Can I Haz Free Money?

[alien billie]

Can anyone explain to me this whole deflation / printing money thing? I already have a partial understanding: the banks are seizing up, so the speed at which money circulates in the economy is slowing, so inflation is dropping and may even become negative. This is a Bad Thing, (because interest rates have also dropped, and can’t go below zero, so there is no incentive to save?), but can be directly countered by printing money, which will counteract the deflation by devaluing the currency.

Pause for breath. If there’s nothing in that little lot that needs correcting, I’ll be pleasantly surprised.

So, we print money and give it to the banks / the people / reduce taxes / build public works. But many people are worried about this, and think it’s a recipe for runaway inflation. Well, duh? In that case, print less money! Is it such an imprecise science to predict the effect of printing a particular quantity of money? Are there positive feedback mechanisms involved, or something? Or maybe further drawbacks to printing money that I haven’t heard about?

So I guess that this is the crux of my question: why is deflation so feared since the opportunity to print money for free seems to me to be a good thing?

[Ray Moscow]

I recommend Paul Krugman's blog (http://krugman.blogs.nytimes.com/), since he discusses subjects like this frequently.

There are indeed big drawbacks to "printing money" in normal times, but when heading into a deep recession/depression it's the right approach.

[Garnet]

I'm a complete idiot about this stuff. *heads off to read the blog*

[Ray Moscow]

I like Krugman since he's been calling bullshit on Dubya since 2000, usually entirely accurately.

And he just won the Nobel prize in economics last November.

[dug_down_deep]

I love Krugman. I just read his book, The Great Unraveling (http://www.amazon.com/exec/obidos/tg/detail/-/0393326055/).

[Garnet]

Oh... my....

I think I'm in love.

http://krugman.blogs.nytimes.com/2009/03/04/marginal-marginalizers/

[Ray Moscow]

I love Krugman. I just read his book, The Great Unraveling (http://www.amazon.com/exec/obidos/tg/detail/-/0393326055/).

Yeah, it's good. It's largely his columns during the Dubya years, though.

I also want to get his recently revised The Return of Depression Era Economics and the Crisis of 2008 (http://www.amazon.co.uk/Return-Depression-Economics-Crisis-2008/dp/1846142393/ref=sr_1_1?ie=UTF8&s=books&qid=1236278965&sr=1-1). (I guess the second half of the title is the "revised" bit.)

[Goodchild]

It was my understanding that most money is created by the banks themselves through lending rather than through the process of printing money?

For a great primer on the creation of money and what it actually is I highly recommend the short program Money as Debt (http://www.youtube.com/watch?v=vVkFb26u9g8). Watch this and you will learn so much, it's written to be understood by those with little to no knowledge of the financial system.

[alien billie]

I recommend Paul Krugman's blog (http://krugman.blogs.nytimes.com/), since he discusses subjects like this frequently.

There are indeed big drawbacks to "printing money" in normal times, but when heading into a deep recession/depression it's the right approach.

Thanks, I'll check out what he's got to say.

[Joykins]

I love Krugman, he's awesome :)

I don't think the problem with "money circulating" in the economy has so much to do with banks seizing up as people being tapped out. We had a spectacular bubble in credit and now the piper must be paid.

The problem is that a little inflation is OK, a lot of inflation is bad, and hyperinflation and deflation are very, very bad indeed. Arguably, we don't know how to fix the last deflation, though we know raising interest rates into double digits and stomping on union colas like bugs can deal with fairly rapid inflation (but with serious economic repercussions).

[Spherical Time]

I love Krugman, he's awesome :)

I don't think the problem with "money circulating" in the economy has so much to do with banks seizing up as people being tapped out. We had a spectacular bubble in credit and now the piper must be paid.

The problem is that a little inflation is OK, a lot of inflation is bad, and hyperinflation and deflation are very, very bad indeed. Arguably, we don't know how to fix the last deflation, though we know raising interest rates into double digits and stomping on union colas like bugs can deal with fairly rapid inflation (but with serious economic repercussions).I disagree with you. The banks aren't loaning each other money because they're afraid that if they do the loans will become defunct.

So, even fairly safe loans aren't being considered, which is having repercussions for normal Americans.

After all, if the bank doesn't have the money to lend, it's hard to lend the money.

[Joykins]

I disagree with you. The banks aren't loaning each other money because they're afraid that if they do the loans will become defunct.

So, even fairly safe loans aren't being considered, which is having repercussions for normal Americans.

After all, if the bank doesn't have the money to lend, it's hard to lend the money.

BUT!! The party died up because enough people stopped paying on their loans. People with good credit can still get loans--my parents just refinanced their house without an assistance program after all and my credit cards still have outrageously high limits.

[alien billie]

Hmm. Done some reading, but I haven't found an answer to my central question yet.

Deflation is coming! Hooray! Let's print loads of money and we'll all get rich!

:banana:

[Spherical Time]

BUT!! The party died up because enough people stopped paying on their loans.No it didn't. Or whoever explains it that way isn't doing a very good job.

