Comments on: Economic meltdown explained

By: TO

TO — Wed, 27 May 2009 14:08:39 +0000

I shall let a number of my friends read this. I was hoping I could share it readily on my facebook page. Cool.

By: renegade_division

renegade_division — Sun, 10 May 2009 00:30:24 +0000

@Ma
Thanks for your appreciation.

You can read similarly example-oriented articles written by me:
Why Speculation is indispensable in Free market?
http://www.reasonforliberty.com/reason/why-speculation-is-indespensible.html

Why is the understanding of money so mysterious to modern day economists?
http://www.reasonforliberty.com/reason/the-mystery-of-money.html

Rational argument for Interest
http://www.reasonforliberty.com/ethics/reason-for-interest.html

Rational argument behind Rents
http://www.reasonforliberty.com/reason/labor-behind-rent-and-interest.html

Busting the myth of Capitalist Exploitation
http://www.reasonforliberty.com/reason/the-myth-of-capitalist-exploitation.html

By: ma

ma — Sat, 09 May 2009 23:31:27 +0000

OMG that was the most well explained article out of the 50,000 articles ive read!!!!!!!(jk)
y cant all the articles be like that?!?!

By: renegade_division

renegade_division — Mon, 13 Apr 2009 14:28:04 +0000

Hi Kashif,
Thanks for pointing out at the mistake. Yes you are right, it should be Steve’s father’s boss.

Basically, Federal Reserve throws in easy credit in the economy, everybody borrows, and it makes everybody(even those who are smart enough to be not fooled by this easy credit) a fool thinking that the whole economy is booming, they start businesses which have no prospect in a real world.

Take for example because of easy credit people pay more and more money to buy good cars, now the increasing prices of Cars fools me(a car manufacturer) that there is a market for flying cars in the economy. So I go ahead and borrow a LOT of money to establish and startup a Fly Car Company. Maybe I even sell a few cars here and there, but eventually people run out of the borrowed money and I find out that there are like less than 2% people capable (and/or willing) to buy a flying car.

So now my business of flying cars goes bust, at the same time my conventional car making subsidiary also gets bust, and now I have to go to Federal Govt to grant me more loans to continue my operations(like what happened with GM and other Detroit based Car manufacturers). The only difference is if someone gives me a loan, I will totally shut down my flying car subsidiary, and fully focus on my conventional cars, but the way American govt is working right now, they are paying huge amount of money to the people who bought cars on mortgages(aka homeowners bailout), they are bailing out flying car subsidiaries reduces taxes on them and trying in ALL the possible ways to ensure that the company still remains(in real world US govt is trying really hard to keep the House prices UP).

By: Kashif

Kashif — Mon, 13 Apr 2009 13:34:22 +0000

Thank you very much for a the wonderful analogy. No one else has been able to explain it to me in such a wonderful way.

But your writing has confused me a little bit as welll. At the start you have mentioned that Steve’s father worked and had a boss (there is no mention of Steve himself working). But towards the end you have written “Steve’s Boss is Federal Reserve”.

I think it is a mistake if not, can you please shed some more light.

By: Tor

Tor — Thu, 12 Mar 2009 13:11:37 +0000

Thanks.Have never come across such an illustration.it appears simple but its actually profound.pls,send it in my email box.

By: renegade_division

renegade_division — Tue, 30 Dec 2008 12:36:46 +0000

Thanks! I highly appreciate your response.

By: anshumita singh

anshumita singh — Tue, 30 Dec 2008 11:16:39 +0000

the stuff was really good atleast for clearing the concepts of the laymens like me

By: RINZU SUSAN RAJAN

RINZU SUSAN RAJAN — Fri, 07 Nov 2008 05:18:32 +0000

it is a pleasureto read ur posts…coz it involves a lot of thorough research…and u have wnderfully potrayed economic bane with a story…
keep up the good work…

By: strongwalker

strongwalker — Sat, 25 Oct 2008 18:34:59 +0000

good post,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,

By: kp

kp — Thu, 23 Oct 2008 11:50:30 +0000

already commented….

