Daily Archives: September 20, 2018

Four Lessons (Not) Learned From The Financial Crisis

By John T. Harvey – That’s fantastic. Good work, Presidents Bush, Obama and Trump. But just because we bailed the water out of the sinking ship doesn’t mean we patched all the holes. And while the former is a necessary first step, without the latter we won’t remain upright for long.

So what didn’t we fix that could still potentially cause a catastrophic leak? Too much. Here’s a short list of what we should have learned but didn’t.

  1. If you are going to bail someone out, bail out the debtor and not the creditor
  2. Financial institutions should be very closely supervised
  3. The market is not always right
  4. Deficit spending doesn’t cause inflation or bankruptcy

Most people assume that what financial institutions do is loan out other people’s money. That is, of course, part of what they do, but what is far more significant is the fact that they create money. I don’t just mean the intro-econ, money-multiplier story where banks make loans after the Federal Reserve injects new funds. In fact, that view is so wrong that economics professors are beginning to eliminate it from their curriculum (not nearly fast enough, but it’s getting there).

Rather, the standard scenario is one in which banks increase the money supply first by making loans to customers and then the Federal Reserve steps in second to supply the necessary reserves. Financial institutions make money out of thin air, not from someone’s savings, and if that leaves the system short of reserves then the Fed buys securities from banks. They do this to prevent interest rates from rising above their targeted rate and therefore the central bank accommodates rather than dictates when it comes to the supply of money. more>

Anthropic arrogance

By David P Barash – Welcome to the ‘anthropic principle’, a kind of Goldilocks phenomenon or ‘intelligent design’ for the whole Universe. According to its proponents, the Universe is fine-tuned for human life.

The message is clearly an artificial one and not the result of random noise. Or maybe the Universe itself is alive, and the various physical and mathematical constants are part of its metabolism. Such speculation is great fun, but it’s science fiction, not science.

It should be clear at this point that the anthropic argument readily devolves – or dissolves – into speculative philosophy and even theology. Indeed, it is reminiscent of the ‘God of the gaps’ perspective, in which God is posited whenever science hasn’t (yet) provided an answer.

Calling upon God whenever there is a gap in our scientific understanding may be tempting, but it is not even popular among theologians, because as science grows, the gaps – and thus, God – shrinks. It remains to be seen whether the anthropic principle, in whatever form, succeeds in expanding our sense of ourselves beyond that illuminated by science. I wouldn’t bet on it. more>

Could China’s Raw Materials Strategy Leave US Automakers Behind?

By Charles Murray – China’s business relationships are so aggressive, said Jose Lazuen, an electric vehicle and supply chain analyst for Roskill, that it’s almost “too late” for automakers in other regions of the world to catch up now.

“The North American and European companies are not at the same level as the Chinese OEMs,” Lazuen stated. “They’ll face problems if raw material costs increase at some point.”

Chinese suppliers at the show said they view relationships with miners as a necessity, given the volatile and unpredictable nature of the market. “The only way you’re going to (get control) is to have a mindset to get ahead of the game by buying rights to those minerals to keep the prices down,” noted Robert Galyen, chief technology officer of CATL, a China-based company that is now the biggest battery manufacturer in the world.

The question of future metal costs is a growing concern, experts said this week, because lithium, cobalt, and nickel will continue to play key roles in future electric car batteries. One speaker at the show noted that the price of cobalt rose 130% last year, while lithium climbed by 50% and nickel was up 28%.

If those increases continue, raw material costs could negate any economies of scale that might otherwise be gained through increases in production volume. more>

Lessons From The Greek Tragedy Unlearnt

By Simon Wren-Lewis – Private banks were happy to lend to the Greek government because they mistakenly believed their money was as safe as if they were lending to Germany.

Other governments first delayed and then limited Greek default because they were worried about the financial health of their own banks. They replaced privately held Greek debt with money the Greek government owed to other Eurozone governments.

From that point voters would always want all their money back. In an effort to achieve that the Troika demanded and largely achieved draconian austerity and a vast array of reforms.

The result was a slump which crippled the economy in a way that has few parallels in history. Most economists understand that in situations like this it is ridiculous to insist that the debtor pays all the money back. For basic Keynesian reasons this insistence just destroys the ability of the debtor to pay: it is not a zero sum game between creditor and debtor. This is why so much of German debt was written off after WWII.

By July 2015 the Greek government was able to pay for its spending with taxes, so all it needed was loans rolled over. The Troika would only do that if the Greek government started running a large surplus to start paying back the debt i.e. further austerity. more>