

The Third Depression - sound
http://www.nytimes.com/2010/06/28/opinion/28krugman.html

======
jswinghammer
Considering that his Keynesianism has basically destroyed Japan's future
(while at the same time he faults them for not borrowing enough) I'd hope he'd
proceed with a bit more caution. The basic problem he has is that he doesn't
really understand why we're here. When debt chases bad assets it's a disease
that has to be cleared.

He ignored some pretty serious depressions in his analysis as well. The panic
of 1819 comes to mind as a pretty serious one. People ignored the desires of
those long on stocks and real estate to bail them out. They realized the
problem was too much debt and just let it work itself out despite the pain it
caused them in the short run.

Then there is the depression of 1920-21. This depression probably highlights
most clearly the Austrian theory of the business cycle and why the Austrian
response to the bust is the correct one. There were no interventions in the
economy following the bust. It was a very serious contraction by any
definition.

We live in a world that's consumed by debt. We're taught that debt is good
despite our instincts to the contrary. We're taught that being irresponsible
is the way to get yourself out of short term pain. Listening to these people
seems like madness at this point. The real reason that budget cuts are on the
table is that everyone knows we're all broke. After 10 years of this I imagine
people are going to get fed up with bailouts and inflation. Krugman will still
be crying for more stimulus while a few people might get serious enough to let
the banks fail and start over.

Our fear of short term pain might be the worst part of the modern political
system. We'd rather avoid some of the short term pain even if that means
dragging things out for decades.

~~~
kiba
_Our fear of short term pain might be the worst part of the modern political
system._

When people realize that they can vote themselves more money, they will.
Government will then promise more than it can deliver and proceed to spend
money like no tomorrow just like what happens to Greece and California.

But it's _heresy_ to suggest that democratic institutions should be scrapped
altogether. Everyone thinks democracy equal freedom, but it's really just
majority rules.

~~~
hnal943
_When people realize that they can vote themselves more money, they will._

I would agree had you said "When people _think_ that they can vote
themselves..." because who are they kidding? There is no "Obama Money." The
government's money comes from the people, as the residents of Greece and
California are discovering.

I suppose you can vote yourself more money if you can vote and yet pay no
taxes, which might be the true problem. Perhaps in order to have a say in the
direction of the country, you need to have skin in the game.

I don't think that chucking democracy is really the right reaction. I stand
with Winston Churchill: "Democracy is the worst form of government, except for
all those other forms that have been tried from time to time."

~~~
steamer25
_Perhaps in order to have a say in the direction of the country, you need to
have skin in the game._

One of the original thoughts behind establishing a bi-cameral legislature was
that only (real-estate) property holders could participate in the senate. The
idea being to prevent the masses from voting the property to themselves.
Eventually, it was settled to give the senate to those who were competent
enough to organize themselves into local governments/states. Still, it would
be interesting to have a house where one man == one vote and a senate where
one dollar == one vote. I'm not sure human nature would allow the government
to be primarily funded by power-mongering but it'd be a fun experiment to try.

------
Retric
I suspect the real problem is the evaporation of superficial jobs. We have
become a nation devoted to our wants, but when things look bad people quickly
cut back on such things. A tiny fraction of our population are "farmers" but
with the over abundance of food produced and the only way to make money is to
either suck on the governments subsidies or create specialty _locally grown,
free range, Organic etc_ goods.

I think only long term way to get out of chronic high levels of unemployment
is to either accept we are going to live in a welfare state, or remove the
minimum wage.

~~~
exit
what do you think of basic income?

<http://en.wikipedia.org/wiki/Basic_income>

~~~
protomyth
Maybe in the future, but it sure seems like a disincentive to working. I would
prefer we implement a flat-rate tax on income filed as individuals and not as
a family. Something like a 20/20 (first 20k exempt then 20% of the rest). I am
not sure about the actual numbers (sounds like a big data crunch through the
IRS income reporting would be good).

Regardless of policy, it is very important to get as many people in the mode
"I am paying for this government" so that fiscal responsibility is desired by
most as opposed to a handout mentality.

~~~
exit
> Maybe in the future,

what are the criteria for this future?

~~~
protomyth
I guess when robots get too good at replacing humans (reasoning, mobile,
perform skilled work).

