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Originally Posted by adios
1) Banks were severely overleveraged. To take this to the extreme, if banks were not leveraged at all does anyone think the melldowns in the financial sector would have unfolded as they did?
The only other way for the economy to have grown to the point it has without there being as much private sector leverage, is for the government to have borrowed more money. So if your argument is that the government should have borrowed more, that's at least a coherent theory, but it's odd. Financial institutions as a whole cannot be any less leveraged than they are without 1) the general public investing a larger share of the wealth in financial institutions or 2) the government spending a larger share of the wealth.
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2) The Fed's quantative easing in response to the current financial situation is basically printing money that supposedly the Fed will "drain" from the system when the economy improves enough (not a great way to put it but hopefully understandable). A sure way to destroy a society is to destroy it's currency. The risk of that happening has definitely increased.
The Fed has for the most part handled the situation correctly, given their legal and operational limitations.
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3) Does anyone doubt that Boros positions on the over use of credit has contributed mightily to the situation we're in?
I don't know who's doubting what, but again, the only way for us to have used credit much less, was to have the government spend more money. The demand for dollars and dollar-denominated debt overseas meant use of credit was economical. If we demanded everyone to have more cash (and less risky, government debt), the only place it could've come from is the US government.
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Can anyone doubt that the government's favorable tax treatment of debt has contibuted as well? We can debate that but it seems more than obvious that the extension of too much credit has caused a lot of the problems we're seeing.
It doesn't follow that the mortgage interest deduction causes people to own homes uneconomically with the mortgage interest deduction intact. Furthermore, there has been much speculation during this boom that had nothing to do with the tax treatment, as investment properties aren't given the same tax treatment.
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I keep thinking that what if the government hadn't intervened with the banks as well as other financial institutions and allowed them to just go belly up. The assets would have been sold off in bankruptcy; private capital would have undoubtedly found it's way to invest in new banks with clean balance sheets; and investors would have demanded better management than existed with the banks that went under.
The #'s don't add up. There simply isn't enough cash around for any of those things to happen without severe deflation. Don't forget that deflation increases the present value of the government's liabilities and to the extent that people whine about the debt, deflation causes the government to be more indebted than before, not to mention the structural economic problems it creates. In fact, allowing severe deflation to take course, to the extent that it massively increases the government debt and destroys the economy and the tax base, would set up a stage for hyperinflation to take place.
Last edited by Phone Booth; 04-17-2009 at 02:21 PM.