The Gains from Preventing a Great Depression
John McCain says we have to avoid another financial calamity:
We must not bailout the management and speculators who created this mess. They had months of warnings following the Bear Stearns debacle, and they failed to act.
We should never again allow the United States to be in this position. We need strong and effective regulation, a return to job-creating growth and a restoration of ethics and the social contract between businesses and America.
What would a world without the possibility of Great Depressions -- however unrealistic that may be -- look like? According to research published last year in the Journal of Monetary Economics (working paper version), Stayajit Chatterjee of the Philadelphia Fed and Philip Dean Corbae of the University of Texas at Austin estimate that consumption would increase by between 1 and 7 percent per year "in perpetuity." The biggest reason for the gains comes from diminished volatility in consumption.
A big caveat, however, Chatterjee and Corbae don't factor in the costs of the regulation needed to reduce the risk of a depression to zero. How much would that hurt growth?
It's very hard to tell, but we can use history as some guide. In 1997, Rutgers' Eugene White looked at what would have happened in a world where the Federal Deposit Insurance Corporation never existed. Here is White's argument for why the FDIC is inefficient:
Although deposit insurance has often been discussed as an important guarantor of the stability of the banking system and hence the economy, the expansion of deposit insurance cannot be justified on macroeconomic grounds. The general view today is that while the failure of individual banks might begin a panic, a systematic collapse may be prevented by proper intervention by the Federal Reserve as the lender of last resort.
While White admittedly called his results "tenuous," he concludes that "for a broad range of estimates, it appears that the FDIC did not reduce costs and may have raised them." He estimates the annual cost of FDIC bailouts between 1945 and 1994 to be $770 million (a bit over $1 billion in today's dollars). This figure is much less than a 1 to 7 percent gain in annual consumption predicted by Chatterjee and Corbae, though there are surely other things that could chip away at that advantage).
Chatterjee and Corbase also estimate, based on past data on contractions and expansions, that the U.S. will be in a depression once every 83 years. Since the last depression started 79 years ago, one would think it's almost time for another.
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This article has 5 comments:
- fxtrader07
- 618 Comments
Sep 18 05:43 AM- carey_jim
- 391 Comments
Sep 18 12:43 PMWe have made socialism into a monster and called it "the communist menace."
Socialism isn't a monster, it is just inefficient, frustrating and can't produce innovations. Europe found out by trying it. Russia collapsed (with a "little" help from the United States, of course, but that's another story.)
We may be in for a long experiment in frustration where the middle class will suffer at the expense of the rich AND the poor (who will move up a fraction and be reminded of the fact incessantly by their betters.)
The rich can't really be hurt except by a revolution and the poor can only move up because they are so far down.
The rich have always made devil's bargains with the poor because it is the poor who have the manpower to stage the kind of revolutions that sweep the rich from power (France, Cuba, China, etc.)
When the middle class makes a revolution with a little help from their poor relatives and friends, it looks more like the English revolutions and the American Revolution of 1776 and the rich just change hats.
The rich know all this very well but many of them are asleep at the switch in their various watering holes around the world.
"May you be condemned to live in interesting times." Ancient Chinese curse for one's enemies.
- Farmer448
- 34 Comments
Sep 18 12:50 PMDown here in Texas we have deregulated Electicity Markets to the highest prices in the nation. Another free market promise that failed to deliver.
Give me practical people who understand the trade offs between free markets, quasi regulated monopoly, and government controlled monopoly. Each market has its place in delivering goods and services to the public.
- woodsey
- 92 Comments
Sep 18 04:02 PM- alajac
- 106 Comments
My Website
Sep 18 07:22 PMHOW TO FIX THE ECONOMY (change the system, not the faces)
a plan to stimulate the economy, lower taxes, start paying off the National Debt, alleviate poverty and decrease crime
by replacing our OLD economic system with a NEW system based on
a new and debt-free U.S. currency to replace Federal Reserve Debt-Money,
a 0.5% tax on electronic transfers to replace the Federal Income Tax and the IRS,
and $1000 per month privatization compensation (non-Fed $) for all legal U.S. residents
There is NO BENEFIT AT ALL in having a Central Bank (well, none for us) compared to having the U.S. Treasury print and distribute our own debt-free money to ourselves. THE ONLY DIFFERENCE between having a central bank or not, is that ``One system costs us 95% of our wealth every hundred years and puts us and our posterity into mind-boggling debt until the end of time``... and the other doesn`t.
So the first thing we need for our NEW SYSTEM is our own, debt-free U.S. Government fiat currency, backed by all the property within the nation`s borders. Obviously I disagree with those who insist that `only gold is real money`. The hoarding of gold-backed money has led to and prolonged many U.S. economic depressions which explains why the U.S. has tried and abandoned `the gold standard` many times over the years. ``Bad money drives out good`` means people will always wind up using as money whatever has the least actual value that will still be accepted by others to facilitate trade. Debt-Free fiat money will work just as well as Federal Reserve fiat Debt-money, but without all the nasty side-effects.
