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March 23, 2010

Without Pain, No Gain?

Robert Samuelson offers an interesting insight into the causes of the financial crisis:

Greenspan's complicity in the financial crisis stemmed from succeeding too much, not doing too little. Recessions were infrequent and mild. The 1987 stock market crash, the 1997-98 Asian financial crisis and the burst "tech bubble" did not lead to deep slumps. The notion spread that the Fed could counteract almost any economic upset. Greenspan, once a critic of "fine-tuning" the business cycle, effectively became a convert. The world seemed less risky. The problem of "moral hazard" -- meaning that if people think they're insulated from risk, they'll take more chances -- applied not just to banks but to all of society: bankers, regulators, economists, ordinary borrowers and consumers.

"We had been lulled into a state of complacency," Greenspan writes in passing, failing to draw the full implication. Which is: Too much economic success creates the seeds of its undoing. Extended prosperity bred overconfidence that led to self-defeating behavior. Neither Greenspan nor any other major economist has yet wrestled with this daunting contradiction.

This is the problem I've had all along with those who worship at the altar of Our Lady of the Perpetually Expanding Business Cycle: sooner or later, every business cycle goes bust. We can kick the can down the road a bit, but we can't prevent the inevitable from happening.

That being the case, is it good public policy to regulate away the pain for so long that people become overconfident and behave as though the "bust" part of the boom and bust cycle will never happen? Does too much government tinkering with the economy lull the public into a false sense of confidence? Several months ago I asked that question with regard to unemployment:

The more common shape is a sharp increase in unemployment that bottoms out and then is followed by a sharp rise in employment. I couldn't help but think of homeopathy here (OK - try not to let your heads explode here - I'm not trying to score partisan points or prove anything. I'm just exploring ideas.) Maybe when things get bad enough in the economy, an equally strong response is stimulated that triggers recovery - sort of a 'no pain, no gain'?

Over at QandO, Lance Paddock pursues the same line of thinking:


I employed my madly crappy graphic editing skillz to eliminate all but the last three recessions from this graph:


Not only have the last three recessions lasted longer than any other post-WWII recession, but they seem to be growing progressively (there's a daft pun in there somewhere) more severe. Lance comments:

The change that we began to see in the 1990 recession is partly structural. The layoffs associated with the much larger manufacturing sector in recessions of the past were associated with a rundown in inventories which then snapped back once the inventories were depleted.

Something else is going on here as well in my own opinion. As the eighties gave way to the nineties the US was in the early stages of an experiment in monetary and economic policy. Monetary policy was explicitly geared to reduce economic volatility. This led to attempts to reduce the severity of recessions, and also led to a reduction in upside volatility as well. This was (at least for a while) somewhat successful, resulting in what became known as “The Great Moderation.” The recession of 1990 was the first crack in that system. Attempts to limit volatility not only reduced the violence of the recession, but the explosive growth typical after recessions previously. It also was a recession which was a result of a financial crisis (the S&L’s) and the real estate boom of the late eighties. The deleveraging of the finance and debt recession (what we are going through now, only in miniature) was sluggish. It took a good while for the adjustment to occur.

We followed a familiar script of lowering interest rates and encouraging credit expansion. Constant expansions of credit whenever things slowed kept the engine running until a bigger crisis hit with the bursting of the tech and telecom bubble. Once again we applied even more credit easing to soften the blow, and the attempt to avoid wringing the excesses of credit from the system led to another sluggish recovery with anemic job growth. Profits however were large and the return for the steadily growing financial sector was immense. If the economy was going to be stabilized by constant applications of credit expansion, then the financial sector was the main beneficiary. Finally we have the latest crisis, one where the financial system itself was the most important bubble.

What we can now see is that the types of recessions we have been experiencing are successive deleveraging cycles, each “solved” by releveraging the economy and leading to a bigger crisis down the road. Sadly deleveraging processes, especially if drawn out by keeping them from running their course, result in tepid job growth. We are now in a massive deleveraging cycle which we are once again trying to solve by adding massive debt to the system. Once again job growth and recovery is slower. Unless we break this cycle (which would be very painful) we should expect nothing different in the outcome, except that the problem is bigger and will last longer.

The nanny state operates much like an overprotective parent, constantly trying to "fix" every problem that crops up. Unfortunately, the end result is a child who rarely has to face truly tough challenges and - as a consequence - doesn't develop adequate coping skills.

That's straightforward enough. The more disturbing implication is that too much government meddling doesn't just weaken our ability to respond to bust cycles once they occur. It may actually promote behaviors that cause recessions.

