Wednesday, December 22, 2010

Don't blame the savers

Steve Waldman blames savers for the housing bubble and financial crises. You heard me right -- Steve thinks that people who refused to take out massive NINJA loans to buy houses they could not afford at crazy prices are the guilty ones. Is he Lloyd Blankfein's puppet? Did Geithner slip him extra-special cookies when Steve flew over to meet the great man? Read through the comments and decide for yourself.


Blogger ds said...

I thought the most interesting part of the piece was the following:

"We measure prosperity by production, not by work, and we measure production by value, by what people are willing to pay for what is produced."

Would you agree that, in the aggregate, this argument is circular? To me, it sort of sums up a lot of the problems with mainstream macro today.

2:38 PM  
Blogger Greg said...

Merry Christmas Winterspeak

I really found the exchange between you and SRW informative and gratifying. Informative because you two went very deep and explored that issue in a way I've never seen it treated before.

Gratifying because I have had similar feelings to SRW myself. I came up with these on my own (guess I'm a closet totalitarian too ;-) ) after looking at the economy in a new complete way. I owe this vision to you (you can go throw up now, I'll wait)............................................
.............................................................. because I got my introduction to MMT from you. It has led me on quests into economic ideas that I never would have explored 3 yrs ago and frankly has been the most illuminating journey in my 51 years. You probably recall a similar shorter discussion with me, in your comment section a couple months ago.

Now, you're probably thinking, "How could you come to SRW conclusions about savers via MMT, you moron?" And I'll just say that it comes from having a more coherent view of those parts of our economic/financial system which are more mechanical and those which are more political. Politics is morality play. And in todays political climate savers are NOT the moral force that they have been lauded as by our Austrian friends. So I feel like MMTers should/could hold two positions at the same time, which are somewhat contradictory. One is the ultimate truth, understood as Investment leads to saving, saving is a passive activity and any fall in output from the currency users increased desire to save can be effectively countered by a smart and "moral" govt.

The other is the provisional truth, understood as savings comes with an implicit expectation that their savings wont be inflated away by a profligate currency issuer. These saver will accumulate power and sway in a poorly run govt and hamstring certain financial solutions from even being explored, often with an implied threat of violent overthrow or secession. Under this truth, savers need to be exposed as the fraudulent moral agents they are professed to be and if necessary demonized as evil. If we can effectively get the discussion of saving/investing out of the moral sphere and into a mechanical sphere then MMT will have "won".

There is a whole lot of moralizing going on, most of based in totally unsupportable ethical assumptions. I think what SRW is doing, maybe unconsciously, is saying "You wanna talk morals, lets talk morals!!"

I feel quite confident that in a completely objective assessment of moral positions, the deficit terrorists and austerians would get their a$$e$ kicked (I'm trying to be sensitive to your cussing policy).

I totally agree that we should not really be having the argument about who is more moral the spender or the saver, but we ARE having that argument so lets at least go and win the argument, by any means possible.

7:34 AM  
Blogger Greg said...

I wanted to post this response at Interfluidity but it seems he has closed comments on his thread.

7:35 AM  
Blogger winterspeak said...

ds: I'm not sure what you mean. I think the problem with mainstream macro is that it does not respect or understand accounting.

greg: SRW is certainly playing in the political realm, and used a moral argument (that he knows to be false) to grab power. He's not the first, nor will he be the last.

But since Steve explicitly took a moral tact to further a political end, I countered him at the same moral level, and called out his power grab. "Will to Power" is not "Seeking Truth".

His "solution" to the "problem" is also awful on a technical level. There are plenty of countries out there with high inflation expectations, and the savings rate if anything is the same or higher. They just save in different vehicles, in ways that are worse for the economy. I didn't touch that topic at interfluidity, but I've been posting about it here.

7:54 AM  
Blogger Noumenon said...

I'm not sure where the dialogue with SRW that Greg mentions was or how much you are purposely mischaracterizing SRW in order to get the moral argument right, but blaming the savers is not the same as blaming all people who didn't take out NINJA loans, and also not the same as not blaming people who took out NINJA loans. Geez, I know you know that, you aren't trying to be objective here, I'll shut up now.

