Well, bank recapitalisation is here

Économiste Monétaire

The government has announced a 10bn fund to aid recapitalisation for banks.

http://www.rte.ie/news/2008/1214/bank.html

BenjAii

A few things that spring to mind.

€10 billion - they could actually buy the entire Irish banking sector three times
over for that amount.

The US/UK don't seem to have succeeded much in persuading the banks they have recapitalised to lend the money on in to the wider economy - what's our plan to do this differently.

None of the the banks, and especially Anglo Irish, seem to be able to be up front about the extent of their loans to now dud commercial property. In which case, how long are they expecting to ride on the coat tails of Irish sovereign credit.

Particularly AIB, who seem to want the best of both worlds, no recpaitalisation and the diminution that would imply, while still taking advantage of unlimited tax payer guarantees for the bad debts they can't be honest with us about.

johnnyskeleton

There's no mention of who gets what though. It almost sounds like the government will lodge deposits with the banks, and equally it sounds like a first come first served basis rather than the more rational "support only the banks that will survive" approach.

cavedave

Should The Government Stop Dumping Money Into A Giant Hole?


All joking apart what do we get for this money? Not eqity in the banks as the government could outright buy them for less.

Économiste Monétaire

BenjAii wrote: »

A few things that spring to mind.

€10 billion - they could actually buy the entire Irish banking sector three times
over for that amount.

The US/UK don't seem to have succeeded much in persuading the banks they have recapitalised to lend the money on in to the wider economy - what's our plan to do this differently.

None of the the banks, and especially Anglo Irish, seem to be able to be up front about the extent of their loans to now dud commercial property. In which case, how long are they expecting to ride on the coat tails of Irish sovereign credit.

Particularly AIB, who seem to want the best of both worlds, no recpaitalisation and the diminution that would imply, while still taking advantage of unlimited tax payer guarantees for the bad debts they can't be honest with us about.

I agree, but it's quite difficult to micromanage and set an effective floor on how much banks should lend.

johnnyskeleton wrote: »

There's no mention of who gets what though. It almost sounds like the government will lodge deposits with the banks, and equally it sounds like a first come first served basis rather than the more rational "support only the banks that will survive" approach.

I believe the banks must present a proposal for the funds by the end of the month. It's fairly sparse on details, at the moment.

cavedave wrote: »

Should The Government Stop Dumping Money Into A Giant Hole?


All joking apart what do we get for this money? Not eqity in the banks as the government could outright buy them for less.

I believe the intent is for preference shares, then to sell whenever the banks regain a reasonable level of their previous market value (if that happens at all, who knows).

gurramok

They better clear out the bank boards for this. Taxpayers money should not be managed by the same fools who got the Irish banking system near to collapse.

Funny thing, the govt and a few posters here had always maintained for many months that there was nothing wrong with the Irish banks in the first place and yet today we have an attempted rescue.

So the guarantee has not worked, will this latest attempt of rescue work?

Any predictions on how the markets will react tomorrow?

Économiste Monétaire

Well, that depends on what you think the guarantee's purpose was. Was the purpose of the guarantee to stop (or postpone) the collapse of the Irish banking sector? If so, then I would say it has worked; possibly not as well as the government had hoped, i.e. a finality instrument. The reason the government said there was nothing 'wrong' with the banks was because the FSAI said they were sound--'wrong' being defined by capital adequacy. (Read Patrick Honohan's piece in the IT, here.)

Also, the question of "will this work" depends on what you believe it's supposed to do. Will it guarantee lending? No. Britain has shown that even with government owning a very large proportion of shares, lending to businesses is not guaranteed. It won't solely be the government putting money in; think of it as another public-private partnership

Of course, that's all dependant on the terms and conditions of the scheme. It's probably going to be a while before we see which banks partake. AIB seems very reluctant.

ranger4

Économiste Monétaire wrote: »

Well, that depends on what you think the guarantee's purpose was. Was the purpose of the guarantee to stop (or postpone) the collapse of the Irish banking sector? If so, then I would say it has worked; possibly not as well as the government had hoped, i.e. a finality instrument. The reason the government said there was nothing 'wrong' with the banks was because the FSAI said they were sound--'wrong' being defined by capital adequacy. (Read Patrick Honohan's piece in the IT, here.)

Also, the question of "will this work" depends on what you believe it's supposed to do. Will it guarantee lending? No. Britain has shown that even with government owning a very large proportion of shares, lending to businesses is not guaranteed. It won't solely be the government putting money in; think of it as another public-private partnership

Of course, that's all dependant on the terms and conditions of the scheme. It's probably going to be a while before we see which banks partake. AIB seems very reluctant.

