A lesson in "power corrupts"

It's actually kind of sad to see what happened to Alan Greenspan. He used to be so smart, and then by 2001, he sowed the seeds of the current financial system problems.

TL, DR.

zzzzzzzzzzzzzzzzzz...

Some of my biggest money issues in life started with the words "Irrational Exuberance", so he can kiss my ass.

Of course the dot com thing was fucking crazy and would have happened anyway.

Yeah, Bush and 6 years of a Republican Congress had nothing to do with it.

Bush and the Republican Congress were too busy distributing crack to inner city youths, wiring bombs in New Orleans, and withholding the cure for AIDS to have any effect on the economy.

^Well, I'm certainly glad you cleared that up for us.

You can learn a lot by going to church.

As far as the financial sector's current troubles are concerned, that's about right, actually. Bush and co. can certainly be blamed for other parts of the economy, but the financial sector problems can be tied almost 100% directly to Greenspan and Bernanke.

How are we supposed to move back to the gold standard? Even at its current hyper-inflated price there isn't enough gold to cover half our GDP, never mind the rest of the world.

There doesn't need to be. There only needs to be enough to cover M1, but it's still a concern. The answer of course is to simply repeal the legal tender laws and let the market decide what it wants for a currency.

I've read that whole article before- it's fantastic. What I could never wrap my head around is why someone like Greenspan, who obviously 'gets it', completely abandoned truth and became a willing part of the establishment that has run our economy completely into the ground. In a just world, he would be one of the first to hang. He fucking knows better, and he knew better a long time ago. That article definitively proves it.

I particularly like these passages:

I'd say very little of our problems have to do with Bernanke. If anything his biggest problem is "too little, too late."

It was Mr. Greenspan with his 1% interest rates that made ARM's so attractive yet unrealistic.

See the thread title for an answer.

And why is that?

A good article. One I'll have to keep.

We are going to hit a very bad crunch in the future anyway so we may be able to get back on some standard.

The monetary term for it is the "velocity" of money; think of it as turnover. Target gets $15 for a shirt, of which it distributes in dividends to three shareholders $5 each, who go and and buy meals at McDonalds. $15 of money, but GDP is increased by $30. It's a big part of the monetarist Chicago school of economics. Though it's used in ways such that it mistakes the forest for the trees, that money has a velocity is certainly true. At one point it was thought that the velocity of money was proportional to its quantity, but that's been disputed in for about 15 years. Nevertheless, it can be measured. IIRC, the current velocity of money is somewhere between 15 and 20 uses per year. When monetarism was becoming popular (after the horrendous failure of the Keynesian Phillips curve with stagflation), it was about 5. So We only need enough to cover 1/20-1/15 of our GDP, assuming my recollection about the current velocity is right (Wikipedia doesn't have the current number). I think the current price of gold bears this out.

For a more closed example, I'll cite Wikipedia's page:

Over the course of a year, 3 transactions take place in a two-man society with $50 of money between them:
A mechanic buys $40 of corn from a farmer.
The farmer buys $50 of tractor repair services from the mechanic.
The mechanic buys $10 of barn cats from the farmer.

GDP for this two-man society is $100. But there's only $50 between them. The velocity of money here is 2.

And again, that's only if we go to an actual gold standard, like we have a zinc standard for pennies. If we simply eliminate legal tender laws and taxes on gold, gold will drive out paper on its own.

What makes gold so special anyway?

I realize, that unlike printed money, its actually scarce. But there are a lot of other scarce resources out there, so why is gold always the de facto choice for a "standard". Is it simply a matter of tradition?

Furthermore, I realize that gold has uses beyond currency that give it value. however, the price is inflated based on confidence in gold as a monetary asset. So, wouldn't it still be subject (although to a lesser degree) to many of the same effects that a fiat currency is subject to?

Also, couldn't a fiat currency get the same benefits of gold (and maybe even better since it cannot be mined) if it was simply limited to a constant level of supply?

I am probably missing something here. If anyone has any further explanation, I'd be interested in reading it.

It's shiny, and pretty, and nearly nonconsumable.

That makes it plenty special, though not particularly useful as a currency.

It's tradition, of course. And a question of who's been investing in gold and would therefore have the most to gain from a return to a sort-of gold standard.

Gold would be subject to all the problems inherent in any other currency, with extra layers of bureaucracy and market manipulation thrown in. Backing currency with gold or using gold directly as currency is the economic equivalent of ordering the government to manipulate gold prices and utterly dominate gold markets through hording and strict regulation of gold sales. It's unadulterated communism in it's purist form, with no benefits to speak of.

