Brad DeLong: Three Cures for Three Crises

Brad DeLong says the cure for a financial crisis depends upon why the crisis exists:

Three cures for three crises, by J. Bradford Delong, Project Syndicate: A full-scale financial crisis is triggered by a sharp fall in the prices of a large set of assets that banks and other financial institutions own, or that make up their borrowers' financial reserves. The cure depends on which of three modes define the fall in asset prices.

The first -- and "easiest" -- mode is when investors refuse to buy at normal prices not because they know that economic fundamentals are suspect, but because they fear that others will panic, forcing everybody to sell at fire-sale prices.

The cure for this mode -- a liquidity crisis caused by declining confidence in the financial system -- is to ensure that banks and other financial institutions with cash liabilities can raise what they need by borrowing from others or from central banks.

This is the rule set out by Walter Bagehot more than a century ago: Calming the markets requires central banks to lend at a penalty rate to every distressed institution that would be able to put up reasonable collateral in normal times.

Once everybody is sure that, no matter how much others panic, financial institutions won't have to dump illiquid assets at a loss, the panic will subside. And the penalty rate means that financial institutions can't profit from the investment behavior that left them illiquid -- and creates an incentive to take due care to guard against such contingencies in the future.

In the second mode, asset prices fall because investors recognize that they should never have been as high as they were, or that future productivity growth is likely to be lower and interest rates higher. Either way, current asset prices are no longer warranted.

This kind of crisis cannot be solved simply by ensuring that solvent borrowers can borrow, because the problem is that banks aren't solvent at prevailing interest rates. Banks are highly leveraged institutions with relatively small capital bases, so even a relatively small decline in the prices of assets that they or their borrowers hold can leave them unable to pay off depositors, no matter how long the liquidation process.

In this case, applying the Bagehot rule would be wrong.

The problem is not illiquidity but insolvency at prevailing interest rates. But if the central bank reduces interest rates and credibly commits to keeping them low in the future, asset prices will rise. Thus, low interest rates make the problem go away, while the Bagehot rule -- with its high lending rate for banks -- would make matters worse.

Of course, easy monetary policy can cause inflation, and the failure to "punish" financial institutions that exercised poor judgment in the past may lead to more of the same in the future. But as long as the degree of insolvency is small enough that a relatively minor degree of monetary easing can prevent a major depression and mass unemployment, this is a good option in an imperfect world.

The third mode is like the second: A bursting bubble or bad news about future productivity or interest rates drives the fall in asset prices. But the fall is larger. Easing monetary policy won't solve this kind of crisis, because even moderately lower interest rates cannot boost asset prices enough to restore the financial system to solvency.

When this happens, governments have two options. First, they can simply nationalize the broken financial system and have the Treasury sort things out -- and reprivatize the functioning and solvent parts as rapidly as possible. Government is not the best form of organization of a financial system in the long term, and even in the short term it is not very good. It is merely the best organization available.

The second option is simply inflation. Yes, the financial system is insolvent, but it has nominal liabilities and either it or its borrowers have some real assets. Print enough money and boost the price level enough, and the insolvency problem goes away without the risks entailed by putting the government in the investment and commercial banking business.

The inflation may be severe, implying massive unjust redistributions and at least a temporary grave degradation in the price system's capacity to guide resource allocation. But even this is almost surely better than a depression.

Since late summer, the US Federal Reserve has been attempting to manage the slow-moving financial crisis triggered by the collapse of the US housing bubble.

At the start, the Fed assumed that it was facing a first-mode crisis -- a mere liquidity crisis -- and that the principal cure would be to ensure the liquidity of fundamentally solvent institutions.

But the Fed has shifted over the past two months toward policies aimed at a second-mode crisis -- more significant monetary loosening, despite the risks of higher inflation, extra moral hazard and unjust redistribution.

As Fed Vice Chair Don Kohn recently put it: "We should not hold the economy hostage to teach a small segment of the population a lesson."

No policymakers are yet considering the possibility that the financial crisis might turn out to be in the third mode.