Wouldnt aib be seen to be at a real disadvantage against the other irish banks if they decide to not partake in gov recap seeing their share values fall even further or are they best positioned to ride out this financial storm and come out the other end the strongest and best postioned in a few years.

thebman

TBH, I think this is the one thing I'd trust FF to do right. I believe they'll come up with a way to end up getting more money back out of the banks.

brim4brim

brim4brim wrote: »

TBH, I think this is the one thing I'd trust FF to do right. I believe they'll come up with a way to end up getting more money back out of the banks.

no FF always get more money out of the Taxpayer, and here again they are blowing our money ....

10 billion could have started a new healthy bank

thebman

Deleted User wrote: »

no FF always get more money out of the Taxpayer, and here again they are blowing our money ....

10 billion could have started a new healthy bank

I don't believe so in this case. FF usually are good at "helping out" friends who have "helped" them.

The banks have fooked themselves up and damaged FF's reputation. They should expect to be taken to the cleaners in the long term.

brim4brim

brim4brim wrote: »

I don't believe so in this case. FF usually are good at "helping out" friends who have "helped" them.

The banks have fooked themselves up and damaged FF's reputation. They should expect to be taken to the cleaners in the long term.

some people cant be saved. If FF were so great at helpin their buddies their wouldnt be such a huge number of unemployed builders

I dont trust them in the slightest with our money. They are wasting it

Économiste Monétaire

ranger4 wrote: »

Wouldnt aib be seen to be at a real disadvantage against the other irish banks if they decide to not partake in gov recap seeing their share values fall even further or are they best positioned to ride out this financial storm and come out the other end the strongest and best postioned in a few years.

Well, I believe the chief executive of AIB said they were looking for investors, just not government funds. Rather, the government scheme is last chance saloon.

Deleted User wrote: »

no FF always get more money out of the Taxpayer, and here again they are blowing our money ....

10 billion could have started a new healthy bank

No, the chaos that would occur by letting the large clearing banks fail would be monumental. Banking isn't like other industries. there would be a huge fall in the money supply. Think Great Depression scale.

Économiste Monétaire

Économiste Monétaire wrote: »

No, the chaos that would occur by letting the large clearing banks fail would be monumental. Banking isn't like other industries. there would be a huge fall in the money supply. Think Great Depression scale.

we shall see which choice will lead to the worst "chaos" over the next few years. I know one way would be quicker than the other.

Économiste Monétaire

Deleted User wrote: »

we shall see which choice will lead to the worst "chaos" over the next few years. I know one way would be quicker than the other.

What do you believe will occur over the next few years?

defiantshrimp

I agree, they should clear out the top management in the banks. They are only making things worse at the moment by refusing to aknowledge the scale of the problems they face.

Mikel

Deleted User wrote: »

we shall see which choice will lead to the worst "chaos" over the next few years. I know one way would be quicker than the other.

Tempting as it is to think the banks should be left to fail, this ignores the importance of them to the rest of the economy. They are not just another company.
You could make an argument that given this special position, that they should be under more control or even state ownership, and that may be where things are headed.

Glacier

If there were only 2 Banks left, could they be in a stronger position in a few year's with less competition?

daveirl

This post has been deleted.

silverharp

Couldnt resist, from the Mish blog

http://1.bp.blogspot.com/_nSTO-vZpSgc/SUa272c5yXI/AAAAAAAAD-8/nQkDGOA9LAk/s1600-h/Bernanke-QE-Cartoon.png

Économiste Monétaire

More details have been released about this:

Anglo Irish Bank to get €1.5bn. BOI and AIB looking for approx. €2bn each.

http://www.finance.gov.ie/viewdoc.asp?DocID=5609
http://www.rte.ie/news/2008/1221/bank.html

rrpc

daveirl wrote: »

This post has been deleted.

+1, People are confusing share values with capitalisation which uniquely in banking aren't the same thing.

As somebody else said on this thread, there's no way any bank can stay out of this scheme if the others are getting into it whether they are strong enough financially or not. It'd be like the Gvernment investing money in Aer Lingus and not in Ryanair, you think Michael O'Leary would stay quiet about that?

The same goes for consolidation. You lump a weak institution with a strong one and you get a bigger, weaker entity. There's no gain for the sounder institutions in such a scenario.

I think that's the balancing act that's being worked here, look closely at what the bigger banks are saying about the possible rights issues and you get an idea as to who's the stronger.

andrewdeerpark

How much would it have cost for a full nationalisation of Anglo Irish bank instead of the current 1.5bn bailout.

By a full nationalisation I mean closing the bank, taking over its deposit base, selling off its loan book and laying off its staff.

An auction of its loan book of 70billion plus its deposit base would have generated money for the government unless its auditors and directors have been grossly exaggerating and in that case they would have to go to jail.

I see no value in 1.5billion for a lame bank like Anglo; government needs to show leadership and just take it out.

Also this would have the effect of scaring all the other banks if they know the government was willing to take the “nuclear option”. Right now the government is playing Russian roulette with the main bankers in the country however they know their's no bullets in their gun; another fudge from spineless Cowen & Lenihan.

