I don't get finance/econ

[summercomfort]

Ignoring the $789 billion stimulus package for a moment...

What's with all the financial bailout stuff?

Why do we want to just print $1 trillion dollars?

How did we already commit $4 trillion to propping up the financial market?

Why is the financial bailout so much bigger than the stimulus package? What's all the money doing? (Commercial paper?) Are we turning into the Weimar Republic? WTF?

In that context, the stimulus package seems relatively reasonable. At least there is concrete stuff there.

Also, my current impression of this whole recession is this:
- for the last >decade we've been generating wealth by borrowing from the future.
- now the future is here and we don't has the money anymore cause we realized that the future isn't as shiny as we thought it'd be when we borrowed from it.
- now our solution is to borrow more money from the future of not only us, but the rest of the world (coughChinacough) in order to survive today?

What's wrong with saying "Wow, I got to live in an awesome house about 10 years earlier than I would have otherwise. It was an awesome 10 years of living in a house. Now I'll go back to living in an apartment cause I used up the future early."

There's probably something fundamentally wrong with the above statement. Please correct me. I really don't get all this finance stuff. I know 3 of you are UChicago econ majors....!

Comments

[yeloson.livejournal.com]

As far as I can tell, without an econ background, the stimulus is smaller because it "only" has to get people to not all lock up their money at the same time/do bank runs, etc., while the bailouts need to make up for the horrible mismanagement of massive amounts of phantom money (they didn't just borrow against the future they gambled it against high odds).

And, as far as just accepting living lean for a while, Americans aren't very good at accepting their own mistakes (individually, or collectively). The Homer Simpson attitude of "It's not a problem now, so it's not a problem" holds very true- as various interests dismantled the financial oversight laws and institutions after the Great Depression and again after the 80's, people just assumed nothing bad happened right away, therefore we didn't need them after all...

In the big picture, the sad thing is that there's more individual reward for gaming the system than protecting the safeguards, so sooner or later more people game it than keep it running and it falls over.

[illuminatedwax.livejournal.com]

I want to respond to this in more depth, but for now, listen to this (http://www.dranger.com/365.mp3) if you already haven't!

[satyreyes.livejournal.com]

Good move Steffen on that link. This American Life's series on the topic of the crash has been breathtakingly thorough and accessible.

Sushu, you get finance/econ better than most people, so don't be too hard on yourself. Nate Silver -- the guy who runs 538, one of the best elections analsysts in the country -- observed the other day on the stimulus that "somewhere between 99.9% and 99.999999% of us are severely underqualified to be making policy recommendations on this particular issue." I think he's wrong; I think the number is probably 100%. No one understands economics. No one. Not Alan Greenspan, not Timothy Geithner, not Barack Obama. No one.

But I'll try to -- not answer your questions, since if I claimed to know the answers I'd only be proving myself unaware of my own ignorance -- but maybe illuminate them a bit.

Why print money? Well, right now we're scared of deflation. One of the primary sources of money (and hence inflation) in the economy is banks creating loans, which "creates money" in a meta sense that we don't have to get into right now. Right now the credit market is frozen and banks are not creating loans. That means that suddenly there is less money floating around than there was a year ago. Less money to go around means each dollar is dearer. That means deflation. And while inflation is a bad thing, deflation is a very, very, very bad thing. So we figure we have some room to print money -- an inflationary measure that makes our money less valuable -- to pay for programs that we think will get us out of recession. Does this make larger than normal inflation more likely when the recession ends? Probably. We don't like to think ahead that far.

How did the government end up spending four to five trillion dollars on bailout measures? Basically because the government is acting as though it does not believe the private sector can recover on its own -- we have to give them money. Some of that we're doing through loans, which might or might not ever be repaid. Some we're doing through buying their stock, which in theory might someday be a good investment (although it is also overt socialism and some of us don't like that). And some we're doing by buying the dubious securities that sparked this whole powder-keg, which in theory we might someday see a return on but more likely won't (since if there were any real chance those securities would get paid the private sector would already be buying them). I'm probably forgetting other ways we're handing out money.

There's more to say, but I have to go to supper and work. I'll check back in when I have time.

[satyreyes.livejournal.com]

Okay, a few minutes before work. I think the most important question you asked in some ways was the last one. Why can't we just return to the standard of living we would have had ten years ago if we hadn't borrowed ten years into the future? There are a number of answers, but one of them, in a word, is interest. Say Jack has a crappy job. If Jack had lived in a cheap apartment for the last ten years he would have been able to put some money aside for a down payment on a house while he worked to get a salary that would let him afford mortgage payments on a permanent basis. Instead Jack borrowed money for the down payment and bought into mortgage schemes that put him further in debt. That worked okay for ten years while times were pretty good, but now there's a crash. Jack has a crappy job again and he still has mortgage payments due, not to mention all the furniture and luxury goods he's been paying off on his credit card. Jack can't just go live in an apartment because instead of starting from a crappy job, as he did in the first scenario, he is starting from a crappy job plus thousands of dollars of unpaid bills. Jack can default on the mortgage and let the bank repossess his house, but the credit card companies will not be as forgiving (and will jack up his interest rate due to his newly in-the-toilet credit rating), and most apartments do credit checks. (And the ones that don't are not good places for Jack to raise his kids.) This is a real problem. About the only bright side, and it is a pretty schadenfreude-laced one, is that even though I (who did not make an irresponsible house-buying decision ten years ago) am suffering due to the recession from decreased business, at least Jack is suffering a hell of a lot worse than I am. So when I'm in a bad mood I say let him suffer. But that is mean-spirited of me. When I'm in a better mood I say I don't want him to suffer but I also don't want to pay to subsidize his bad decisions. (I feel the same way about Wall Street bailouts.) It's a quandary.

[eptified.livejournal.com]

I would suggest reading "the shock doctrine". I think sometimes it is as simple as half the people in charge don't understand how any of this stuff works and the other half are profiteers.

At root the reason that the payouts to the financial industry dwarf the stimulus package is that the stimulus works on Keynesian principles. Conservative economists are currently spinning it as the ultimate "experiment" (a concept they love to bandy around) with Keynesian economy management, which means that everyone who is invested in neoliberal economics (most of the people who have run the country and the financial and business communities for the last three decades) are rooting for it to fail. Their interests are transnational; they have no reason to be worried about what's going to happen to the American economy in the short term. In fact, a deepening of the disaster would work in their favor, not only in that it would nip the current progressive resurgence in the bud and let them finish the process of redefining the New Deal as the ultimate boondoggle, but in that it would allow them to push through the kind of ultra-laissez-faire policies they've marketed as the only answer to inflation across the world since Pinochet. Why print a trillion dollars? Because an inflation crisis is exactly what they want. (I was talkin' about this on my blog months ago.)

I'm amazed that even after the last eight years people are so slow to believe that these people are crooks.