And, as if on cue, from the WSJ Economics blog:

Liquidity Threat Eases; Solvency Threat Still Looms, WSJ Economics Blog: As 2007 winds down, the much-feared year-end liquidity crisis appears to have been averted thanks to aggressive action by central banks. ... [A]s 2008 begins, it's solvency, not liquidity, that threatens the economy and the financial system. And at the root of the solvency threat is a likely decline in housing prices that will further undermine credit quality. Making banks more confident of their own ability to raise funds is not going to resolve a generalized shrinkage of lending driven by declining collateral values. ...

Comments

[Bruce Wilder]

That was wonderfully clear.

I have always expected Bernanke to be an inflationist. But, now everyone, who reads DeLong will also expect it.

Interesting development.

[hari]

Brad is not forthright inspite of his classical analysis.
Recession is already in for 2008 and, with it, comes more surprises because the quantum of subprime credit crunch is greaty underestimated, so far.

More than 2 trillions, I hear from forex markets!

Still Brad's analysis is, so far, the most dispassionate and objective of the lot. Let's see what reaction follows when 2008 starts...

[anne]

What is necessary is precisely what was necessary from 1990, to keep short term interest rates low enough to allow enough of a difference between banks borrowing short and lending long at higher rates to re-build balance sheets. There is no reason why such a policy will be any more inflationary than after 1990 when the Fed lowered the funds rate to 3% and before the Fed finally raised the funds rate from 3% in Janaury 1995.

The liquidity problem has seemingly be handled in country on country by central bank provision since August. What is now the issue is bank asset building. Coupled with international bank investments, I would think low short term interest rates will more amply allow the asset problem to be handled than in the 1990s.

[paine]

brad's third tier of purgatory
may not have an inflation option

such a mechansim is not built into
the real economy as
it appears to be
in kids play things
like
uncle milty's toy monetary model

[ken melvin]

They didn't actually think housing could continue to go up, did they?

[paine]

ahh
bw
what wonders you'd produce
if you had the economics to go with your fine judgement
and kool steel logicon

hell i'm a professed ideologian
untrustworthy even at piane toss distances
but you ...
armed with stiglitz vickrey lerner ....

such wonders

never dreamed of
in horatio's philo-sophy

[paine]

to point directly at
tinker belle time

"Print enough money and boost the price level enough, and the insolvency problem goes away "

[paine]

any one who
quotes that pompous ass walt bagehot
deserves to be ...brad delong

[jm]

Ah, yes.

The cause of our problem? Borrowers willing to pay such absurd prices for assets using Other People's Money that they'll never be able to pay it back.

The cure? Reward those borrowers by inflating away the value of the Other People's Money, so they'll have no trouble paying it back.

After all, stupidity got us into this problem. Why can't it get us out?

[robertdfeinman]

And yet we still hear about "punishing" markets or institutions. If one can't express a policy without including a moral component then one is not providing disinterested advice.

The banks or hedge funds aren't going to be "punished", their investors are, as may many who borrowed money to buy over priced assets.

There isn't even a mechanism available for those who suffer the consequences of bad corporate judgment to exercise influence. What little power stockholders had has been eroded to the point of non-existence.

So, let's hear what the real policy goals of the Fed and congress are. Are they interested in protecting the assets of the investors in financial institutions? Are they interested in protecting the assets of mortgage borrowers? Are they interested in shoring up the credibility of the international trading firms so that they can continue to make deals throughout the world? Are they interested in preventing a takeover of major financial firms by foreign interests?

If one is going to take the pronouncements of the Fed seriously the first thing they need to do is come clean about their goals. Punishment isn't one of them.

[Bruce Wilder]

anne: "What is necessary is precisely what was necessary from 1990, to keep short term interest rates low enough to allow enough of a difference between banks borrowing short and lending long at higher rates to re-build balance sheets."

Apparently, in 2007-8, we also need Arab and Chinese Sovereign Wealth funds to recapitalize our banking system for us.

While, the Fed is pushing down short-term rates towards 2% or less, Citigroup will be paying 11% or more for primary capital in the form of convertible preferred. Ditto for most of the other big boys. How do you think that is going to be working out for them, or us?

As the dollar declines, the only thing one can do with excess and unneeded reserves is buy American real assets -- banks, real estate, turnpikes, probably national parks before long.

The fire sale and the fire are likely to be indistinguishable and unextinguishable.