I accept the need for AIB and BOI to receive funds however with a board clearout. Anyway do Irish CEO ‘s have no shame or Patriotism proceeding over a collapse in the company’s share price, putting the country close to bankruptcy, and still hang on their jobs!

rrpc

andrewdeerpark wrote: »

I accept the need for AIB and BOI to receive funds however with a board clearout. Anyway do Irish CEO ‘s have no shame or Patriotism proceeding over a collapse in the company’s share price, putting the country close to bankruptcy, and still hang on their jobs!

You would think that the same could be said for Google, Dell, Intel, Ryanair and Aer Lingus to name but a few.

BanjoKelly

http://www.thedailystuff.ie/bankers_bailout.html

An attempt at humour, but this bailout is a serious situation in terms of moral hazard.

loyatemu

can anyone tell me, what have we got to lose by letting Anglo fail? Its a minor investment bank - they pumped up their stock value during the boom, but their importance to the real economy is minimal as far as I can see. Let them go to the wall.

Économiste Monétaire

Anglo Irish Bank is not an investment bank. It is a commercial/retail bank, or a "high street" bank. Whether or not to let it fail would depend on how you judge what is systematically important for the country. If it were to fail, you would still have to offload the deposit arm of the business, and the loan book.

woodseb

loyatemu wrote: »

can anyone tell me, what have we got to lose by letting Anglo fail? .

letting anglo fail will send many developers to the wall as their loans are bought by more agressive entities. This will cause more distressed selling of housing in ireland, hastening and exagerrating the decline of the housing market

cavedave

woodseb

letting anglo fail will send many developers to the wall as their loans are bought by more agressive entities. This will cause more distressed selling of housing in ireland, hastening and exagerrating the decline of the housing market

And this would be good. Having zombie banks propping up bankrupt property speculators to hold empty estates of houses is not efficient.

If I make a bad mistake in my average industrial wage paying job I would get fired. How come a banks board member who makes millions a year make a mistake over the course of years that costs billions and still have a job?

andrewdeerpark

Why are the economists who advocate a free market afraid of its consequences right now regarding our Irish property market?

Lets have a blood on the floor and be done with it regardless of who fails (big developers, insurance moguls etc), p*****g away our future retirement fund on a failed entity is that any better??!!

It is amazing how learned economists run from radical market movements they prefer to write about such events (in retrospective) rather than let them run in practice proving the spineless nature of the science.

rrpc

cavedave wrote: »

And this would be good. Having zombie banks propping up bankrupt property speculators to hold empty estates of houses is not efficient.

And letting these housing stocks go at fire damage sale prices would create a negative equity situation for thousands of people who bought at the height of the market. Maybe that's not you Dave but you proabably know lots of people who are already there.

If I make a bad mistake in my average industrial wage paying job I would get fired. How come a banks board member who makes millions a year make a mistake over the course of years that costs billions and still have a job?

Lending is a risk assessment activity. On a micro scale, if you borrowed 300k to buy a house two years ago, would you have believed then that it was a bad investment? Yet now, this kind of borrowing is described as irresponsible

Obviously many people didn't, but they are now in possession of unsaleable houses whose value has dropped below the price paid at the time.

rrpc

andrewdeerpark wrote: »

Why are the economists who advocate a free market afraid of its consequences right now regarding our Irish property market?

Lets have a blood on the floor and be done with it regardless of who fails (big developers, insurance moguls etc), p*****g away our future retirement fund on a failed entity is that any better??!!

It is amazing how learned economists run from radical market movements they prefer to write about such events (in retrospective) rather than let them run in practice proving the spineless nature of the science.

It's funny how people can divorce themselves from their own actions over the last five years as if there was no connection between the decisions they made and those made by the developers and bankers in the same period.

So the banks shouldn't have given out mortgages and funded development and the developers shouldn't have built houses when the price of property was going up. People who boasted about the value of their house going up after they bought deserve everything they get now that the value has plummeted...

So, let everything run it's course, dump all the unsold property on the market at the same time at whatever price the market will take, keep incurring job losses in construction and associated industries and force the unemployed out of their houses and dump them on the market as well. Keep going until everything is sold that can be sold and the wind whistles through empty homes as the last plane flies out carrying the remaining emigrants to wherever will employ them.

In a nutshell, let's return to the eighties, oh halcyon days!

cavedave

I think I was overly glib in saying let the bankrupt banks fail. All sorts of things could happen if they did fail involving small businesses getting loans withdrawn and such that would have bad consequences. Bad consequences that I cannot quantify and do not think are fair on the properly run businesses.

rrpc

And letting these housing stocks go at fire damage sale prices would create a negative equity situation for thousands of people who bought at the height of the market. Maybe that's not you Dave but you proabably know lots of people who are already there.
.

That is me. But I have no god given right for my house to keep going up in price. Standing king Canut like against the real value of items is not going to work for long.

Should the Dutch government have propped up the prize of tulips indefinitely because so many people had invested in them?