There's a secondary market, the CDO (Collaterallized Debt Obligations) that is made up of people that buy and sell groups of mortgages.

The CDOs that you can buy are rated from good to bad. The bad ones pay more, but they're riskier because the people default more often. What happened wasn't that people "stopped paying on their loans," it was that the ratings on the "bad" CDOs were grouped again and then rerated as "good."

This actually created a demand for subprime (i.e. mostly bad) mortgages because everyone was buying bad CDOs that were labeled as good.

And then everything was sliced up and rerated again, so that now even the worst of the worst CDOs were being sold as "AAA" prime, top rated, very good by the rating companies.

That way, all the market's money was being pushed onto the mortgages that were already risky. It was a lie though: even though they were telling people that it was safe, it was really just a way to sell people bad CDOs that were labeled as good.

So when the expected thing happened, and some of the loans collapsed, it turned out that the majority of the money in the market was riding on them, and it started a chain reaction.

If all that money hadn't been placed on risky CDOs, none of this would have happened. It was 75% the fault of the bankers who mislabeled and lied about the risky CDOs to sell them, 20% the fault of the banks who pushed riskier loans to create the risky CDOs, and maybe 5% of the fault of the defaulters.

After all, banks can estimate how many loans will fail when they make them. Since they were selling them as CDOs though, they didn't care that the risks were huge. They knew the loans would collapse. That part wasn't a surprise.

What was a surprise, and what caused the crash, was that all of these money managers had put all the money of these big banks on loans that the mortgage banks knew would collapse. And the CEOs don't care, because they get paid anyway. And the boards of directors don't care because they're now all made up of other CEOs.

The weird thing is, I keep hearing people say that it was the individuals who got loans that were at fault for the crash because they stopped paying. Have you ever heard of a bank suddenly loosing 20 billion dollars over 100 million dollars in loans?

It's the bankers fault for doing stupid things with the money, like, you know, lying about their CDO tranches. :bang:

Yarrrrr. I've been spending too much time with all my New York banker friends. I'm beginning to actually understand some of this.

People with good credit can still get loans--my parents just refinanced their house without an assistance program after all and my credit cards still have outrageously high limits.True. My mom just had to get a new car. But if I wanted a car, or if someone responsible but new to credit wanted to get a loan, they couldn't. Same with new business loans. It isn't the people at the top of the credit rating that are being affected, it those of us in the middle of the pack that are loosing out.

To the tune of millions of lost jobs and a huge recession.

[Spherical Time]

Is it such an imprecise science to predict the effect of printing a particular quantity of money?Yes.

Are there positive feedback mechanisms involved, or something? Or maybe further drawbacks to printing money that I haven’t heard about?Yeah, there are further drawbacks.

It doesn't really help if the banks won't take all that money that you just gave them and turn around and give it out. And they're not. They're just holding on to it.

So, your choice is between giving lots of free money to people who didn't earn it and won't do anything with it or . . . not.

The weird thing is, all that bailout money? Those billions in real money that got handed out to stupid bankers? That was sort of necessary because if it didn't happen, all of the suddenly half the country would be kicked out of their homes because all the sudden the mortgage companies would fold and people would go from having $800 per month due to needing $100,000 right now.

Most people don't have the balance of their mortgage lying around the house.

So, despite the fact that what happened looks a lot like what you're proposing to fix the problem, it probably wouldn't help much.

So I guess that this is the crux of my question: why is deflation so feared since the opportunity to print money for free seems to me to be a good thing?Dunno.

[Joykins]

The weird thing is, I keep hearing people say that it was the individuals who got loans that were at fault for the crash because they stopped paying. Have you ever heard of a bank suddenly loosing 20 billion dollars over 100 million dollars in loans?

No argument that Wall Street magnified the losses out of proportion by playing derivative Russian Roulette.

And then the housing bubble pop and the stock market crashes made people who weren't really touched by the "subprime" crisis feel poorer, and they started hoarding money too--just like the banks. Add that to unemployment news, and saving money is just self-preservation these days. Doesn't help the employment situation, though.

[Joykins]

True. My mom just had to get a new car. But if I wanted a car, or if someone responsible but new to credit wanted to get a loan, they couldn't. Same with new business loans. It isn't the people at the top of the credit rating that are being affected, it those of us in the middle of the pack that are loosing out.

The assumption that one should need a loan to get a new car should be questioned. </Dave Ramsey> I have had enough debt for long enough, I want to get OUT and not HAVE any more avoidable debt. I don't think I'm alone, either.

[Joykins]

So I guess that this is the crux of my question: why is deflation so feared since the opportunity to print money for free seems to me to be a good thing?

I'm gonna guess that in deflationary circumstance, people and institutions hoard money rather than spending it (after all why pay $10 today for something that will cost $5 tomorrow), and printing excess money just provides more for them to hoard.