[paine]

hey gang
my point is this

the zyztem can get itself into a state
where it can't inflate itself
out of the sink hole
not even by
violating its own golden rules
of fair play

pushing on a string
to create movement
is
like wishing on a star

[bersi]

The analysis is simple and clear. The options to policy makers do not seem to be many and what policy tool is employed very much depends on how the future unfolds.

One thing I am not very comfortable with is the inflationary approach. Does this mean that those responsible for this situation will get away with it (and probably benefit)? Won't this policy hurt the more responsible ones, i.e., those who did not adventurously throw themselves in the housing market? What does the term "massive unjust redistribution" refer to?If the policies do not lead to relatively just outcomes should they at all be on the policy list?

I am not sure I have an answer to this myself but would be happy to hear from those who have deeper knowldge of the trade-offs involved.

[paine]

anne
you cite the proper precedent
let us hope as with the last such debacle
a brad-oidal
type two remedy will do the trick

how in hell can anyone know
but if it don't ...

[Bruce Wilder]

paine:
ahh
bw
what wonders you'd produce
if you had the economics to go with your fine judgement
and kool steel logicon

hell i'm a professed ideologian
untrustworthy even at piane toss distances
but you ...
armed with stiglitz vickrey lerner ....

Think what stiglitz et alia could accomplish, armed with me.

[paine]

"The fire sale and the fire are likely to be indistinguishable and unextinguishable"

great line bruce

[paine]

"What does the term "massive unjust redistribution" refer to?"

it refers to nothing real here

now what
was engineered
---with yank expert help---
in post soviet russia
that
brad's phrase mirrors quite nicely

[paine]

brad at his nadir

"Government is not the best form of organization of a financial system in the long term, and even in the short term it is not very good. It is merely the best organization available"

brad's inner
smug needn't think it thru
bluffer skim reader
slacker comes out here

shrewdly covered by powers that be
ass kissing
take this apart
sentence by sentence
beyond the evaluative flashing
and its pure peel
no fruit
read it over three times
and then
go smoke a churchill cigar
and contemplate its shallow
implications

[paine]

why talk tinker belle

because
"the insolvency problem goes away without the risks entailed by putting the government in the investment and commercial banking business."

god forbid we do what we did in 1940....

[sootytern]

Paine

Winston Churchill famously said that democracy was the worst possible government but was still better than all the rest. I think in the financial case it may be the best of all the other options if, and only if, all else fails. I am not looking forward to the next few years. I think we have acted irrationally and we will reap the rewards (consequences) of that irrationality.

[evagrius]

"I think we have acted irrationally and we will reap the rewards (consequences) of that irrationality."

And was that irrationality the notion that money/profit is to be had by Tinker Belling?

[esb]

We all need to forgive Brad.

The poor boy is just now beginning to experience the fear of a capital loss on the sale of his Blackhawk residence when he moves back (he assumes) to the Capitol in early 2009.

Blackhawk is only a very, very few miles away from Stockton, as the hawk flies.

Stockton, San Juaquin County, the epicenter of the housing implosion ...

So what's wrong with a little "unjust redistribution" in the direction of Brad, Brad?

What say you, Brad?

Oh, you have already said it.

[jm]

Rather than allow any pain to be experienced in the aftermath of the dot-com debacle, Greenspan papered it over with negative real interest rates. The result? The current, vastly larger debacle, following on years of "private equity" firms buying up companies with cheap debt and stripping them of their assets, and a mortgage lending industry shot through with fraud from top to bottom.

Now DeLong proposes an even larger dose of "The Hair of the Dog that Bit You."

Sufficient quantities of that hangover cure lead to death by cirrhosis of the liver.

The longer we put off the pain, the more horrible it will be.

[paine]

sooty

precisely the great man's meme
i had in mind

but the democracy way
is not ...the fed way

[paine]

jm

put off who's pain

yours and mine ????

or just the everyman's

[Inflation Hedges]

Brad makes a convincing case to stock up on inflation hedges, and stay away from dollar denominated debt instruments. Anyone working toward a traditional fixed pension might want to reconsider it. Why bother if it will just be inflated into worthlessness?

[sootytern]

evagrius: irrational is defined fy the dictionary as lacking mental clarity or sound judgment.