Tulip-holders held public meetings hoping to find the best way forward. Deputies were sent to the government in Amsterdam, seeking a solution. At first, the government refused to interfere. It advised the tulip-holders to agree a plan among themselves.

....
The question was raised in Amsterdam, but the judges unanimously refused to interfere, on the ground that debts contracted in gambling were not debts in law.

To find a remedy was beyond the power of the government. And so the matter ended.

from http://www.thetulipomania.com/

Économiste Monétaire

Morgan Kelly roasts the recapitalisation of Anglo Irish Bank in today's IT:

Better to incinerate €1.5bn than squander it on Anglo Irish Bank

For this Government, the bailout follows a compelling political logic: Anglo Irish funds developers, and developers fund Fianna Fáil, writes Morgan Kelly
FOR THE current Government, a month without a catastrophic policy error has come to seem like a month wasted. After the bank liability guarantee in September and the medical card fiasco in October, the Government had a quiet November but has now come roaring back to form with the bailout of Anglo Irish Bank. Attempting to recapitalise Anglo Irish is not only expensive and economically pointless, but futile.

Some simple arithmetic shows the hopelessness of what the Government is trying to do. In the typical property bust over the last 30 years, US banks have lost on average about 20 per cent of what they lent to developers.
Let us suppose that Anglo Irish is no more incompetent or dishonest than the average bank and will also lose up to 20 per cent of what is has lent.
Then, given lending of about €80 billion to developers, it follows that Anglo Irish is facing losses on the order of €15 billion. The true figure could easily turn out to be twice as large.

With likely losses of this magnitude, the Government's proposed investment of €1.5 billion will vaporise in months, forcing it either to continue pouring good money after bad, or to repudiate Anglo Irish's liabilities. For all it will achieve, the money might as well be piled up in St Stephen's Green and incinerated.

Anglo Irish epitomised the Irish bubble economy. Its rise began a decade ago as the boom created a demand for houses and commercial property. As prices started to rise, banks made a miraculous discovery: the more they lent, the more prices rose; and the more prices rose, the more people wanted loans to get into the booming market. And the more loans that bankers made, the bigger the bonuses they could award themselves.
It was brilliant while it lasted. One of Bank of Ireland's stable of developers would buy an office block for €100 million, and sell it on a year later to one of Anglo's for €120 million, and so on: a process known to bankers as adding value. Everyone was a genius and nobody could lose.

As a senior executive of Anglo Irish once assured me, there was no risk involved. All of the loans were guaranteed by the enormous property portfolios of the borrowers. What concerned me at the time was not that he was spouting transparent nonsense - that, after all, was what he was paid to do - but that he clearly believed it himself. Sadly, like any pyramid scheme, it contained the seeds of its own destruction.

Once banks stopped lending, as they were forced to do earlier this year, the market collapsed. Developers were left holding properties whose rental incomes were a ruinously small fraction of their interest payments, and banks discovered that their collateral was worthless.

All Irish banks have been injured by the collapsing property pyramid, some fatally so. Unfortunately, as international experience shows, banks that have been overwhelmed by bad property loans do not simply fade away.

Their final act typically has three scenes.
First, the bank starts to admit that a certain fraction of its loans are receiving active management, it increases its bad loan provision but by an unrealistically low amount, and its share price collapses.
In the second scene, evidence of malfeasance starts to appear, as senior bankers are found to have had difficulties in distinguishing the bank's assets from their own, and to have been acting as poachers as well as gamekeepers in their dealings with developers.

It is to be hoped that any Irish bankers in this situation have heeded the cardinal rule of Irish finance and kept their more imaginative dealings within the jurisdiction. As Patrick Gallagher discovered, the British judicial system takes a less indulgent view of lapses of fiduciary responsibility than does our own, and seems to harbour a particular antipathy towards charming Irish rogues.

In the final stage, as the bank slides over the brink of collapse, senior managers loot its assets. Looting a bank involves nothing so unsubtle or easily traceable as driving away with carloads of cash.
Instead, each bank has a filing cabinet with personal guarantees written by borrowers and deeds to property pledged as collateral (large property deals involve surprisingly little paperwork); and these documents have a tendency to find their way into the briefcases of departing executives who can later negotiate their return to their original owners.

So much for the future. Right now, in the "nothing in the last six months has really happened" world of the Government, the bailout of Anglo Irish follows a compelling political logic. Anglo Irish funds developers, and developers fund Fianna Fáil.

By any other criterion, a bailout of Anglo Irish is senseless. Institutions such as AIB and Bank of Ireland fulfil an economically vital role of clearing payments and lending to households and businesses; Anglo Irish and Irish Nationwide were purely conduits for property speculation.
They fulfil no role in the Irish economy and their absence would not be noticed.

By using taxpayers' money to acquire Anglo Irish's portfolio of dingy shopping centres and derelict development sites, the Government is squandering scarce resources that are needed elsewhere. Just as the State is putting too much money into Anglo Irish, it is putting in too little to recapitalise AIB and Bank of Ireland on which, whether you like it or not, large sectors of the Irish economy depend.