Another problem with the OLD SYSTEM is that income-based taxation creates wasteful tax avoidance behavior, requires an expensive tax reporting industry and an intrusive collection bureaucracy, and is, arguably, a form of `involuntary servitude`. Under our NEW SYSTEM, we should replace all income-related taxes with a one-half percent, automatically-collecte... electronic transfer tax (also known as a `debit tax`) which will be avoidable by transacting business using cash or barter. This will not only rid us of the IRS (saving the billions currently spent on `tax reporting`), it will also end the current penalization of work and entrepreneurism, as well as freeing up untold billions currently spent on `tax avoidance`. A debit tax is `more just`, corresponding closely with ``benefits previously-obtained`` rather than penalizing labor and industriousness, and (as it can be legally avoided, even if only inconveniently so) this debit tax can be considered ``voluntarily-paid``. A small electronic transfer tax will also act to discourage excessive short-term market speculation and should be able to raise enough revenue to begin paying off the National Debt. The tax should be either paid with the new debt-free money or exchanged for it by the Treasury with tax revenue on Federal Reserve money being used to start retiring the National Debt.
As argued by Tom Paine in his 1797 essay ``Agrarian Justice``, the third problem with the OLD SYSTEM is that, because governments privatize all of their claimed property (allocating it however they like), everyone winds up being denied free access to all property (other than that which has been specifically allocated to them) without being compensated for that loss. That`s not a problem for those with access to capital and property ownership, but for the rest of us, it is totally unfair and creates a slanted playing field upon which wealth gravitates to the already wealthy and the well-connected. However governments allocate their property, every method has the same result of `denial to everyone of free access to all land`. It has taken 200 years for this injustice to be acknowledged in a place and time where something can be done about it and when events have conspired to make rectification not only just, but vital to our economic survival. Just as compensation for eminent domain takings are provided for in the 5th Amendment of the U.S. Constitution, governments should provide compensation for denying everyone `right of free access to all property`.
Thus, in order to remedy this, we must elect a Congress that will PAY EVERY LEGAL U.S. RESIDENT `Adequate and Equal Compensation for Denial of Free Access to U.S. Property`, compensation which can FUNCTIONALLY REPLACE ALL FORMS OF PERSONAL AND CORPORATE WELFARE AND SUBSIDIES, including rescinding Federal Minimum Wage laws and phasing-out the Social Security system. (Once everyone is getting `Denial of Free Access` compensation their whole lives, most people will be able to save enough to be able to comfortably cease working at some point in their lives.)
Our NEW SYSTEM should pay $1000 per month (of our new, non-Fed, non-Debt-Money) to every legal adult resident. Compensation for minors should be held in a trust fund to avoid incentivizing `baby factories`. Since everyone gets the same amount of compensation, this plan is not wealth redistributive, but will give the least wealthy the biggest relative monthly percentage increase of wealth. Because when people HAVE something, they have something to lose, we can expect a reduction in all sorts of crime under our NEW SYSTEM as well as better childcare, less poverty, more rural homesteading, better maintained urban areas, less intrusive and cheaper government with lower military-related expenses and a safer world in general. Once this NEW SYSTEM gets going, I expect residents of other countries will insist their governments either copy our NEW SYSTEM or else apply for U.S. statehood as Texas did in 1845.
HEALTH CARE...The AMA and FDA work to constrain competition in order to maximize the medical and pharmaceutical industries` ability to extort unconscionable prices for services and substances that should be affordable out-of-pocket. We need to train up thousands more doctors and other healthcare professionals and to decriminalize and unbridle access for adults to WHATEVER drugs adults want, obtained from WHATEVER source adults decide thay want to obtain them, for WHATEVER purpose those adults wish to use them, and let the market work to make prices of normal medical help and pharmacology affordable.
SEND A MESSAGE to candidates running for Congress in 2010 and 2012 that they need to support the three changes (new currency, new taxation, and privatization compensation) required to implement this proposed NEW SYSTEM with a MASS WRITE-IN CAMPAIGN that `blows socks off` from DC to LA. I will be registered as a Write-In Candidate for US President in Michigan, and in other states as I get help with other states` registering processes. Pass this message along to several people every day (or, even better, to everyone you know today, and to everyone you meet from now on). IF EACH OF US EVERY DAY CONVINCE EVEN ONE OTHER PERSON TO JOIN US, OVER ONE BILLION PEOPLE WILL BE `ON BOARD` IN 30 DAYS. (Seriously. Grab a calculator and start doubling from 1.) For an e-copy, or to ask questions or volunteer, write me at alan_jacquemotte@yahoo... or P.O. Box 183393, Shelby Twp, MI 48318.