By: renegade_division

renegade_division — Wed, 22 Oct 2008 22:37:23 +0000

I am sorry but who is “OP”, I am clueless.

By: anarcho-mercantilist

anarcho-mercantilist — Wed, 22 Oct 2008 22:31:03 +0000

Renegade, lowering interest rates does not necessarily cause monetary expansion, nor vice versa. Central banks seem to do both at the same time, so some see them as correlated.
I do not think that the OP presented an accurate version of the Austrian Business Cycle Theory. Malinvestment did not cause loan defaults, as the OP appeared to claim. Malinvestment starts in the early phases of the business cycle, and ends in the “bust” phase. In the “bust,” the allocation of capital goods would reflect consumer preferences. Therefore, the bust benefits consumers rather than hurts. Then why do some consumers get mortgage defaults during the bust phase? Actually, monetary contraction caused the mortgage defaults, since the borrower does not have enough supply of money to pay back the loans.
More info here: http://anarcho-mercantilist.blogspot.com/2008/10/15-mistakes-by-austrian-economists.html

By: Credit Check On Credit Speak » Economic meltdown explained

Credit Check On Credit Speak » Economic meltdown explained — Wed, 22 Oct 2008 16:36:16 +0000

[…] Economic meltdown explained Lemme explain the readers of this blog, the current global economic meltdown in simplest examples. I […]

By: KP

KP — Wed, 22 Oct 2008 07:16:22 +0000

good try to explain the crisis….keep up the work…

By: renegade_division

renegade_division — Tue, 21 Oct 2008 22:54:25 +0000

@Anarcho-Mercantalist
Isn’t lowering the interest rates a form of monetary expansion? When the govt lowers the interest rates, it forces people’s savings out, it encourages people to take more loans, and all these loans come from the Feds.

I mean take for example the inverse situation, the creditory contraction, now Federal Reserve does not really recalls the currencies it has printed, nor it abolishes the credits it has given to the various banks. All it does is it increases the various interest rates, and people start depositing the money back into the banks, and Banks back to the Federal Reserve.

Without actual creditory expansion, the Federal Reserve has to be really rich in order to cut down the Interest rates.

Alan Greenspan in 2001-03 to deal with the then Recession, slashed the Federal Funds target(the overnight interest rates paid to the banks) to really low 1.5%. That clearly increased the active money supply in the Market.

By: anarcho-mercantilist

anarcho-mercantilist — Tue, 21 Oct 2008 19:55:35 +0000

Malinvestment and underinvestment already exist, since the state enforces regulations and taxes that undermines the economy. More generally, the state exists, then distortion and malinvestment must exist. So one should also call the “boom” phase of the business cycle as increased malinvestment.
Inflation, per se, does not cause increased malinvestment. The lower real interest rates than the “equilibrium” rate causes malinvestment. The lower real interest rates encourage firms to invest in long-term assets than short-term assets, distorting the “optimal” ratio of long-term assets and short-term assets. Thus, the un-“optimal” equilibrium would result in more opportunity costs for individuals.
Only in the “boom” phase of the cycle, malinvestment occurs. In the “bust” phase, the “adjustment” occurs. The ratio of long-term assets to short-term assets approaches the “optimal” level during the bust. Therefore, the bust phase makes consumers wealthier! Then why do some consumers get poorer in the “bust” phase? The individuals who has a loan during a monetary contraction would not have enough money to pay back to the banks.
The Misesians misnamed the terms such as “boom,” “bust,” “growth,” and “recession.” Actually, the only variables that defines the boom and bust phases include lowering and increasing interest rates, respectively. Monetary expansion has nothing to do with “booms” and “busts.”
Note that during a bust phase, one should not view the two concepts: malinvestment and unpayable loans, as related or correlated with one another. In a “bust,” malinvestment may occur without a loan crises, and vice versa.
Lower than “optimal” interest rates causes malinvestment. Monetary contraction causes unpayable loans. Monetary expansion, per se, does not cause increased malinvestment. Lower interest rates actually does.
Without monetary expansion, malinvestment may still occur by lowering real interest rates. Conversely, without lower interest rates, loan defaults may still occur due to not enough money to pay the loan from monetary contraction.