~~~
exit
so why are people unemployed now? isn't it, as Retric put it, that superficial
jobs are being automated?

do you think all those unemployed now are just lazy?

~~~
protomyth
wow, talk about interpreting what I said way out of context and intent......

No, I don't think unemployed people are all lazy. Where the heck did I even
come close to saying that? I believe the "basic income" as described in your
link is wrong for right now and has more of a basis in some future.

People are unemployed because we are in an economic downturn and people are
not spending and capital has also dried up. Companies are going without more
than automating. This isn't the consequence of some tech revolution, it is the
consequence of poor decision making on Wall Street and in Government.

------
lionhearted
I click the article. I see it's Krugman. Before I read further, I say, "Ah,
Krugman. I bet his solution is to print money."

> ...governments are obsessing about inflation when the real threat is
> deflation, preaching the need for belt-tightening when the real problem is
> inadequate spending.

That's Krugman's answer for everything. Dot-com crash? Create more money:

2001 Krugman: “During phases of weak growth there are always those who say
that lower interest rates will not help. They overlook the fact that low
interest rates act through several channels. For instance, more housing is
built, which expands the building sector. You must ask the opposite question:
why in the world shouldn’t you lower interest rates?”

Oh, wait, they did that and that created the housing bubble that he's now
suggesting we prop up by... creating more money.

This quote from the article is even crazier:

> But no: over the last few months there has been a stunning resurgence of
> hard-money and balanced-budget orthodoxy.

Balanced-budget orthodoxy? Man, the guy's got huge cojones, at least. When
your policy causes problems, insist it on even louder as the solution, and
point to classical common sense ("balance revenues and spending") as
orthodoxy. Good economics, not so much, but huge cojones definitely. Startup
founders could do worse than emulating his confidence when pitching investors.

~~~
cia_plant
I'm glad to finally find someone who knows exactly what caused the housing
bubble and subsequent crash. Could you explain it to me? I find the whole
matter very confusing myself, although I've read a lot about it. So: low
interest rates caused the housing bubble. Could you explain how that happened
exactly?

~~~
lionhearted
> I'm glad to finally find someone who knows exactly what caused the housing
> bubble and subsequent crash. Could you explain it to me? I find the whole
> matter very confusing myself, although I've read a lot about it.

Yeah, it is a complicated topic. What did you want to know specifically, what
were your questions?

> So: low interest rates caused the housing bubble. Could you explain how that
> happened exactly?

Low interest rates were a big part of the problem - the price of money got
below the cost of inflation. That means borrowing as much as you can is
profitable. Let's say your interest rate is 4%, but the rate of inflation is
5%. That means that all things being equal, your rents on a commercial
property are increasing faster than you're paying in interest! That doesn't
seem like a big difference to a layman, but the gap between 4% and 5% is huge.
That's 20% on your money.

In that kind of environment, it means if you borrow as much as you can, you
turn bigger and bigger profits. This drives housing prices up. It also drives
the stock market up. But the assets are artificially high because the money
lending rates are artificially low, ie, set by the Federal Reserve. An
arbitrage like this would be much less likely to happen over such a long
period without the rates being set artificially low for political reasons, to
make things look good when they weren't.

And then you know the rest of the story after that.

For the most straightforward, plain English explanations, I'd recommend Peter
Schiff - he was correctly predicting the housing crash almost to the letter
and getting mocked on news analysis programs for it. Here's a link to some of
his clips from 2006 and 2007:

<http://www.youtube.com/watch?v=2I0QN-FYkpw>

He's got some free videos and wrote some books, check the clips above out -
he's consistent with that message - and then check more of him out if you want
to understand more.

If you have any specific questions, I'll try to answer to the best of my
ability.

~~~
cia_plant
I guess my question was very vague. Let me be more specific.

When people talk about causes, they can mean a few different things. For
example, if someone is crossing the street at a walk signal, and is hit by a
drunk driver, we tend to say that the drunk driver caused the accident. The
accident could have been prevented if the pedestrian had been more careful,
perhaps, but he was generally justified in crossing at a walk signal. The
driver, on the other hand, was doing something unexpected and dangerous. So in
this sort of situation, we can point to a cause.

Then again, there are other accidents where there is no single cause. If you
ask what caused Chernobyl, you could answer that it was caused by bad reactor
design; or by failing to follow safety protocols; or by running a dangerous
experiment; and, from what I've read about the accident, all of these
explanations would be somewhat correct. All of these actions were reckless,
and the absence of any one of them could have prevented the accident. So with
Chernobyl, there are many independent factors which collide in an
unpredictable way to create a catastrophe.