Governments tend to forget whose interests they are supposed to serve. Our Government was not elected to look after the managers, shareholders and bondholders of recklessly mismanaged banks. Its sole duty is to Irish taxpayers: to ensure that banks that serve a useful economic purpose continue to operate, while those that serve none are swiftly closed down.

Morgan Kelly is professor of economics at University College Dublin

Link

silverharp

rrpc wrote: »

And letting these housing stocks go at fire damage sale prices would create a negative equity situation for thousands of people who bought at the height of the market. Maybe that's not you Dave but you proabably know lots of people who are already there.

its going to happen anyway, property will fall to the level it needs to, the only question is the time to get there. If Japan is a model then property here have to fall 2/3rds from the top. The only question is does it happen over 5 years or over 10.

meglome

As a taxpayer I'm not happy with this deal. I think we could have got more for our money and Anglo Irish Bank is an accident waiting to happen by the sounds of it.

So any of you with backgrounds in economics and finance, what do you think so far?

meglome

meglome wrote: »

So any of you with backgrounds in economics and finance, what do you think so far?

Let Anglo Fail. If we are to bail out a bank let it not be them

MSporty

Deleted User wrote: »

Let Anglo Fail. If we are to bail out a bank let it not be them

Anglo are being bailed out because most of their clients are in the fianna fail "golden circle" or closely associated with it. Why else would this bank be bailed out

MSporty

MSporty wrote: »

Anglo are being bailed out because most of their clients are in the fianna fail "golden circle" or closely associated with it. Why else would this bank be bailed out

We should be ringing and emailing every newspaper, radio station and TD (i know they are on holidays email them)
http://www.thepropertypin.com/viewtopic.php?f=4&t=14604
^^ email addresses list

Maybe we can prevent the nation going bankrupt to bail our Irelands golden circle of the richest. It makes me wonder why Fianna Fail are so hellbent on saving them it stinks to the high heavens........!!!! :mad:


Ireland is as bad as Africa for corruption the difference is we do it with money they do it with guns.

cavedave

This has gone fairly political. So to return it to economics. Who has been in a situation like this before? What did they do? Did it work?

Japan. Propped up Zombie banks. No

Sweden. Took over the banks. Yes.

These are different because they could control their own currency and they were not bad cases in a worldwide recession but isolated cases in fairly good times.

So is the Savings and Loan crisis in the 1980's a better example? Was one state particularly badly hit?

Are there any examples of countries who left their banks (or at least the specialised ones (like anglo Irish)) fail?

If you have a bit of time this is an 1850 economics description that makes funny/scary/annoying reading. Its about the south seas bubble of Newtons time. A play of it would be like "the crucible" in terms of modern day parallels.

SimpleSam06

cavedave wrote: »

Are there any examples of countries who left their banks (or at least the specialised ones (like anglo Irish)) fail?

It has gone considerably deeper than the banks at this stage. The entire global economy is listing, and while specific questions about banks need to be answered, the situation needs to be dealt with as a whole - you won't fix this by fixing the banks.

I would recommend what I recommended some months ago in accom/prop, and what Obama seems to be doing in his policy making, and what pulled the US out of the first Great Depression, Germany out of the Weimar stagnation, and Japan after WW2. A widepsread program of public works combined with tooling up of new educational facilites to create a fresh (or in Ireland's case first) industrial base, combined with a severe curtailing of the public sector.

silverharp

SimpleSam06 wrote: »

I would recommend what I recommended some months ago in accom/prop, and what Obama seems to be doing in his policy making, and what pulled the US out of the first Great Depression, Germany out of the Weimar stagnation, and Japan after WW2. A widepsread program of public works combined with tooling up of new educational facilites to create a fresh (or in Ireland's case first) industrial base, combined with a severe curtailing of the public sector.

There is a good case to be put forward that the spending programs extended the depression in the states(remember taxes were increased during this time). As for the German example again I think there is a good case that in purely economic terms the German economy would have bankrupted itself.
I think you are overestimating the abilty of an economy to pull itself up by its own bootsraps. Unless you are suggesting that "counterfitting" currency is a way to increase wealth , there has to be real savings in an economy to carry out the programs you are suggesting. As gov. spending has to be extracted from the private economy, to the extent that gov. spending increases, the private sector will be deprived of savings for profitable investments which will be diverted into pork barrel projects which will only benefit the people involved

SimpleSam06

silverharp wrote: »

There is a good case to be put forward that the spending programs extended the depression in the states

Only by those few economists who are opposed to such things as social welfare and minimum wage as well, a group who coincide usually with the proponents of the voodoo that is the Austrian school.

silverharp wrote: »

(remember taxes were increased during this time).

What are you talking about, only the top 3% of earners paid income taxes from 1926 to 1940.

silverharp wrote: »

As for the German example again I think there is a good case that in purely economic terms the German economy would have bankrupted itself.

