Welcome, Nicole Gelinas!
The Ricochet Book Club is delighted to welcome Nicole Gelinas--a much-anticipated event here at Ricochet, Nicole. Do you have questions about how to save capitalism from Washington and Wall Street? She's got the answers.
Don't forget, the five members who offer the best comments--as measured by the "like" button--will receive copies of our next book club selection.
Let me start: Nicole, it seems to me the most debatable suggestion you make is this: By 2008, it was too late. (Page 160, for those of you with your copies in hand.) I quote:
Could free markets have sorted out the mess without extraordinary government action? Yes, but only by destroying the remains of the financial system and possibly putting tens of millions of people out of work. Despite virulent public opposition to the Bush bailouts, society would not have tolerated the price that a sudden free-market correction of decades of financial excess would have exacted.
I wonder. I truly don't know what would have happened. What do other members of Ricochet think?
- Comment (32)
- · Quote
- · UnfollowFollow (4)
- Pages:
- 1
- 2
- Pages:
- 1
- 2
Comments :
Re: Welcome, Nicole Gelinas!
Again quoting Nicole ...
....what price would that have been exactly? More jobs lost? Tighter credit? What would the catastrophe scenario have looked like?
Oct '10
Re: Welcome, Nicole Gelinas!
Of course, it is uncertain what would have happened. It is certain that there would have been a more dramatic correction and that many who did not get hurt badly would have been hurt worse. But many who did get hurt may not have been hurt at all or not hurt so badly. In other words, those with the highest exposure to risk would have been less sheltered from the adverse consequences of that risk.
Oct '10
Re: Welcome, Nicole Gelinas!
The most salient line in the book, for me, was:
"The inevitable financial catastrophe reminded us of something that we had forgotten. When financial markets are too free, they will eventually destroy themselves and damage everything around them."
Faith in the free market system is tempered by the market disciplines that were enacted after the Great Depression. Commonsense regulations promulgated by FDR served the financial community for nearly 50 years. One of the first signs of unraveling happened under Reagan in the bailout of First Continental and laid the foundation of Too Big To Fail.
I didn't know any of these things until I read the book...a great history lesson.
Edited on Jan 14, 2011 at 12:36pmMay '10
Re: Welcome, Nicole Gelinas!
The recession was a response to faux economic growth produced by the Federal Reserve's artificial expansion of the supply of credit. When the Fed expands the credit supply, it reduces interest rates. Falling interest rates cause the quantity of credit demanded (by businesses) to increase. The lower rates make previously unprofitable undertakings now profitable. Businesses use this credit to acquire productive factors (land, capital goods) and use these factors to produce goods for sale, causing factor prices to increase.
The problem is that the Fed's expansion of the credit supply is not preceded by a increase in the supply of savings on the part of investors. Investors give no indication that they are interested in the goods produced by these credit dependent businesses. The ventures encouraged by the credit expansion fail to satisfy demand. Costs exceed revenue and ultimately force these businesses to go bankrupt, go under, or be purchased. The recession is the liquidation process by which these businesses cut costs, e.g., sell real estate, layoff labour, etc., and by which unprofitable firms collapse with their capital assets sold off at a discount to institutional buyers.
.....
Aug '10
Re: Welcome, Nicole Gelinas!
Having been somewhat shaken by recent events, I spent too much of my free time this week delving into mental-health issues to have finished reading Nicole's book. So I regret having no intelligent questions to ask.
But I look forward to others' questions, and referencing them to the book as I read.
Oct '10
Re: Welcome, Nicole Gelinas!
Michael, it appears there is plenty of blame to spread around beyond the Fed...banks eager to shed their traditional role, successive legislatures and administrations relaxing market disciplines, market participants bent on opacity in an effort to obfuscate risk...
Edited on Jan 14, 2011 at 12:52pmMay '10
Re: Welcome, Nicole Gelinas!
.....
The recession process requires price deflation, including falling securities prices, capital good prices, real estate prices, and wages, as well as unemployment. These undertakings are fundamentally unsound, hence labour must be removed from them as well as land and capital goods. However, most Americans are insufficiently familiar with economics to distinguish necessary but painful recessionary events from unnecessary government-produced mal-effects. Government intervention postpones and aggravates the necessary economic contraction. Perpetual postponement, e.g., "quantitative easing 2, 3, 4..." leads to hyperinflation.
If in 2008 and 2009 the government refrained from intervention, the market would have sharply corrected and rebounded by now. This is the reason why no one is familiar with the depression of 1920. At the time, President Harding called for fiscal restraint and price deflation. The economy promptly recovered within two years.
Edited on Jan 14, 2011 at 12:52pmMay '10
Re: Welcome, Nicole Gelinas!
I'm merely describing the effects of a recession in the absence of government intervention. The recession is made necessary by government intervention; further government intervention forestalls the inevitable and makes the recovery worse.
May '10
Re: Welcome, Nicole Gelinas!
By autumn 2008 we were told that without massive bailouts the country could slip into depression. The bailouts began. Through winter 08/09 some were saying the bailouts were not working as planned. By spring 09 banks were reporting profits again.To the casual observer its hard to believe that we went from imminent disaster to wealth & prosperity in less than a year.One commentator even claimed recently that the bailouts worked so well that some now question whether they were needed at all. At the same time others say the bailouts should have been bigger.
So my question is were we ever really staring into the abyss or were we simply afraid of uncertainty?
Edited on Jan 14, 2011 at 1:09pmOct '10
Re: Welcome, Nicole Gelinas!