I would define in this era as:

1. Believing that the stock market will always go up.
2. Same way with residential/commercial real estate.
3. The deficit doesn't matter.
4. Cutting taxes increases revenue.
5. And a host of other nonsense that people are gullible enough to believe.

I''m pessimistic about our situation. Frankly, I don't think we have enough courage to solve our problems before they overtake us. When that happens we will as normal run around like chickens with our heads cut off and probably make matters worse.

[flow5]

ANNE: "What is necessary is precisely what was necessary from 1990, to keep short term interest rates low enough to allow enough of a difference between banks borrowing short and lending long at higher rates to re-build balance sheets. There is no reason why such a policy will be any more inflationary than after 1990 when the Fed lowered the funds rate to 3% and before the Fed finally raised the funds rate from 3% in Janaury 1995."

How to borrow short & lend long is the predominate issue. Dropping the FFR won't work because (1)it would lower the exchange rate of the U.S. dollar, (2) fuel our already deep rooted inflation & (3) won't prevent non-bank disintermediation.

The answer is that the commercial banks get out of the savings business. It's a win win solution. There is no other answer. None whatsoever.

[groucho]

"I have always expected Bernanke to be an inflationist. But, now everyone, who reads DeLong will also expect it."

BW, Bernanke is a CB. Domestic currency depreciation is the quid pro quo between CB's and their national govt's.

Some claim that CB's are "private banks".
Baloney! CB's are the ultimate GSE, a product of national govt's to LEGITIMIZE the currency depreciation process.

Most govt's and CB's have learned that only a slow depreciation can keep the general population in check and avoid widespread rioting and political mobilization.

DeLong suggests that Bernanke will try to "push the limit" on what the population will bare. I'm not sure that he has thought through how the inflation will work it's way through the system, though.

Anne, is correct that the FED wants to give the money center banks a "fat spread".
Nothing new here, traditional bailout for
"2 big 2 fail" banking operations.

With the dollar being the world's reserve currency any substantial increase in depreciation will result in an international dollar revulsion. The "Dollar Crisis" will be here.

What will that mean for the US financial system?

Currently, the Saudi peg is what legitimizes the dollar as the world's reserve currency. Since energy is one of the main drivers of the real economy, for the US, keeping the Saudi peg and making sure petro-dollar recycling (to help finance US national debt)continues is critical. Pressure from the US on the middle east is guaranteed, no matter who takes the WH.

But what if the middle east balks or blows up. Have the policymakers thought these ramifications through?

What about the average citizen, whose standard of living will drop even further if inflation is imported while their income stagnates or declines in real terms?

At some point the general population will realize "their goose has been cooked". To expect them to go quietly to their graves is irrational at best. If the govt continues to depreciate, revolution will be a sure bet.

[gordon]

Bruce Wilder says two interesting things:

“Apparently, in 2007-8, we also need Arab and Chinese Sovereign Wealth funds to recapitalize our banking system for us…”

and

“As the dollar declines, the only thing one can do with excess and unneeded reserves is buy American real assets -- banks, real estate, turnpikes, probably national parks before long.”

The mechanism will be interesting. Resistance to the proposed Conoco and ports purchases by non-Americans seems to indicate that US-based shells will need to be used. Watchers of sovereign wealth funds should therefore watch for the creation of such shells and their activities in buying US assets.

[dilbert dogbert]

esb,
Brad lives just over the hill on hwy 24 and thru the Caldicott from Berkeley. Blackhawk is near San Remote (San Ramon). My guess is houses in Blackhawk are deflating a bit but not much - yet. You would never know that there is a problem with housing by looking around my neighborhood. Teardowns and rebuilds are happening all over the area as they have for the last 12 years I have lived in zip code 94301.
Best of luck to all of you in the new year.

[don]

If the Fed were to drop interest rates to, lets say 2% or less, and the Treasury (which prints money - not the Fed) prints money big time, then won't the resulting inflation lead to a further and significant drop in the dollar, and as a consequence won't foreign purchasers of Treasuries be but much less inclined to buy T., thus resulting in an increase in long term rates, thus nullifying the effects of a large drop in Fed interest rate and Treasury massive printing?