1:55 PM  
Blogger Andy Harless said...

I think SRW is entirely correct in blaming the savers (although the worst offenders were Chinese rather than American). The housing boom was the result, in large part, of the Fed's pursuit of its mandate of high employment and price stability using the tools it had available, namely low interest rates. The Fed's pursuit of its mandate required it to go to extremes because there was insufficient consumption to produce enough demand to employ people who chose to work. People chose to work -- i.e. to earn income -- and they chose to consume too little, in aggregate, relative to that income, to support the creation of that income without extreme measures. Those extreme measures led to the crisis. In short, people chose to save, and it was this saving that led to the crisis.

Morally speaking, it seems perfectly reasonable to me that one might reformulate Say's Law as a moral obligation: supply has a duty to create its own demand. In other words, if you're lucky enough to have income, you have an obligation to use that income in such a way as to produce income for others. When interest rates are sufficiently high, saving is a good thing, because the Fed will act as your agent and cut interest rates enough to create an equal amount of income for others, while your foregoing of consumption will allow resources to be used for investment, thus increasing others' income even more in the long run. But when interest rates are very low, the Fed's agency only serves to create instability in asset markets (if it even succeeds in doing that), so a well-functioning economy requires income-earners to spend their income directly. I think it's reasonable to argue that the Chinese in particular (who, because their currency is tied to the dollar, are effectively part of the economy managed by the Fed) have failed in this responsibility and that any American who, on the margin, chose (or chooses) not to spend was (and has been) making the situation worse and deserves, on the margin, to be condemned.

It seems to me that in a time when inflation and interest rates are high and capital formation is low, we could reasonably condemn people for consuming too much, for using up resources that could be better devoted to something else. Is it any less reasonable to condemn people for consuming too little in a time when resources overall are (or threaten to be) underutilized?

3:33 PM  
Blogger winterspeak said...

Andy: Next you're going to blame water for being wet, and the sun for being warm.

I'm never sure how much MMT you understand.

4:25 PM  
Blogger Andy Harless said...

The water wouldn't be there if someone didn't turn on the tap, and the sun wouldn't be there if someone didn't open the shade. Earning income is a deliberate act (usually), and there's nothing illogical about believing that it entails certain positive responsibilities. The crisis occurred because people (mostly in Asia) earned too much income and didn't spend enough. The crisis wouldn't have happened if they had chosen not to earn that income, and it wouldn't have happened if they had chosen to spend more. The financial and housing sectors over-expanded because Y-C was too high in the rest of the economy. You can't blame them for the minus sign, but you can blame them for choosing the values of Y and C. I say again, saving caused the crisis.

8:06 AM  
Blogger winterspeak said...

Andy: Orthodox macroeconomists such as yourself are really a gift. First Nick Rowe very graciously suggested buying luxury kayaks in response to his savings evaporating, and now you're blaming savers for a crises clearly caused by banking making loans to borrowers who could not pay them back, and then the private sector having too little money.

Can I get a quote from you blaming wet pavements for causing it to rain? Not that I need it.

9:28 PM  
Blogger Andy Harless said...

"crises clearly caused by banking making loans to borrowers who could not pay them back, and then the private sector having too little money."

So what would have happened if the banks hadn't made those loans? It seems to me the private sector would still have had too little money; it just would have realized that sooner. Looking at the situation in 2003, can you seriously argue that things would have been just fine if only banks hadn't lent recklessly?

4:33 PM  
Blogger winterspeak said...

Andy: Short answer -- yes. If banks had stuck to making loans that would be paid back, we would not have a credit crises caused by loans not being paid back.

Longer answer. Fiscal policy in general, and tax policy in particular, is not formulated by people who understand how the macroeconomy actually works. In particular, orthodox macroeconomists, and the models they use, do not capture savings well, nor balance sheets, nor bank operations. This is not an attack on models in general, this is an attack on the specific models in fashion today.