So it had nothing to do with the reparations of the treaty of Versailles, than?

silverharp wrote: »

As gov. spending has to be extracted from the private economy, to the extent that gov. spending increases, the private sector will be deprived of savings for profitable investments which will be diverted into pork barrel projects which will only benefit the people involved

Again with the free market rubbish. Although taxation is viewed as leakage in certain models, that point of view fails to take into account infrastructure and societal developments without which the economy would collapse. In its simplest terms, the government aren't aliens from another planet, they are people tasked with distributing the wealth granted to them by the citizenry in a manner which will best benefit the country as a whole, which is a good and healthy thing.

book smarts

SimpleSam06 wrote: »

Only by those few economists who are opposed to such things as social welfare and minimum wage as well, a group who coincide usually with the proponents of the voodoo that is the Austrian school.

Again with the free market rubbish. Although taxation is viewed as leakage in certain models, that point of view fails to take into account infrastructure and societal developments without which the economy would collapse. In its simplest terms, the government aren't aliens from another planet, they are people tasked with distributing the wealth granted to them by the citizenry in a manner which will best benefit the country as a whole, which is a good and healthy thing.

Peter Schiff, who correctly predicted this recession, is a proponent of the voodoo school of Austrian economics. But that doesn't mean it's the correct model. All economic models are bogus.

Also, Japan's infrastructure push didn't bring it out of it's dark decade. Maybe the money spent on that would have been better spent elsewhere.

silverharp

SimpleSam06 wrote: »

Only by those few economists who are opposed to such things as social welfare and minimum wage as well, a group who coincide usually with the proponents of the voodoo that is the Austrian school.


What are you talking about, only the top 3% of earners paid income taxes from 1926 to 1940.

You will probably not agree with any of the conclusions of the article below, however I have yet to be conviced that growth in gov beyond the bare minimum is a good thing, how many more "benchmarkings" "decentalisations" "Corn Ethanol subsidies" or clowns like Gordon Brown giving he green light for everyone to go nuts by saying he has done away with boom and busts or subsidising the auto industry and spending money to reduce man made global warming at the same time, need I go on? gov is too inclined to misallocate capital and add to the cost of doing business and are too easily corrupted by special interest goups

I am actually looking forward to the few years, it will be an excellent case study to see if more gov. works

http://www.minyanville.com/articles/MER-GS-MCO-ms/index/a/15389

How Democrats Failed to Learn From FDR's New Deal.

Franklin Delanor Roosevelt is popularly regarded as the man who saved democratic capitalism with vigorous governmental intervention. But the failure of government – not the free market – created the Great Depression.

Here’s how:

Tax Hikes

FDR nearly tripled the tax burden between 1933 and 1940, boosting excise, income, inheritance, corporate, and dividend taxes and slapping a tax on “excess profits.” The highest individual tax rate soared to 79%. High taxes sucked money out of the private sector, smothered entrepreneurship and killed incentives to work and invest. By contrast, Treasury Secretary Andrew Mellon helped spark an economic boom in the 1920s by backing a plan to slash the top individual tax rate to 25% from 73%.

High Employment Costs

The New Deal raised the cost of employment, making it expensive to hire new workers and contributing to the nation’s high unemployment rate. The National Industrial Recovery Act and the Davis-Bacon Act mandated artificially high wages, further crimping private employment. The new minimum wage cut demand for unskilled workers. The new Social Security tax raised compensation costs. Compulsory union membership often fostered violent tactics – and the goal wasn’t increased efficiency or innovative products to grab market share. The WPA and other government agencies “created” jobs, but at great cost – private sector employment was lower in 1940 than it was in 1929.

Brutalizing Business

FDR railed against “economic royalists” and “privileged princes” who sought to establish an “industrial dictatorship” and a “new despotism.” Roosevelt issued about 3,700 executive orders, many limiting business activity, and let lose a plague of anti-trust lawyers on American industry. New securities laws made it difficult to raise capital. FDR ordered the breakup of the nation’s strongest banks, including those with the lowest failure rates. This created an uncertain business climate that stifled investment and killed private sector job creation.

Inflating Prices

The National Industrial Recovery Act of 1933, struck down by the U.S. Supreme Court two years later, created “codes” – cartels – in about 500 industries and limited competition in an effort to maintain high prices and, it was thought, wages. Business owners who responded to the market by cutting prices received a stiff warning from the federal government followed by a fine. The Agricultural Adjustment Act of 1933 also sought to keep prices high by limiting production. “Excess” food was destroyed or sold below cost overseas as millions of Americans went hungry. In 1937, “marketing orders” limited production of milk and fruit. Roosevelt apparently thought it was government’s role to protect established high-cost producers from entrepreneurs who could beat them on price. Roosevelt’s policies stifled job creation and raised prices for families already struggling to make ends meet.