Yet again, there are systems like the weather. If you want to know why it's
raining, you can point to particular things that happened recently - like
moisture moving in from the pacific or what have you. Each event that occurs
has some proximate causes. But overall, the weather is chaotic and
unpredictable. There's not really any way to analyze it into overall causes -
the best we can do, long term, is the ultimate forecase of the 'hippy dippy
weatherman': 'the weather will continue to change, on and off, for a long,
long time'

So, for me, right now, the economy is pretty much like the weather. There are
highs and lows, and each one has its particular characteristics, but I can't
see an overall system to it. I'd love to have a level of understanding where
it is more like the driving accident: I could point to the particular asshole
who caused the mess. If that's not possible, I'd at least like to have a
Chernobyl level of understanding, where I have some sense of what mistakes
were made.

So anyway, I guess I've read some pieces of the story from a few different
sources, and they all give a fairly plausible story of how A preceded B, and
~A would have prevented B. Some of these are: deregulation, low interest
rates, government interference in the housing market, bad modeling of risk on
the part of finance firms and credit agencies, capitalism itself. I have a
little bit of an understanding of each of these stories. But I'm still
confused over which of these could be considered independent causes. For
example, if the financiers somehow _needed_ to find a place to put their
money, then it may have been a _consequence_ that they came up with risk
models which drastically underestimated the risk of certain products.

So, what I'd like to know is, how did low interest rates lead specifically to
this housing-led finance bubble? Were the other factors coincidental, or
forced?

I hadn't ever heard that borrowing was actually below the rate of inflation -
so that's very interesting to me. But then, why didn't the bankers just borrow
money and put it into treasury bonds or the stock market? Why build up this
house of cards with subprime mortgages and mortgage-backed securities and
whatever else?

Thanks for taking the time to answer my questions. I'll also look into Schiff
later (I don't really like video, but I'll see if my library has one of his
books).

~~~
thaumaturgy
I find the recent financial trouble really fascinating, partly because so much
of it was predictable, and partly because I'm not certain that it was
avoidable.

Let's rewind the clock. IIRC, in 2000-2001 we had the dot-com crash and its
various effects on the economy, but there was a relatively fast recovery,
partly due to low interest rates. Low interest rates in and of themselves
didn't directly affect consumers' habits, but they did have a powerful
indirect effect in the form of easy credit.

This easy credit prompted the poor and lower middle classes to overextend
themselves. They took the opportunity to buy consumer products they couldn't
technically afford, in the form of new cars, electronics, furnishings, etc.,
and that in turn caused a brief period of economic boom.

But, one of the interesting things about the poor and lower middle classes is
-- despite another article on HN this morning -- they're always on the lookout
for a way out of their situation. Especially anything that looks like a
"cheap" solution.

The housing market. The combination of cheap credit -- with lenders
practically falling over themselves to hand out loans to individuals that
didn't qualify on paper for the loans -- along with the mentality of the lower
socio-economic classes that housing was suddenly "a good investment" --
because prices were going up, up, up and _nobody_ at the time believed they
could ever fall -- caused a housing gold rush.

In places like the Bay Area, a lot of the available land for new housing is
party far removed from everything else. This is the classic suburban housing
model, and it's also going to be factor.

Because, things actually were going pretty great for about a year or two. If
your credit was shaky for any reason, you couldn't afford to move or buy a
house, but hey, everyone else is happy. And, remarkably, the price of basic
goods and services didn't _seem_ to change much during that period -- just the
price of housing, which exploded.

And then, in a perceptibly short period of about a year or so, gas prices went
through the roof. (I still don't understand why that happened, but it was
timed nicely with the war in Iraq.)

What happens if you're running down a hill as fast as you can, and then you
try to make a slight course correction? There's a pretty good chance that you
eat pavement, and that's what started to happen.

The over-extended poor and lower middle classes had by this time used much of
their available credit, and they were doing fine, unless the day-to-day cost
of living changed much. Thing is, many of them had nice homes that were a 30
minute commute from work, and many of them had nice, huge vehicles. Both of
those turned into the perfect storm of a price sensitivity on gas.

The first stumble happened in the car market. The distinctly American SUV,
which had been considered invincible, suddenly started to see a slow-down in
sales. A slow-down of anything in a bubble economy makes people nervous, but
there didn't seem to be a very noticeable reaction from any major groups.

But, the price of gas stayed fairly relentlessly high, and significant numbers
of people started to fall slightly behind on their credit card payments. This
led to effect number 2: a very slight downward change in consumer spending.

The really neat effect though was on housing. Seemingly overnight, nobody
wanted to move farther away from work. Houses started to stay on the market
longer, but the prices didn't drop, at first. Thing is, too many of the people
trying to sell were doing so because they themselves were overextended in
credit, and they were trying to get some of that free equity out of their home
that everyone had promised them.

Realtors at the time were still naively optimistic though, so they -- nearly
to a one -- encouraged their sellers to stick to their price and wait it out.

The net effect was precisely what most people had considered impossible: the
housing market stalled, and then crashed.

The lower socio-economic classes by now were really beat up financially, so
even when the price of gas fell again, they just weren't spending money
anymore. A huge number of people got soaked on their home purchases, seeing
decades of savings evaporate seemingly overnight.

The big financiers and creditors then ran into trouble, and we all know the
rest.

I think that the price of gas was the metaphorical straw that broke our
economy's back, but I also think that the trends at the time were totally
unsustainable and doomed to failure eventually. I also see how people are so
willing to blame low interest rates and cheap credit (two sides of the same
coin), but the thing is, those also resulted in the rapid growth of economy.
What few people want to admit is that a healthy modern economy absolutely
depends on the lower socio-economic classes spending money; the more they
spend, the better off everyone else is. Maybe someday our economy won't work
that way, but for now, it does.

Without those low interest rates, it's just as likely that we would have seen
a long period of stagnation coming out of the dot-com crash. Whether that
would have been intrinsically better or worse for us is way over my head.

------
paulnelligan
I often wonder why more engineers don't get into economics. It is a control
system and would be well suited to engineering graduates with expertise in
control systems.