[alien billie]

There's a secondary market, the CDO (Collaterallized Debt Obligations) that is made up of people that buy and sell groups of mortgages.

The CDOs that you can buy are rated from good to bad. The bad ones pay more, but they're riskier because the people default more often. What happened wasn't that people "stopped paying on their loans," it was that the ratings on the "bad" CDOs were grouped again and then rerated as "good."

This actually created a demand for subprime (i.e. mostly bad) mortgages because everyone was buying bad CDOs that were labeled as good.

And then everything was sliced up and rerated again, so that now even the worst of the worst CDOs were being sold as "AAA" prime, top rated, very good by the rating companies.

That way, all the market's money was being pushed onto the mortgages that were already risky. It was a lie though: even though they were telling people that it was safe, it was really just a way to sell people bad CDOs that were labeled as good.

So when the expected thing happened, and some of the loans collapsed, it turned out that the majority of the money in the market was riding on them, and it started a chain reaction.

If all that money hadn't been placed on risky CDOs, none of this would have happened. It was 75% the fault of the bankers who mislabeled and lied about the risky CDOs to sell them, 20% the fault of the banks who pushed riskier loans to create the risky CDOs, and maybe 5% of the fault of the defaulters.

After all, banks can estimate how many loans will fail when they make them. Since they were selling them as CDOs though, they didn't care that the risks were huge. They knew the loans would collapse. That part wasn't a surprise.

What was a surprise, and what caused the crash, was that all of these money managers had put all the money of these big banks on loans that the mortgage banks knew would collapse. And the CEOs don't care, because they get paid anyway. And the boards of directors don't care because they're now all made up of other CEOs.

The weird thing is, I keep hearing people say that it was the individuals who got loans that were at fault for the crash because they stopped paying. Have you ever heard of a bank suddenly loosing 20 billion dollars over 100 million dollars in loans?

It's the bankers fault for doing stupid things with the money, like, you know, lying about their CDO tranches. :bang:


Definitely agree that it's the creators of the CDO's that are most to blame, criminally to blame even. Not so sure I understand how come, if banks were responsible for creating dodgy CDO's, that banks then went and bought the damn things too! Maybe Chinese Walls are stronger than I thought :rolleyes:. But I can't believe that the CEOs bought crap just for the hell of it. :dunno:

[Spherical Time]

The assumption that one should need a loan to get a new car should be questioned. </Dave Ramsey> I have had enough debt for long enough, I want to get OUT and not HAVE any more avoidable debt. I don't think I'm alone, either.I doubt you're alone. But as my mom pointed out to me one time: credit allows you to buy a car before you need it to drive to work. It also allows people to live in a home now that they otherwise wouldn't be able to afford until they're fifty.

No argument that Wall Street magnified the losses out of proportion by playing derivative Russian Roulette.I take it that you're still trying to blame this mess on people who bought too much house, but okay, I'll let it slide.

[Joykins]

I take it that you're still trying to blame this mess on people who bought too much house, but okay, I'll let it slide.

Not at all; or, at least, only partly. You could stop paying on a debt due to incapacity for many reasons, only one of which is borrowing too much (losing your job, frex.). I also come from an area where at the peak of the bubble $300,000 bought you a shack or crackhouse so I'm unlikely to blame it on "too much house." I'm sure flippers did their bit by inflating the bubble, too.

Whoever lent a a lot of money no questions asked to people who were known to have bad credit and then marked up the best of the dodgy lot as AAA definitely have a lot of 'splainin' to do. I'm just saying that isn't the only factor. Yes, people should handle their money/debt responsibly, but that doesn't mean you should throw it at them either.

[Spherical Time]

Definitely agree that it's the creators of the CDO's that are most to blame, criminally to blame even. Not so sure I understand how come, if banks were responsible for creating dodgy CDO's, that banks then went and bought the damn things too! Maybe Chinese Walls are stronger than I thought :rolleyes:. But I can't believe that the CEOs bought crap just for the hell of it. :dunno:For the most part it was mortgage banks that were creating the CDOs and investment banks that were buying them. Two different animals.

[MNPhysicist]

Definitely agree that it's the creators of the CDO's that are most to blame, criminally to blame even. Not so sure I understand how come, if banks were responsible for creating dodgy CDO's, that banks then went and bought the damn things too! Maybe Chinese Walls are stronger than I thought :rolleyes:. But I can't believe that the CEOs bought crap just for the hell of it. :dunno:

The ability to leverage 40:1 on securities based upon mark to blowing finger in the wind valuations, plus double digit returns is one heck of a carrot. Why ask questions, just buy buy buy, after all, the regulators, ratings firms say its safe, SarOx pretty much means if they pull a fast one, they could go to jail, surely no one would pull an Enron? And if something goes screwey, just put it in a SPV, and push it off the balance sheets, no one will know, and then buy more. Its easy money..... until 1 minor little crack starts. I almost wish the SEC would have been asleep at the wheel on Sept 18th. We might well be on the way to recovery had that happened, although maybe not.