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|User Info||Ron Paul Strikes Out; entered at 2011-10-21 22:40:27|
@Karl: I usually agree in broad terms with you, but I beg to differ on two points:|
"See, there's this fantasy land (...) where (...) booms or busts [don't] have to happen."
"That graph is always going to exist, unless you ban lending of money."
Your diagnosis on excessive debt is correct, but I sincerely believe your conclusions on the inevitability of booms and busts short of banning lending is incorrect.
Debt has a significant impact on growth if and only if it is comparable to the GDP level.
Take a $1Bn economy growing 5% a year, with a total debt of $100M growing at 10% per year. The total aggregate demand is then growing by $60M that year. It's absolutely not sustainable, but it is very workable in the short term.
With $1Bn of initial debt, by contrast, aggregate demand grows $150M.
If debt stops growing the next year while the economy continues to grow at the same rate, aggregate demand - as felt by businesses - then *shrinks* by a bit under $50M.
The point here is, excessive debt growth is bad in the economy when its total becomes materially comparable to the GDP. And the key problem is that bankers have a huge incentive to over-lend. And they do, as you're regularly pointing out in your blog.
Now, regarding your two points in reverse order.
You don't necessarily need to disallow lending to keep the amount of debt in a system in phase with the GDP.
Picture, say, a progressive tax on banks based on their reserve ratio. Say, 0% with a reserve ratio of 100%, perhaps 50% at 50% reserve ratio, and quickly sliding towards excruciating rates beyond that. Basically, the higher the leverage, the higher the tax rate on any profit. Make it excruciating enough and bankers could become good citizens and stop lending right, left and center.
There additionally is something to be said on speculation. Besides banning all sorts of derivatives (those that are nothing but speculative vehicles), a finger is worth pointing towards the stocks and real estate markets.
As entrepreneurial as I am, I feel that once a company grows beyond a certain size, it arguably belongs to the employees as much as it belongs to its founder. Whichever entrepreneur denies this is a lunatic or outright blind to the obvious that he'd have gotten nowhere without the folks working for him.
In this sense I'd be in favor of some kind of limited duration stocks (25 years total?) from the day they initially change hands (as opposed to issued when the company is created, or issued by a company in need of capital) if a company is of a certain size (50 employees?). Doing so would keep the reward for creating the company around (albeit lessening it for those who only intend to "cash out" without building anything durable), massacre the M&A and LBO related businesses, and obliterate stock prices back to realistic levels (since a stock bought in its final year would only possibly generate a year of dividend before becoming worthless).
(Side note: Bureaucracies are bad business owners. But the ideological argument whereby employees can't run their business is garbage when you look at facts. There are plenty of examples in post-bankrupt Argentina that demonstrate otherwise. And as you surely know as a former business owner, it's easy to churn a profit out of investments you didn't pay for.)
Regarding real estate, I entertain the idea that a way to beat the crap out of speculators while guaranteeing property rights is to put a punitive tax on *idle* real estate. That meaning, on whoever buys to flip a few years later without renting in the meanwhile; or fails to rent because he made a bad bet; or more obnoxiously if he can't afford the tax, a second or third home. And I really mean punitive: something so outlandish in comparison to the average yearly rent that you'd never want to buy a house or a commercial properly if you're not occupying it shortly after and/or won't be able to rent it then and there.
Put another way, property rights (without which there cannot be any capitalism anyway; and everyone here will agree that capitalism *is* good) might need some adjustment if we're to avoid bubbles in the coming century by means of preventing speculation.
As to the inevitability of booms and busts, I'd suggest you look into Steve Keen's research and "Debt Deflation" blog if you haven't recently. Personally, I had nothing but contempt towards economists until I ran into his works. Keen is an econophysicist, with a good mathematical background. And as a mathematician, he stroke a chord. His current series of lectures (available on YouTube) are impeccable in so far as maths are concerned, and I'd advise anyone reading this to take the time to watch them.
At any rate, if his modeling efforts are anything to go by - and I believe they are - then a major source of the boom and bust cycle is over-lending (at any level of debt, excessive or not). Without it, the resulting system tends to be sustainable and stable.
Put another way, boom and bust cycles aren't a necessary evil. At least not to the degree we're experiencing them since the 19th century.
The evils lie in the speculator and in the banker.