have to be prepared to take the good & the bad. If you want to enjoy the benefits of a bubble, then take your medicine when the bubble bursts. Prudent people tend to save when the bubble is forming, so they are ready & prepared when it happens.

Cheers


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## Mr J (13 July 2009)

Buckeroo said:


> If Rudd decided to apply this same principle, would people still vote for him.




You think so? I would think there would be a massive whinge at how hard it had become to earn the 'Australian Dream'. Why would people suddenly respect hard work, saving and earning after experiencing the credit spend-money-like-water environment? As a hot actress once said, the mob is a fickle bunch.


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## Temjin (13 July 2009)

Knobby22 said:


> Temjin
> 
> What do think of the freeing up of the banks under Bush that allowed banks more financial freedoms that were limited after the last depression?




I know what you are trying to stir up and this discussion can be quite controversary and is probably beyond my understanding of the whole free market concept to explain. 

Yes, we all know (assuming!!) that Alan Greenspan had increased the debt-to-net-capital ratio for the FIVE investment banks from 12-to-1 to up to 30 or even 40 times in 2004. This was after the SEC created the 12-to-1 rule in 1975 as part of regulatory policy to mitigate the inherent risk of the fractional reserve banking. (which from an Austrian economic point of view, is fraudent and should never have been practicised from day one, or at least not in current form) 

And of course, we all know what happened to these big five banks. Ironically, when Alan Greenspan enacted these exemptions, he claimed that it was to regulate them even more because these rules would strengthened the oversight of the securities market, where prior to their adoption, there was no formal one. It was claimed that it is now easier to oversee the market and ensure better management of risk. 

Any person would simply see this was a failure of the free market because they were allowed to ramp up their leverage so high and created a huge systematic risk. Naturally, the people wanted MORE regulations in order to prevent it from happening again. (as if we don't have enough already, just check how many agencies/firms/people employed in the regulatory industry!)

Here is a quote from Mises



> Public opinion has become convinced that such happenings are *inevitable *in the *unhampered market economy*. People did not conceive that what they lamented was the necessary outcome of policies directed toward a lowering of the rate of interest by means of credit expansion. They stubbornly kept to these policies and tried in vain to fight their undesired consequences by more and more government interference.




In other words, the low interest rate policies set by the central bankers (REGULATION!!!!) because they BELIEVE it would be beneficial for the economy, had actually distorted the rate of credit expansion and allowed for the return for more booms and busts. When banks failed as a result of it, the public would look to blame the free market due to some regulatory changes but then NEVER QUESTION why they really failed in the first place. They only seek to understand the consequences but don't look at the cause. 

They question how free market had failed but do not realise how the central banks *manipulation* of interest rates was actually responsible for the bust! 

If only market interest rates were left DETERMINED by the FREE MARKET, then there wouldn't have been any unhampered rapid expansion of credits and the banks would not be fooled into expanding credit so fast. 

If we want to solve this, they should just get rid of the central banks and let the market determine the interest rates! But of course, you can imagine what will happen next. Big bust! Unhappy bankers! And these unhappy bankers will cry for bail outs / intervention to the votes-hungry-politicans. 

The core issue has never been the regulation of capital reserve requirements or lending criteria from the banks, but rather the issue was that the government INTERVENED with how credit should have been priced. The former wouldn't happen if the latter didn't. 

I believe that the banks would be perfectly be capable of setting their own capital reserve requirements, etc if the markets were truly free. Why would they be crazy enough to increase their leverage ratio to 50 times (for more profit) if they know a tiny default on loans would bust them out?  

Of course, investment banks are doing it now because they KNOW that they will not be allowed to fail. Moral hazards at its worst thanks to all these regulations.


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## Buckeroo (13 July 2009)

Mr J said:


> You think so? I would think there would be a massive whinge at how hard it had become to earn the 'Australian Dream'. Why would people suddenly respect hard work, saving and earning after experiencing the credit spend-money-like-water environment? As a hot actress once said, the mob is a fickle bunch.




Yep - couldn't agree more and I'm thinking the mob may not have much time to wait before they find out what life's like without the frills.

Cheers


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## Glen48 (13 July 2009)

http://news.bbc.co.uk/2/hi/business/8142838.stm?ref=patrick.net
Hers some thing else they forgot to think about.


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## Julia (28 August 2009)

I'm not sure this is the right thread, but here is a very interesting discussion between Professor John Quiggan (main address), Steve Keen and Guy Debelle.

Just under an hour but really worth listening to:

http://www.abc.net.au/rn/bigideas/stories/2009/2663111.htm


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## Buckeroo (28 August 2009)

Julia said:


> I'm not sure this is the right thread, but here is a very interesting discussion between Professor John Quiggan (main address), Steve Keen and Guy Debelle.
> 
> Just under an hour but really worth listening to:
> 
> http://www.abc.net.au/rn/bigideas/stories/2009/2663111.htm




Can you give us a quick summary Julia? Bit long for me - got to wash the dishes & put the kids to bed!

Cheers


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## Julia (28 August 2009)

Buckeroo, here is the header for the programme:



> New Times New Approaches: exploring Australia's economic options
> 
> The global economic situation in 2009 is complex and rapidly changing. It's been the subject of much debate and speculation both locally and internationally, but what do we really know about the implications for Australia, now and in the future?




Essentially each of the three speakers gives their summary of why they consider the GFC occurred, and then offers their views about the efficacy or otherwise of the remedial measures applied by governments.  Then they give the expectations for the future.

There is some disagreement amongst the three speakers which adds to the interest.  Well worth making the time for if you can.


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## Buckeroo (28 August 2009)

Julia said:


> Buckeroo, here is the header for the programme:
> 
> 
> 
> ...




Thanks Julia - you've convinced me, will have a look this weekend

Cheers


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## joeyr46 (11 October 2009)

We should be asking now why so many are convinced everything is back on track (albeit at a slower pace) and failing to see the problems that still exist or have actually got worse, Higher unemployment more debt both public and government and less profits in real economy as opposed to in banking which produces nothing for real economy although important in it,s own right.
Looking at charts nothing actually looks bullish on the long term charts but neither has anything reached or formed a bottom. Given the magnitude of the correction and the break of long term trend lines in many things and supposed V bottom. Have heard about this phenomenon but have never seen it happen.
So why are so many saying things are good again and a new bull market are they using the same tools as last time


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## Timmy (11 October 2009)

joeyr46 said:


> We should be asking now why so many are convinced everything is back on track (albeit at a slower pace) and failing to see the problems that still exist or have actually got worse,




My perception is this is not the case at all, quite the opposite.  Most of what I read on commentary/blogs/forums is extremely bearish and pessimistic.


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## joeyr46 (11 October 2009)

Timmy said:


> My perception is this is not the case at all, quite the opposite.  Most of what I read on commentary/blogs/forums is extremely bearish and pessimistic.




Try the mainstream press Financial review and daily papers worst I've seen is expecting small consolidation and then continue even Krudd and Henry are being criticized for being too cautious and told to reign in the stimulus package and of course were starting to get share issues like Myer that usually happens at tops


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## Timmy (11 October 2009)

joeyr46 said:


> Try the mainstream press




Ahh, there's the problem, right there


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