~~~
roel_v
Sweet mother of jesus no. Engineers would gravitate towards a centrally
controlled system in no time. Economics is _not_ a control system, it's
emerging behavior from independently acting agents (free market economics is,
which I argue is the only morally defensible system). A UK (?) technology-
oriented scientist build a computer-controlled economic system for some South-
American country in the 1970's, complete with a Star Trek like control room.
There was a revolution before it could be put to proper use though. I don't
remember enough details to google it, anyone else who can dig up some links?

~~~
bd
Project Cybersyn:

<http://en.wikipedia.org/wiki/Project_Cybersyn>

Discussed here:

<http://news.ycombinator.com/item?id=1190508>

~~~
roel_v
Thank you, that's the one.

------
stcredzero
So, besides drugs and entertainment, what were the growth industries during
the Great Depression?

~~~
hga
Government ( 1/2 :-).

That's certainly the case right now; since the start of the recession,
according to the BLS government jobs have increased by 590,000 and 7,960,000
private sector jobs have been lost
(<http://www.powerlineblog.com/archives/2010/06/026620.php>)

~~~
stcredzero
Yes, but I know there are several other private sector industries that held
their own or even flourished during the Depression.

------
DanielBMarkham
Related article from this morning's reading:
[http://www.telegraph.co.uk/finance/comment/ambroseevans_prit...](http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7857595/RBS-
tells-clients-to-prepare-for-monster-money-printing-by-the-Federal-
Reserve.html)

~~~
jimbokun
...directly addressing Krugman's viewpoint:

"The Krugman doctrine of perma-deficits is ruinous - and has in fact ruined
Japan."

------
known
America is saturated and inhabited by people who will live on
<http://en.wikipedia.org/wiki/Passive_income>

------
startuprules
We're certainly in a great depression already - with real unemployment close
to 20% (shadowstats.com), most of our states having greece-like deficits,
people losing 50%+ wealth from the market/real estate crash. We don't see soup
lines because we have food stamps and unemployment checks mailed to our home
and deposited right into our bank account .

And it's only the beginning. Global austerity is here (except US and Japan is
fighting valiantly to steal more honest work from its people via printing).
World's biggest consumer, the boomers, are retiring. Automation/Software will
keep reducing jobs permanently.

The ancillary point is, boostrap your startup wisely. Hire smartly. Don't
spent money on things unless you have to. Don't take money. Keep control of
your company.