What benefits? The "benefits" of gold backed currency are entirely chimerical. Hording and selling gold is no different than printing and retiring dollars except for royally screwing up the commodity market in gold. Besides, you generally want the money supply to increase as the economy grows, otherwise deflationary pressures lead people to keep money under their mattresses, nipping growth in the bud.

The alternative to so-called "fiat" money isn't gold money; it's barter, and barter economies suck worse than a nickel whore with sharpened teeth in the middle of an epileptic seizure.

Even if we accept that as true, wouldn't we still have to cover actual currency in circulation?

Fort Knox has 143.7 million ounces of gold reserves. The Federal Reserve Bank has 176.3 million ounces of reserves (they technically hold gold for foreign nations too but we'll just assume it all goes to us). At the current exchange rate that's $293 billion. That covers less than half of the $595 billion of currency in circulation (and gold prices are already hyper-inflated right now).

Well, presumably a modern gold "standard" would work like foreign currencies that peg themselves to the dollar. The government would declare that a dollar is worth 1/800th of an ounce of gold and then trade gold on the open market until the target price was hit. As people redeemed their dollars or invested in gold, gold would be purchased or sold by the government to keep the price of gold flat. People would always be able to redeem their dollars for a constant amount of gold. What exactly the benefits of this are supposed to be escape me.

Of course that's not what goldbugs envision as a gold standard, but it's just about the only thing closely related that could actually work without melting down the economy. What the gold standard jibberjabber is really about is taking anti-tax rhetoric to its illogical extreme. People know that government increasing the currency supply at a rate faster than the growth of the economy is an inflationary policy, and they know that inflationary policies that are used to increase the purchasing power of government are a tax. Therefore radical anti-tax extremists want to prohibit the printing of money because it's something that can end up looking like a tax. Of course economic collapse due to being caught in a liquidity trap because of deflation doesn't bother some people nearly as much as the thought that the scary government might institute a stealth 1/2% tax by printing too much money, but there's no reason to listen to such people.

It's clear that many of you failed to read the article.

Again, the simplest solution is to repeal the legal tender laws, and stop taxing the sale of precious metals. Gold (and possibly other metals) will reassert itself, eventually, and without the terrible economic shock that might otherwise come. Also, what Marso said.

Gold can kill Cybermen.

That's not true. Simplified, the Bush administration did everything in its power to undermine trust in the dollar by borrowing like crazy for things that have no ROI: war and corporate welfare. The first point is clear. The second has to do with globalization: while 'trickling down' worked in the 80s under Reagan, it failed this time. Back then, the free money was reinvested at home. This time, they'll take the free money and build another plant in China. This causes an interesting effect (in Europe too btw) - the economy soars, but purchasing power doesn't follow suit as the wages stagnate or even shrink. Inflation sets in as the central banks start printing money. Interesting and chilling effect: the west actually gets poorer and the developing countries don't get richer - once they demand more, Big Money will simply move on to the next shithole. Thus, one consumer base is eroded while they fail to build another one.

Some here will probably cry 'socialist!!!!!', but an economy simply can't work like that. It needs a healthy consumer base. Just shuffling around numbers with no basis in reality produces absolutely nothing. Stock jobbers are parasites that can be tolerated when the economy is well (that means, people buy stuff and not virtual stock quotes that mean nothing), but those people can't run the asylum. Which, unfortunately, is what happened in the past few years. And the Bush administration has done its share. In all fairness, it certainly wasn't the main reason.

It's worse than that. We have a crisis now because of the widespread leveraged purchase of supposedly safe bonds. There are, of course, going to be cases of true arbitrage opportunities, where someone is undervaluing the right to collect on safe loan 'A' and another person takes out loan 'B' in order to purchase the opportunity to collect on safe loan 'A.' That doesn't produce anything, but it doesn't hurt anything either.

The thing is, such true arbitrage opportunities are blips in a well functioning market. Someone takes advantage and then they disappear. It's impossible for it to be systematically profitable to take out a loan to purchase genuinely and appropriately AAA rated bonds. If you're regularly getting a significantly lower interest rate on your loan to purchase bonds than the bonds return then there has to be a correspondingly higher risk on the bonds and they're therefore not really AAA safe. If leveraged purchases of AAA bonds are happening more than occasionally, that is proof, beyond a doubt, that those bonds aren't really safe and that someone, somewhere, is hiding risk. If leveraged purchases of AAA bonds are happening systematically then you can be absolutely certain that the person taking a commission is in on the fraud.

People who create investments that "just shuffle around numbers with no basis in reality" are almost always committing fraud, because once a commission is taken off the top investors can never come out ahead in the long run. If an investment looks too good to be true, it is.

What exactly does "reassert itself" mean?

Dunno, but it's a prediction that sounds suspiciously religious in nature.

I wonder if it involves the Almighty Invisible Hand?