[quartz]

I thought we had accepted that you can not by off recession/depression by allowing higher inflation--eventually you just get both. It sounds like brad offers a choice between having those who lent against real estate either getting back 70% of their dollars at current values or getting back 100% of their dollars devalued by thirty per cent. The only problem is that in the second option everyone's dollars are worth 30% less, not just those who took the risk of lending against an asset that was clearly rising at an unsustainable pace.

[Treasuries]

The Fed will just buy the treasuries, if foreign nationals don't. The Fed will use money created out of nothing to buy treasuries, forcing the savings out of fixed income pensioners and such. The pensioners will gain nothing for their savings, but rather just have less purchasing power.

Forced savings through inflation is apparently the preferred cure for a non existent national savings rate. Fixed income people are apparently unimportant in the scheme of things.

[barry payne - economist]

Tom Keane, Global Editor at Large for Bloomberg just gave an interview on Bloomberg TV going on about the great CEOs and brilliant people at Goldman Sachs and other IBs, how Morgan Stanley didn't have to depend on the China bailout - that it could raise the funds on its own.

He cited financial propeller-heads in the industry with their remarkable formulas and financial skills, noting that Greenspan had nothing to do with the housing problem.

He brought up suggested reasons for the problem "by some" like tax write-off problems for real estate under Bill Clinton and something about a financial professor investigating instability in the housing market around 2002 as a root cause.

There was no mention of recession in what I heard, instead job growth was praised and job "development" predicted to be challenged. The only negative comment was about the "-8 to -10" percent write-offs that's being taken care of to get through the problem, almost like an annoyance.

It's a sharp contrast from Mark Zandi of economy.com crying that the sky's falling a few weeks ago in a Senate Subcommittee hearing.

These guys have to be pitching for their clients in some sort of insider role to at least give an appearance of attempting to influence the outcome. It's too bizarre to make any common sense.

[Farrar Richardson]

Frankly, I don't see what Delong has against nationalized banks. Here in France these last 30 years, I've dealt with nationalized and now privatized banks and I don't see that the nationalized were any worse than the privatized ones. Of course, there was the Credit Lyonnais fiasco, but that didn't risk dragging the economy down like Citibank might. In fact I found that BNP and Societe Generale among others gave just as good service to ordinary folk when they were nationalized.

All that is a prologue to suggesting as an antidote to worst case scenario No 3, that Madame Bair (or whatever her name is at FDIC) send in an army of bank examiners, declare Citi, Morgan, and Bankamerica insolvent (which seems to be the case) and have the government take them over. This would have the triple advantage of
1) opening up and rationalizing the credit markets.
2) forestalling Saudi or Chinese takeover of the banking system
3) proving that free markets are too rich for private enterprise to intermediate.

Too rational a solution to ever be adopted.

[Farrar Richardson]

Another advantage of my above solution -
Cutting corporate welfare.
See Marginal Utility
http://atbozzo.blogspot.com/2007/12/93-banks-are-not-rational-actors-or.html

[bob niederman]

Yes, the financial system is insolvent, but it has nominal liabilities and either it or its borrowers have some real assets.

Yes but

1) they have adjustable rate mortgages on those nominal assets and

2) inflation makes long-term rates go up, defeating the increase of housing values.

How can this possibly work?

[Long Rates]

If central banks create enough currency to loan as much money as the market wants to borrow at low rates, arbitragers will keep long rates low. This has been going on for a long time. An example, the Yen carry trade. Japan loaned hedge funds virtually as much money as they wanted to borrow at near zero interest, and the hedge funds used the loaned money to buy US long bonds. This helped keep long rates low.

The Fed could loan unlimited money at near zero interest, and hedge fund types would borrow it to buy long bonds. The Fed could also decide to buy long bonds directly with money created out of thin air. This would create high inflation with low interest rates.

Of course, no one would ever save money in this country again, but the national savings rate is not one of the Fed's mandates.

[anne]

There is a funny thing about the no-saving-ever-never folks, and that is somehow failing to notice that this year has again been a splendid time to save and invest as last year and several years before. Internationally, these 5 years, there has been as profound a bull market in stocks, broad and deep, as I can find any record of.

Then too, as absolutely secure an investment as Vanguard's inflation protected Treasury securities fund has returned 11.6% this year.

Saving has been and is worth the while, and will continue to be.

