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Kamma

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PostSubject: HR.1   Tue Feb 17, 2009 4:50 am



The outlays of the stimulus over time. Shockingly, it never exceeds 2.5% to GDP per year -- this is a very very modest package when you look at it this way.

Here's an estimate by the CBO of the output gap.
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PostSubject: Re: HR.1   Tue Feb 17, 2009 1:47 pm

Kamma,

I always wondered about your signature. Are you including it at satire or a serious comment? I don't see putting too many bananas on your roof as a market failure OR a government failure- just terrible banana inventory management.
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Kamma

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PostSubject: Re: HR.1   Tue Feb 17, 2009 5:01 pm

Think of it in terms of allocative efficiency. If you put bananas on your roof and that ends up reducing your well being, there is allocative inefficiency and thus a market failure. It would have been more efficient for them to have gone to some other use. If the incentives were there for you not to put the bananas on your roof and hurt your house, then the market would achieve allocative efficiency by putting the bananas to other uses.

It's a comment by Tyler Cowen on how to understand why government distortions cannot explain our current crisis. Specifically (I interpret) in relation to the housing market. Yes, the gov't distorted mortgage rates via Fanny and Freddie. However, no one made investors stick all their cash into the bubble which was clearly irrational (putting bananas on the roof that is about to collapse). Although the mortgage giants (as well as the savings glut in the world economy and loose monetary policy) certainly helped egg on the bubble via cheap credit (cheap bananas made it easier to buy the bananas to put on the roof) they didn't create it (cheap bananas didn't make you put em on the roof).

In terms of allocative efficiency: we would have been better off if investors had invested into productive assets instead of a spineless housing bubble.

The counter argument to it being market failure is to claim that my utility gained from having bananas on my roof before the collapse outweighed the cost of the roof collapsing. It's hard to make that argument for the housing bubble though.
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grak

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PostSubject: Re: HR.1   Tue Feb 17, 2009 11:47 pm

Okay I see what you mean. But I think it's a pretty weak analogy. A bad banana market would be if it failed to provide bananas at a price appropriate to the demand, not if someone chose to stack them on their roof after they purchased them. It's also not analogous to the housing market because the roof collapses AFTER the bananas are paid for and is unrelated to the purchase. All of the houses that went into foreclosure or went upside-down were not paid for by the speculator.
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Kamma

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PostSubject: Re: HR.1   Wed Feb 18, 2009 9:07 am

Right. But, you're being too literal. Why can't I use a mortgage to buy bananas? Ooops, now I have to pay for the roof to be fixed. Effectively -- in terms of monetary flows -- it's the same thing. Nevertheless, the point wasn't to have a direct analogy but to say something about the relative merits of explanations which focus on government failure (e.g. price distortions) and market failure (people being motivated to do things that cause inefficiency).

I.e. Demand for housing went nuts because people had overly optimistic expectations. Price distortions are not the fundamental root of bubbles, people's expectations are. In banana-land, you didn't expect your roof to fall in. You had incorrect expectations -- you should have known that doing something stupid was stupid (you shouldn't have bought into the housing bubble). It's a more general point than about bananas (or even houses).

Simply put, sometimes people do stupid things because they have stupid expectations. In such situations, the only way you can blame the government is if you hand a super-authoritarian role to government to intervene into how people make decisions (1984!). However, I don't think this is the road which people who see the gov't as Leviathan are attempting to head down.

Or in simpler terms, people are imperfect, and therefore you can't blame the government for all of their troubles.

Edit:
or even, here's the original blog post: http://www.marginalrevolution.com/marginalrevolution/2008/01/the-return-of-h.html
and another one that he self quotes: http://www.marginalrevolution.com/marginalrevolution/2008/12/market-failure.html

Keep in mind, Tyler Cowen is of a somewhat libertarian disposition. And, as you'll see the comment section goes into detail in exactly you concern.
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PostSubject: Re: HR.1   Wed Feb 18, 2009 2:14 pm

I have nothing to add to this conversation, I just wanted to let the whole world know that I too am capable of partaking in intellectual discussions regarding fiscal responsibility and risk taking.


















P.S.-




Edit: In before "Yeah, she likes her banana's big." Or "I'll show her a big banana." etc.

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grak

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PostSubject: Re: HR.1   Wed Feb 18, 2009 2:24 pm

Okay I understand now. So it's more of a statement about the fallibility of the assumption of rational agents rather than an argument about the particular judgments irrational consumers might make. I guess I buy that.

But isn't the irrational notion of houses as sure-bet investments reinforced by incentives to encourage home ownership? It's obviously impossible to tell, but I wonder...would we be in this mess if there wasn't this perpetual post WWII sentiment that you're somehow not "making it" unless you own your home? It seems to me that this idea has been extended long past its shelf life by government policies and programs designed to encourage home equity investments.

I think the psychology of the situation is a little more complicated than just another Dutch tulip craze.
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PostSubject: Re: HR.1   Wed Feb 18, 2009 4:57 pm

Yes. It is reinforced by incentives to encourage home ownership. This is a dumb argument, but I'll make it anyway: why didn't we fuck up this bad before? The federal government subsidizes alot of things, but not all of them blow up in a huge bubble. Certainly, the gov't facilitated cheap mortgages by implicitly guaranteeing Fannie and Freddy. But fundamentally, bubbles are psychological. Maybe F/F sparked it/facilitated the spark? Maybe the worldwide savings glut did? Maybe loose monetary policy did? Whatever nudged the market, a functioning market wouldn't have reacted to the nudge.

Personally, I think all of the above pushed us a tad. However, I'm inclined to believe that the largest structural driver which got the bubble going was the savings glut. It's hard to blame F/F because there were housing bubbles all over the world. F/F don't deal in Spain, last I checked. It's hard to blame monetary policy because central banks all over the world (in countries with and without housing bubbles) were doing similar things with interest rates and inflation targets. The biggest, universal shift in the world economy in recent history has been the savings glut originating in Asia.

Here's another imperfect analogy for what happened.

Suppose you are sailing a sailboat in a bay where there is a strong wind coming from the mouth of the bay, and there are random flows of wind over all the rest of the bay. Now suppose the government builds a big fan that creates a steady cross wind across the bay. You are in a flow of wind, backed by the gov't fan, which is taking you towards the mouth of the bay. Once you get there, the strong wind knocks your boat over and you drown. Did you die because of the government's fan, your choice of not changing course, or because you had a shit boat?

The way I see it, although the government fan made changing course harder and got you going in that direction to start, you should've at least tried to avoid being blasted by the strong wind, or had a better boat.
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