If people aren't investing in T-Bills, they're either going to invest that money somewhere else or hoard it under their mattress. So deficit spending will help when confidence is low but won't be worthwhile at other times.

Ideally T-Bill interest rates shouldn't even be as much as inflation. You should actually have to make an informed choice and take a risk to make money, rather than participating in an ever-snowballing hereditary aristocracy.

>> ^jwray:

Yeah, I know about Keynesian economics, but that's not sustainable. It's a short term thing to avoid deflation. You have to balance the budget eventually, or at least keep the debt around a constant fraction of the GDP.

Right, Keynesians say that too. Do temporary deficit spending to get out of the slump, and then balance budgets during the expansion.

To return to your original point, I don't understand how raising taxes and balancing the budget would change the thinking of investors when it comes to private investment.

Is the idea to try to starve the supply of long-term treasury bonds, and therefore drive their interest rates even lower? They're not going to totally disappear anytime soon, even if we miraculously start having government surpluses next year.

I don't see how that changes the thinking of investors -- the long term bond rates are already unusually low, and still they aren't going after more lucrative (yet more risky) private investments.

It seems like an expectation of disinflation or deflation would only increase the risk to entrepreneurs looking for an investor to borrow from, and therefore reduce their supply, therefore reducing employment...

In other words, it seems like it'd make our problems worse, not better.

Yeah, I know about Keynesian economics, but that's not sustainable. It's a short term thing to avoid deflation. You have to balance the budget eventually, or at least keep the debt around a constant fraction of the GDP.

Also, In Jamaica, there's so little private investment because the government is a much safer bet and pays high interest rates.

@blankfist, since you seem to want my thoughts on this (but for some reason, wanted to edit the comment to look like you were just clearing your throat), I'll give you my rebuttal.

I'll take his three points in reverse order.

#3 about regulatory uncertainty is one of these universal conservative economic fantasies. There's no evidence that this really has any kind of macroeconomic effect. Certainly the usual conservative and business advocacy groups always get a laundry list of businessmen to all line up and say how they won't be able to function if they have to pay compensation to workers injured on the job, have to check to see if the products they produce are poisonous or otherwise unsafe, can't dump toxic chemicals into lakes and rivers, can't use slave labor, etc, etc. They always fight against efforts to stop them from being able to leverage negative market externalities for extra profit.

#2 The Yahoo Finance link itself debunks this, because what Schiff says is a flat-out lie. Here's what that link says:

In contrast to Schiff's warning, the law does the following, according to Reuters:

“The bill would set up an "orderly liquidation" process that the government could use in emergencies, instead of bankruptcy or bailouts, to dismantle firms on the verge of collapse.

“The goal is to end the idea that some firms are 'too big to fail' and avoid a repeat of 2008, when the Bush administration bailed out AIG and other firms but not Lehman Brothers. Lehman's subsequent bankruptcy froze capital markets.

“Under the new rule, firms would have to have 'funeral plans' that describe how they could be shut down quickly.”

Liberal critics also question whether the bill addresses "Too Big to Fail", but they're talking about limits on the overall size of banks.

#1 I've covered this fantasy of Schiff's about the nature of the crisis before. Here are two quick points I always make, which you never respond to: low interest rates don't create moral hazard, and Fannie and Freddie weren't even remotely the biggest players in the subprime mortgage-backed security space, much less the chief source of moral hazard.

All the moral hazard was created by the financial industry thinking it had found a way to insulate itself from the risks involved in bad mortgages using CDO's and CDS's -- without relying on government backing of any kind.

I'm happy to go into much more depth on #1 if you like, but you've never really demonstrated that you have any interest in listening to what I have to say on the topic with anything like an open mind.

Oh, and liberals agree that this bill doesn't really do enough in addressing the underlying problems that led to the crisis (the real ones). Basically, they say there's not enough rating agency reform, no leverage caps on investment banks, no Glass-Steagall separation of traditional and investment banks, no commitment to break up banks that grow beyond a certain size, etc.

In fact, from what I've read, the strongest part of this bill is exactly the part Schiff lied about -- it should prevent future Congresses from being forced to do taxpayer-funded bailouts. Instead, it'll be like the standard FDIC process for failed banks, only scaled up to deal with corporations of this size and complexity. Under that process, the bank shareholders, owners, and management get wiped out and fired, but the bank's creditors and depositors are made whole. The bank fails, but it doesn't take a huge chunk of the economy with it when it goes.

>> ^blankfist:

@NetRunner. Nobody is talking about it? Not true. Nobody from the current Administration probably, but to say the housing bubble and manipulation of interest rates had nothing to do with the current recession is absolute nonsense.

First, "manipulated interest rates" is meaningless nonsense. If you mean the Fed setting short-term interest rates through open market operations, apparently depressions have been permanent since it started doing that in 1913. No? Well, maybe before that they must have never happened. No, actually they did, and with far greater frequency than 2 per century.

Second, of course the housing bubble has to do with the current recession, but what's absolute nonsense is the idea that the housing bubble of the 2000s was caused by long standing housing subsidies is absurd. Just look at the price of housing and un-subsidized commercial real estate on a single chart. Hey, those look like they both turned into bubbles!

>> ^blankfist:
Also, you show me the invisible hand of market. I've not seen a free market in the US in my lifetime and neither have you. Corporate charters and the "lender of last resort" central banking system are not representative of open markets.