Whether we like it or not, governments play an important role in financial markets. "Government intervention" is a tricky pejorative. One part of the debate here is the nature and extent of the intervention. Ms. Gelinas did an excellent job of detailing how government's response got it right initially and subsequently, through inaction, got it wrong.
Aug '10
Re: Welcome, Nicole Gelinas!
Oct '10
Re: Welcome, Nicole Gelinas!
The part that is so hard for the casual observer to understand is the incredibly rapid rise in the use of derivatives (into the trillions in a matter of 4 to 5 years) and the millions of "strands" that interconnected the banks, investment houses and insurance companies. In the past there were "firewalls" that would have prevented or at least inhibited these strands to occur. It was the fear of the unknown effect of this interconnectedness that drove the intervention.
Edited on Jan 14, 2011 at 1:15pmJul '10
Re: Welcome, Nicole Gelinas!
My guess is that monetarism has, at least in a crisis, diminished free markets, truly ironic. With the view that the collapse of the economy and consequent pain of the Great Depression resulted from a collapse of the money supply, any reasonable threat of collapse of the money supply will trigger interference in free markets by government action. No one will risk a Great Depression.
I take it that much of Nicole's thesis is that there should be modest market limitations such as capital requirements and orderly liquidation procedures of failed financial institutions such that the markets will be preserved without extraordinary government reaction.
Aug '10
Re: Welcome, Nicole Gelinas!
As the US is forced to realign it's system, will the general international credit crises combine to make it that much harder , or was there ever any country that would or could help us anyway ?
John Prather: One of the first signs of unraveling happened under Reagan in the bailout of First Continental and laid the foundation of Too Big To Fail.
I didn't know any of these things until I read the book...a great history lesson. · Jan 14 at 12:33pm
Edited on Jan 14 at 12:36 pm
So the Chicago Machine was responsible for the First Continental Bailout as well ?
Sep '10
Re: Welcome, Nicole Gelinas!
During my life I have frequently heard from people 20 years my senior explaining their frugality and/or their aversion to the use of credit say, “ I lived during the depression.” They and I both realized they needed to say nothing more for they were appealing to the obvious effect that the depression had on the national psyche. I believe this sociononmic phenomenon does more to explain the 3 or 4 decades of relative financial tranquility we experienced more than the regulations. As the influence of this generation began to wane the regulations Nicole sited began to be ignored, repealed or interpreted more laxly. I, for one would not expect similar regulations, absent the national psychic effect the depression had to be as effective. If one listens carefully one can begin to hear the false lesson learned from the bail outs. “If government acts correctly we can avert a depression no matter what.” Excellent book!
Nov '10
Re: Welcome, Nicole Gelinas!
If Calvin Coolidge had been president in 2008 he would have done precisely the right thing, which is nothing. Everything would be back to normal by now, after some suffering of course. U.S. financial institutions would be out of the casino banking mode for all time and Laissez-faire capitalism would thriving in the United States. Instead we have crony capitalism run amok. Gelinas can’t be serious and should not be taken seriously.
Jul '10
Re: Welcome, Nicole Gelinas!
Ms. Gelinas' assessment strikes me as having the ring of truth. Government interventions over many decades had already distorted the so-called "free market" almost beyond recognition. With those distortions in place and causing the economy to scream along at 70 mph, it's no good suddenly deciding to let the free market work, and slam things into reverse. The economic and political consequences that would have flowed from a decision by the Bush administration to "[stand] by while the markets did their work" are too staggering to contemplate.
More to the point, however, is whether our leaders have learned anything from the consequences of their meddling. I would be fascinated to hear Ms. Gelinas' thoughts: Does anything that has happened since the period you write about give you cause for optimism that we have learned the tough lessons and are undoing the distortions that brought us to this terrible state of affairs?
Aug '10
Re: Welcome, Nicole Gelinas!
Well, it may have more effect than regulations, but on the other hand, I know from my own family's experience that living through the depression does not necessarily make one fiscally wise.
What seems like noble frugality from one perspective may turn out to be "penny wise, pound foolish" from pretty much everyone else's perspective, and an aversion to risk grown to monstrous size impairs the ability to wisely choose among inevitable risks.
Our family is probably worse off, on balance, for one ancestor's preference for "depression-era virtues" over realistic risk analysis. These virtues have their costs, too.
Oct '10
Re: Welcome, Nicole Gelinas!
I won't attempt to chronicle the different worlds in which Coolidge operated versus now, but suffice to say the economies of the world depend on trust. Just as trust was integral to the banking system of the 1930's, the world looks to the United States (and it's government) to react to crisis. We may debate in what form that reaction should be. Many would argue that allowing the commonsense market disciplines to fall by the wayside, which served our economy well for the better part of 50 years was precisely the inaction that shook that trust. One should not shoot the messenger...
Edited on Jan 14, 2011 at 2:01pmSep '10
Re: Welcome, Nicole Gelinas!
Claire I have a question for Nicole. As I’m sure you know a couple of centuries ago Britain placed the Payment function (checking) and the saving/ credit function in one institution and called it a bank. The payment function derives its revenue from fees and has little risk associated with it. The saving/ credit from interest and has considerably more risk. When a disruption occurs both functions shut down. It has been suggested that these functions be separated into different institutions. Then when problems arise at least the payment function of the financial system would continue functioning. This would undermine one of the arguments for deposit insurance which Nicole seems to like. I don't believe you vovered this in your book., but I am curious about your views. T/Y