[anne]

Also, for them what worry about the value of the dollar, the Federal Reserve has happily made clear any number of times that concern with dollar value will not change monetary policy. The weaker dollar is increasing exports and selectively supporting property values, and long term bond yields are telling us inflation is a minimal consern. There is no presently evident reason the Federal Reserve cannot keep the funds rate low in coming months allowing for a re-building of bank assets.

[random]

The second option is simply inflation. Yes, the financial system is insolvent, but it has nominal liabilities and either it or its borrowers have some real assets. Print enough money and boost the price level enough, and the insolvency problem goes away without the risks entailed by putting the government in the investment and commercial banking business.

The inflation needs to make its way into the debtholder's hands before it does any "good." Without wage inflation for the median consumer, housing prices will remain unsustainable, consumer debt can't be serviced, and the insolvency problems will not resolve. The downward pressure on wages from globalization etc. won't just "go away" because the Fed lowers interest rates.

[paine]

groucho et al

the inflation busters-the fed's
a narrow elite fiat ratchet-racket
etc etc

who are they warning ???

they csan't be selfishly upset
since one has to presume
they themselves long ago got out of
the "holding debt securities "biz
and into gold or what ever is real enough
and limited in supply enough
so its gotta hold its relative real value
or grow it

so why are they warning us

why ???

are they expressing scorn ????
"u boobs don't get it "

trying to spoil our hope filled macro illusions ???

btw

guys listen

econoies can get into a state where expanding the monetary base won't get it done
ie won't produce additional price level effects

inflation requires firms to increase their prices
but if demand doesn't increase ....

obviously things can get to a point
where only the spender the demander of last resort can
effectively increase spending enough here
to get the system moving faster forward again

here's a guess once made

if hoover had wanted to effectively end the year 30
real economy death spiral
prevent product deflation and protracted
production depression
he would have needed to declare
a total tax holiday at all gub levels
and the federals would have needed
to borrow the full amount of the prior years
fiscal budgets of all
levels of gubmint fed state and local...all

now would any merlin advising that
have been listened to ....????

hey new system new gear designs
even more complexity

could get a planetary scrape like 30 all over again

and you guys are worried about hyper inflation

geeez louise

[paine]

random

" Without wage inflation ..."

give everyone a big raise
i like that that would do the trick

but as you suggest
how ???
and
what does that require ???
and then what happens ???

[paine]

anne

what if the first five of the titanics chambers are flooding not the three design specs say the ship flooation capacity can survive ???

maybe this time
the debt structure
hog tied to a value over shoot
is too big for a 90-95
repair on the run job
maybe the credit ship
is
about to --by jerks and plunges ---
sink out of sight
not just go a bit lower in the water

[anne]

http://krugman.blogs.nytimes.com/2008/01/01/did-we-dodge-a-bullet/

January 1, 2008

Did We Dodge a Bullet?
By Paul Krugman

In a recent post * I pointed out that up through the third quarter of 2007 rising exports had roughly offset the impact of the housing bust. Here's the chart again. (By the way, all of the data come from the Bureau of Economic Analysis, which has fairly easy-to-use interactive data tables.)

[Chart]

So did the U.S. economy dodge a bullet?

Yes, it did — which is why I haven't been as sure about a looming recession as, say, Larry Summers or Marty Feldstein, let alone Nouriel Roubini. (No, I'm not always a doom and gloom guy — only when the situation warrants, which has been pretty often lately.)

While we dodged a bullet, however, there are between one and three more bullets headed our way.

First, housing has further to fall. There's been a further plunge in building permits and starts since the credit crunch began in August; these take a while to be reflected in construction spending, so there's a fresh hit to GDP definitely in the pipeline. Even now, residential investment as a share of GDP is only down to its long-run average; you'd expect it to fall below that average for an extended period.

Second, there are hints of a slump in business investment, especially commercial real estate, which seems to have had a bubble of its own and is feeling the effects of the credit crunch.

Third, there are hints that consumers have finally started to cut back.

On the other hand, exports still seem to be growing fast.

So I'm actually uncertain about where things go this year.