Showcase Projects

FDR used tax money to build the Tennessee Valley Authority, TVA, a power-generating monopoly. He then exempted the TVA from state and federal taxes and regulations. But the massive project failed to produce an economic boom. In a report for the Cato Institute, Jim Powell, author of FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression, says non-TVA southern states such as North Carolina and Georgia posted stronger growth than TVA states because there was a faster transition to higher-paying jobs in manufacturing and services from farming.

if the New Deal were a product in a competitive market, Roosevelt would have been bankrupt. But politicians have different goals, different means of achieving them and a different scale for measuring success that have little to do with a market economy. Most of FDR’s “make work” government jobs created little of value and therefore didn’t give the economy a long-term boost. No matter. Harry Hopkins, one of FDR’s closest advisors, summed up the political philosophy of the New Deal: “We shall tax and tax, spend and spend, elect and elect.”

Voters might want to keep this in mind the next time a presidential candidate yaps about “giving” you some nifty benefit (i.e. buying your vote with your money) or “investing” in a spiffy new program which, wouldn’t you know it, just happens to gobble more of your taxes.

Historian David M. Kennedy won the 1999 Pulitzer Prize for his book Freedom from Fear, a review of the economic consequences of the New Deal. “Whatever it was,” he wrote, FDR’s New Deal “was not a recovery program.”

Here’s part of Louis Armstrong’s l940 song about the Works Progress Administration, the granddaddy of the nation’s workfare programs:

Sleep while you work,
Rest while you play,
Lean on your shovel
To pass the time away...

SimpleSam06

book smarts wrote: »

Peter Schiff, who correctly predicted this recession, is a proponent of the voodoo school of Austrian economics.

Cats and dogs in the street were predicting this problem back in 2001, and if they could do it, even goldbugging witchdoctors that actually decry the scientific method, and wait for it, mathematics, could certainly spot it.

book smarts wrote: »

Also, Japan's infrastructure push didn't bring it out of it's dark decade. Maybe the money spent on that would have been better spent elsewhere.

Japan already had an extremely mature infrastructure and industrial base - there was little enough that could have been done to improve it. Besides, pointing at Japan which was a fairly isolated example is fairly pointless when looking at a global depression.

silverharp wrote: »

however I have yet to be conviced that growth in gov beyond the bare minimum is a good thing,

Sure, why not, lets go down the libertarian route and revert to a feudal society where the strong take what they want and the weak live at their whim. A much better idea.

silverharp wrote: »

how many more "benchmarkings" "decentalisations" "Corn Ethanol subsidies" or clowns like Gordon Brown giving he green light for everyone to go nuts by saying he has done away with boom and busts or subsidising the auto industry and spending money to reduce man made global warming at the same time, need I go on?

The excesses of various governments, including our own, can be attributed to poor governance, not to the idea that capital needs to be privately controlled and distributed. To quote Keynes, "Capitalism is the extraordinary belief that the nastiest of men, for the nastiest of reasons, will somehow work for the benefit of us all".

silverharp wrote: »

gov is too inclined to misallocate capital and add to the cost of doing business and are too easily corrupted by special interest goups

Bad government is. The problem I see is that during "good" times, people will put up with any amount of malfeasance. I predict that will change shortly.

silverharp wrote: »

FDR nearly tripled the tax burden between 1933 and 1940, boosting excise, income, inheritance, corporate, and dividend taxes and slapping a tax on “excess profits.” The highest individual tax rate soared to 79%. High taxes sucked money out of the private sector, smothered entrepreneurship and killed incentives to work and invest. By contrast, Treasury Secretary Andrew Mellon helped spark an economic boom in the 1920s by backing a plan to slash the top individual tax rate to 25% from 73%.

Talk about your partisan rags. Read this for more in-depth information on this vastly complex issue.

silverharp wrote: »

High Employment Costs

The New Deal raised the cost of employment, making it expensive to hire new workers and contributing to the nation’s high unemployment rate. The National Industrial Recovery Act and the Davis-Bacon Act mandated artificially high wages, further crimping private employment. The new minimum wage cut demand for unskilled workers. The new Social Security tax raised compensation costs.

Yes, damn that minimum wage and social security, getting in the way of profits.

silverharp wrote: »

Compulsory union membership often fostered violent tactics – and the goal wasn’t increased efficiency or innovative products to grab market share. The WPA and other government agencies “created” jobs, but at great cost – private sector employment was lower in 1940 than it was in 1929.

Violent tactics that were begun by employers. Unemployment dropped to half what it was at the depth of the depression, then climbed somewhat, before dropping in WW2. See what happens when you look at the details?

silverharp wrote: »

Brutalizing Business

FDR railed against “economic royalists” and “privileged princes” who sought to establish an “industrial dictatorship” and a “new despotism.”

No harm to break up actual monopolies, the end result of Austrian stupidity.

silverharp wrote: »

Inflating Prices

The National Industrial Recovery Act of 1933, struck down by the U.S. Supreme Court two years later, created “codes” – cartels – in about 500 industries and limited competition in an effort to maintain high prices and, it was thought, wages.