Therefore, it is quite possible that the tax code, plus the fiscal policy we have, never sustains sufficient aggregate demand to support full employment as it drives the deficit into surplus when that point is approached, killing growth.

So, in 2003 the private sector probably still had too little money, and things would not have been "just fine" as a consequence. Nevertheless, the leverage generated by bad credit decisions, and the subsequent collapse of that leverage made things much worse than they would have been otherwise.

11:42 PM  
Blogger Andy Harless said...

What we had was a combination of a high saving rate, an insufficient fiscal policy (which is just a high saving rate -- or more precisely a low dissaving rate -- by the government), and a monetary policy designed to produce full employment. The necessary result of the 3 things in combination was that interest rates were very low, so that asset prices were unstable. (Low discount rates imply that the value of capital assets is highly sensitive to difficult-to-estimate growth rates, hence they create instability.) As it happened, that instability manifested itself in part in the form of bad lending practices. Without bad lending practices, the instability would have found some other way of manifesting itself.

You can quibble about which of the 3 necessary conditions you're going to blame for the asset price instability, but I would say they are all to blame, and if I could have a choice, I would rather the situation had been avoided by reducing the private sector's saving rate than by increasing the US fiscal deficit or by pursuing a tighter monetary policy.

12:40 PM  
Blogger winterspeak said...

Andy: We housing bubble was a credit bubble, not an asset bubble. The inability to distinguish between the two is probably the second biggest issue in academic macroeconomics as it exists today.

Maybe I'm being unfair. If you can point me to a commonly used model that draws a clear distinction between the two, I'd be much obliged.

I am curious why you would pick "reducing the private sector's saving rate" as your solution though. The private sector did that very well all by itself, and the end results were not pretty.

Why not pull the obvious lever?

3:01 PM  
Blogger Tom Hickey said...

"The housing market was a credit bubble."

Housing prices increase to the level that creditors are willing to lend on them, or buyer indifference level is reached. After that, the music stops. The run up was due to creditors willingness to loan on the presumption that the indifference level would never be reached, so that there would be buyers at every increasing prices. At the top, both creditors and buyers chickened out when it began to become obvious that the second derivative was flattening.

I was on the ground in CA watching this happen. It was truly the "Wild West" where anyone who could fog a mirror could qualify by paying an extra point. Most people looked at it as renting rather than buying. It was all the monthly. In fact, it was easier to buy than rent, since to rent in CA, three months up front is pretty standard. At the end, the terms got ridiculous to stay in the monthly affordable range for decreasing quality of buyers, but for only two years.

Once it became clear that the music was winding down, the flippers rushed for the door. That ended demand.

8:40 PM  
Blogger Ralph Musgrave said...

In “blaming” and “condemning” households for excess saving, Andy Harless is effectively saying that the average household can be expected to know as much economics as the average Professor of economics. That is, the average household can be expected to look at assorted statistics, work out whether the nation is saving too much etc etc,and taylor the family’s budget accordingly.

This is straight out of Alice in Wonderland.

When Andy Harless tumbles to the point that only government / central bank machine can do the above job, we may be able to welcome him into the MMT club.

3:20 AM  
Blogger Ohm (Ώ) said...

"The run up was due to creditors willingness to loan on the presumption that the indifference level would never be reached, so that there would be buyers at every increasing prices." ..... and they successfully sold their presumption/delusion/deliberate fiction (take yr pick) to:
1) the 'renter-manipulturned-buyers' that Tom Hickey further refers
2) Savers, including in China, to bring more money into the game via biting into MBSs.

If you have a system that incentivizes both oversaving, and indebtedness ("credit history"**, interest deduction in taxation, et al), and financial players that run riot on it - without even provisioning for losses when the music stops (in order to suck out as much bonus for themselves as they can), it is quite a distraction to later fight over blaming the savers v/s debtors.

** if you use less credit in your life, you get a poor credit score, wt...!
It was purely a banker BS and mayhem, even calling it a crisis (making it sound like a natural disaster) is a falsehood.

5:10 PM  

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