* http://krugman.blogs.nytimes.com/2007/12/29/why-we-havent-had-a-recession-so-far/

[flow5]

"The weaker dollar is increasing exports and selectively supporting property values, and long term bond yields are telling us inflation is a minimal consern. There is no presently evident reason the Federal Reserve cannot keep the funds rate low in coming months allowing for a re-building of bank assets."

You must be short oil.

[calmo]

Interesting to read the ka-boom of esb's post (that variant on the tenured prof (BDL) being able to afford the insulated view, but perhaps with some pain...an ad hominem) followed by dilbert's much more persuasive post (only for evaso persuadable me, people) that the insulation is much better than one might suppose and the pain in that location is negligible.
Compounding the ad hominem by default?...well, I don't care such was the 'boom' part of this combination.
So much depends on this distribution of wealth, --not the white chickens beside the red wheelbarrow as previously reported, but the gobs of gold glistening in that wheelbarrow, under those stupid chickens maybe...some undisclosed location, you know?

[don]

Treasuries says:

"The Fed will just buy the treasuries, if foreign nationals don't. The Fed will use money created out of nothing to buy treasuries, forcing the savings out of fixed income pensioners and such."

However, were the Fed to aggressively expand monetary base, then unneeded reserves would pile up in banking system (hoarding by primary dealers), causing the fed fund rate to dive.

[btg]

Tresuries wrote"The Fed will use money created out of nothing to buy treasuries, forcing the savings out of fixed income pensioners and such. The pensioners will gain nothing for their savings, but rather just have less purchasing power.
Forced savings through inflation is apparently the preferred cure for a non existent national savings rate. Fixed income people are apparently unimportant in the scheme of things."

It is a zero sum game - you forget the other side, since the choice is between inflation vs. recession and a massive delcine in real estate values.

with inflation, investors lose - mainly those who bought bonds, but yes, pensioners who have defined benefit pensions. some pensioners are living off of savings - which and in any case, pensioners are old - with a limited life span, it will only affect them for 10-15 years at most. of course, pension plans will be hit, ans will other institutional investors that in the end represent average people's savings for the future. some pension income - mainly from government, is fully or partially indexed.

on the other side, home-owners, people who own companies (directly or through shares, including those same instituions mentioned above) and employees.

in the end, for every pensioner who will lose buying power, there are also workers who will lose their jobs, and suffer a much greater loss of income for one or more years, until the economy recoviers. however, many of those people will lose high paying jobs that they will never replace, and will suffer a long term hit on their earning power (20 years or more left in their working life), which will also hurt their retirement too since their income will affect their pensions and savings. then there are small business owners and holders of stock who will be hurt when companies go bankrupt.

i cringe whenever i hear this argument about a few retirees who lose out - we are not talking hyper-inflation here, but a few points per year. those retirees also own homes and condo, by the way, so either way they lose.

[a]

"Then too, as absolutely secure an investment as Vanguard's inflation protected Treasury securities fund has returned 11.6% this year." Doesn't sound like a great investment if you're from the euro zone.

[anne]

What is important to understand is that savings has been and is critically useful and sound simple investing has been remarkably successful for savers for decades. We are currently in the midst of the most profound international bull stock market I can find record of, but even completely conservative intelligent investing in inflation protected securities has been a fine invest vehicle.

Criticizing savers is a fear ridden foolish mask.

[flow5]

Liquidity? What should be done? As a long-term proposition, the Federal Reserve should re-apply and then gradually lower REG Q ceilings until the commercial banks are out of the savings business. Outside of the commercial banks, interest rates would be left to the market place. What would all of this do? The commercial banks would be more profitable - if that is desirable. Why? because the source of all time deposits is demand deposits directly via the currency route or through the commercial banks undivided profits accounts. Money flowing "to" the intermediaries actually never leaves the commercial banking system as anybody who has applied double-entry book-keeping on a national scale should know. The growth of the intermediaries cannot be at the expense of the commercial banks. And why should the banks pay for something they already have? I.e., interest on time deposits

[flow5]

You raise reserve ratios & you can't monetize this years entire budget deficit with no inflationary consequences.

[paine]

anne

"Criticizing savers is a .... foolish mask"

and i wear it gladly anne
and paradoxically without shame or fear

the modern credit system
has removed at least
the social necessity
---even in a capital accumulating system---
for any "net" household savings