So hold on a minute, was he destroying cartels or building them? Your article contradicts itself, usually not a good sign.

The rest of it is such unremitting bullshit I find it difficult to even read it, tbh. Argue for yourself rather than finding partisan blogs, of which there are an infinite supply, to do it for you.

book smarts

SimpleSam06 wrote: »

Cats and dogs in the street were predicting this problem back in 2001, and if they could do it, even goldbugging witchdoctors that actually decry the scientific method, and wait for it, mathematics, could certainly spot it.


Japan already had an extremely mature infrastructure and industrial base - there was little enough that could have been done to improve it. Besides, pointing at Japan which was a fairly isolated example is fairly pointless when looking at a global depression.

Strange you should refer to the scientific method, considering Economics is pseudoscience, surrounded in jargon and false rigour, where "experts" blind people with fancy maths and pretend they know what they're talking about-including Keynesianism. Look at the mess the "experts" have us in.

It's not a depression yet, and you were happy to refer to Japan when it suited you.

silverharp

Poor governance is almost guaranteed though? A state sector worker/organisation doesnt have to deal with the market and probably operates in some form of monopoly, there is no mechanism to ensure innovation or effecient supply of service. As for the Keynes quote, that lacks any content, how do you apply that to for instance Aerlingus v British Airways or Ryanair

SimpleSam06 wrote: »

The problem I see is that during "good" times, people will put up with any amount of malfeasance. I predict that will change shortly.[\Quote]


How will it change? State agencies are not going to come in one day and vote that they close themselves down in the public interest. And the “people” will always lobby to vote themselves more goodies or defer cuts or push the cuts somewhere else.






re taxes , Ok here is how I understood what happened , you will have to explain what context I am missing
and I will argue that raising taxes during a recession is the worst thing to do. With a $2 billion deficit during 1931, Congress passed, in the Revenue Act of 1932, one of the greatest increases in taxation ever enacted in the United States in peacetime.The range of tax increases was enormous. Many wartime excise taxes were revived, sales taxes were imposed on many items , the normal rate was increased from a range of 1.5percent–5 percent, to 4 percent–8 percent; personal exemptions were sharply reduced, and an earned credit of 25 percent eliminated; and surtaxes were raised enormously, from a maximum of 25 percent to 63 percent on the highest incomes. Furthermore, the corporate income tax was increased from 12 percent to l3 percent, and an exemption for small corporations eliminated; the estate tax was doubled, and the exemption floor halved; and the gift tax, which had been eliminated, was restored, and graduated up to 33percent.

SimpleSam06 wrote: »

Yes, damn that minimum wage and social security, getting in the way of profits.[\Quote]

Not getting in the way of profits, you will need to convince me that wage increases during a depression does not afect the total hours worked in the economy. Remember the cost of living drops when inflation is negative so real wages are increasing, if you peg the rate above what the market can bare then hours and jobs decrease.

SimpleSam06 wrote: »

Unemployment dropped to half what it was at the depth of the depression, then climbed somewhat, before dropping in WW2. See what happens when you look at the details?.[\Quote]


In May 1939, Treasury Secretary Henry J. Morgenthau Jr., one of Franklin Roosevelt's best friends, testified before the House Ways and Means Committee: "I say after eight years of this Administration we have just as much unemployment as when we started… And an enormous debt to boot". When he spoke, unemployment exceeded 20 percent. Hmmmmm... if thats a definition of sucessful policy , I'd hate to see if it went wrong.



The “enonomic Royalists” remarks were FDR's quips at anyone who critisied the new deal. There is no contradition in the article, of course FDR actions were restrictive,and with respect you seem more interested in winning a debate then in discussing the salient points. Merry xmas:D

SimpleSam06

book smarts wrote: »

Strange you should refer to the scientific method, considering Economics is pseudoscience, surrounded in jargon and false rigour, where "experts" blind people with fancy maths and pretend they know what they're talking about-including Keynesianism. Look at the mess the "experts" have us in.

All the good advice in the world is worthless when nobody is listening. As for the rest, not much to say to that really, and I'm not too sure why you're bothering to post in this forum.

book smarts wrote: »

It's not a depression yet, and you were happy to refer to Japan when it suited you.

Unfortunately you seem to have missed the "post WW2" part in front of that. But carry on strawmanning!

SimpleSam06

silverharp wrote: »

with respect you seem more interested in winning a debate then in discussing the salient points. Merry xmas:D

You win a debate by discussing the salient points. I'd find it easier to discuss them if your post was formatted to be readable though, so whenever you're ready. Merry Xmas!

silverharp

SimpleSam06 wrote: »

You win a debate by discussing the salient points. I'd find it easier to discuss them if your post was formatted to be readable though, so whenever you're ready. Merry Xmas!

I have amended as best as I can , no time to rewrite I'm afraid, do me a favour and respond in paragraghs , some posters find it irritating if their posts are responded to line by line