And this is the real nonsense behind all of your beliefs. By this logic, you should also conclude that you can't blame liberalism for anything that goes wrong now or in the past, because we've never brought our ideal system into play in America, so you don't know what life under liberalism would really be like.

@NetRunner. Nobody is talking about it? Not true. Nobody from the current Administration probably, but to say the housing bubble and manipulation of interest rates had nothing to do with the current recession is absolute nonsense.

Also, you show me the invisible hand of market. I've not seen a free market in the US in my lifetime and neither have you. Corporate charters and the "lender of last resort" central banking system are not representative of open markets.

>> ^NetRunner:

Revisionist history would be declaring that the economic crisis was caused by interest rates, housing subsidies, or "propping up" the housing industry, and not about a bunch of greedy banks building themselves a de facto ponzi scheme.

You know why you don't? Because a) nothing about this crisis disproves anything about New Keynesian economics, and b) because apparently you consider criticism about how regulators didn't enforce the laws on the books to not be criticism.


It can't be the fault of the banks AND the bad policies of the Federal Government and the Federal Reserve? Then, you sir, lose. Good day.

>> ^blankfist:

I'm NOT defending the banks, but this smacks of revisionist history, because no one is talking about manipulated interest rates, housing subsidies, and propping up the housing industry influenced the bubble inflation and bursting.

Revisionist history would be declaring that the economic crisis was caused by interest rates, housing subsidies, or "propping up" the housing industry, and not about a bunch of greedy banks building themselves a de facto ponzi scheme.

>> ^blankfist:
This is what scares me about Obama. Because he's president now, he is incapable of making any substantial critique of the government's failings in our economy. Sure, he may point the finger at Bush, which is an easy target, but never do you hear anyone from his administration discuss the failures of the Federal Reserve's egregious financial dick-fingering and the Keynesian model altogether.


You know why you don't? Because a) nothing about this crisis disproves anything about New Keynesian economics, and b) because apparently you consider criticism about how regulators didn't enforce the laws on the books to not be criticism.

>> ^blankfist:

I'm probably the only person here that smells insidious propaganda. Especially since in this propaganda piece the blame only falls on the banks.
I'm NOT defending the banks, but this smacks of revisionist history, because no one is talking about manipulated interest rates, housing subsidies, and propping up the housing industry influenced the bubble inflation and bursting.
This is what scares me about Obama. Because he's president now, he is incapable of making any substantial critique of the government's failings in our economy. Sure, he may point the finger at Bush, which is an easy target, but never do you hear anyone from his administration discuss the failures of the Federal Reserve's egregious financial dick-fingering and the Keynesian model altogether.

Somebody's been reading wikipedia

I'm probably the only person here that smells insidious propaganda. Especially since in this propaganda piece the blame only falls on the banks.

I'm NOT defending the banks, but this smacks of revisionist history, because no one is talking about manipulated interest rates, housing subsidies, and propping up the housing industry influenced the bubble inflation and bursting.

This is what scares me about Obama. Because he's president now, he is incapable of making any substantial critique of the government's failings in our economy. Sure, he may point the finger at Bush, which is an easy target, but never do you hear anyone from his administration discuss the failures of the Federal Reserve's egregious financial dick-fingering and the Keynesian model altogether.

>> ^blankfist:

I love it! He's absolutely right! The only way to pull up the poor is by pushing down the rich. Wars, increased government spending, subsidized industry and manipulated interest rates have nothing to do with it. He should title it Atlas Sighed.


I love it. You didn't watch the video, I'm guessing?

I love it! He's absolutely right! The only way to pull up the poor is by pushing down the rich. Wars, increased government spending, subsidized industry and manipulated interest rates have nothing to do with it. He should title it Atlas Sighed.

Not to belabour the obvious, but in Hebrew

Low = No.

Cane = Yes.

So this is the boring Israeli bank equivalent of saying... everyone else may turn you down for a loan, but we'll give you one, and look at our low interest rates!

Oh, and at 0:36, the word (spelled out on the screen) is "Cheshbon", which means "account" (ch in this case being a guttural h... like at the beginning of Channukah, or Challah)

Seder's right, it's bullshit. He didn't really make it super-clear why, but the reason we know this is because a) the bond market understands this stuff better than we do, and b) our 10-year bond interest rate is low. It's the low interest rate that's the real giveaway, not that people are still buying them. It's that our debt is still cheap.

See, if the market were worried that we'd default on our debt, they would demand a greater rate of return on the investment before buying it. They aren't, so they're not.

That's the "I don't know anything about the underlying economics, I just know how to read the market's tea leaves" answer.

Here's Krugman's take on why the market isn't nearly so worried about us as it is about Greece, and his take on why fears about "becoming Greece" may turn us into Japan.

I'm not sure if I'd agree with the basic premise that borrowing money is actually cheaper than paying for everything up front. We are a very rich nation, paying for everything the government currently does would not be a problem, if we were willing. The reason we don't pay for the cost of government services up front is because politicians are generally weasels, and it's much easier to give a great deal to your constituents, while charging future generations who obviously have no say in it.

Even if the increase in our GDP actually outstrips the interest rate on our loans, that doesn't mean it's a good idea to borrow as much as possible. That would only be true if our increasing GDP is CAUSED by the investments we make with all that borrowed money. If not, then we're just screwing ourselves out of a lot of the benefit of our work since so much of it is going to make the minimum monthly payment on our China credit card.

But I could be wrong.