Posted by Cassandra at March 23, 2010 06:26 AM

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Nanny parents may lead to children with poor coping skills for problems they encounter, but that is itself just another problem those kids have.

So, what is the right coping skill for this particular problem: a government/investor relationship that is leading to successive leveraging/deleveraging cycles? Taleb's advice -- not to leverage in the Fourth Quadrant -- will protect you, but it might be wise to set aside some venture capital to follow the leveraging cycles, pulling portions of it out at various points so that you only lose your initial venture capital in the crash (keeping the profits in non-leveraged investments).

Posted by: Grim at March 23, 2010 10:39 AM

...what is the right coping skill for this particular problem: a government/investor relationship that is leading to successive leveraging/deleveraging cycles?

Well, heightened awareness for one thing. If you aren't even aware of what is going on, you're at a disadvantage. If you are aware, you can make informed decisions that reflect your subjective goals and risk tolerance.

Posted by: Cassandra at March 23, 2010 11:29 AM

Interesting proposition, and I think you have one more historic precedent you overlooked. There was Johnson's raid on the social security fund for his war on poverty.

I has to ax the question here; is government, in theory, a non-profit entity? I know non-profits are not supposed to spend more than they earn, nor are they to just fritter away the surplus.

What would actually happen if the surplus was used to check government spending by not expanding the welfare state? With what has just happened, government booming will eventually bust, won't it?

Posted by: Cricket at March 23, 2010 02:01 PM

I have always looked at the economy from the standpoint that it acts like an ecosystem. The classic example would be Volterra's work on predator-prey cycles. As the prey group grows, the predator group follows which causes a die-back in the prey group, and so on, and so on.

If we arbitrarily increase either group it will naturally expand or contract the cycle. More importantly, we have no real idea what the long term consequences will be.

The bottom line for me: it is no surprise that government action affects the cycle, in fact, I expect it to.

This is also why I have always believed that stimulus via government spending is nonsense. Volterra already assumed that there was an unlimited supply of clover for the rabbits to graze on. The cycle still occurs.

Posted by: Allen at March 23, 2010 05:24 PM

The more disturbing implication is that too much government meddling doesn't just weaken our ability to respond to bust cycles once they occur. It may actually promote behaviors that cause recessions.

Ya think?!

Posted by: camojack at March 24, 2010 12:25 AM

From an engineering viewpoint, cycles that grow in duration and intensity indicate a system that is self-destructing and in the process of collapse.

Posted by: bob sykes at March 24, 2010 09:13 AM

That's an interesting observation, Bob.

I know little to nothing about engineering (though it fascinates me) and that was my intuitive sense, looking at these charts.

Posted by: Cassandra at March 24, 2010 09:19 AM

Bob - good comment.
Cassandra - Two examples:

1) A refinery has thousands of "Control Points". Systems sense temperatures, pressures, flow rates, levels in vessels, fluid compositions and so on. All of these things are "controlled" to stay where they should be. They are controlled by automatically changing things - such as how far open a valve is. A liquid flow may have a sensor that measures the flow and a valve that can adjust the flow. There are electronics in-between that calculate how much to adjust the valve to maintain the desired flow rate. Simple. Unfortunately, there can be a lot of interaction between systems. The pressure downstream of the valve may be controlled in the tank the liquid flows to. So if the tank pressure control changes, it affects the flow - lower pressure allows more liquid to flow through the valve. Which then affects something else upstream of the valve. And so on. Thousands of times. When something starts getting really weird, and you're getting a bit anxious over whether the entire system will remain stable, a simple action is often taken. Someone looks at all the oscillations occurring (there are graphs available), all of these changing temperatures, flows and so on, and all of the automatically adjusted valves, and picks out one of these valves. And fixes that valve at a set opening. This is called putting the control system in manual, rather than automatic, for that valve. Sometimes, this simple action will allow the entire place to just settle down. All of the controls were interacting, and interfering with each other, with time delays between when adjustments were made and when it affected something else. One thing in manual can stop the growing cycle.

2) A young man has been diagnosed as manic depressive. One, and then another and another medicine are prescribed and taken, and the symptoms are not being adequately controlled. The young man is taken out of college by his parents. After a year, the patient is clearly functioning at a minimal level. Mom steps in, and takes patient to a new doctor. Doctor says she can't diagnose with the patient in this condition. And weans the the young man from all medicines. She then diagnoses a much less severe disorder, probably aggravated by the stress associated with junior year college classes to appear to be the original diagnosis.

The solution to solving a refinery or personality problem? In both cases - reduce the adjustments. Leave it alone. Stop trying to control everything. Or it just gets worse and harder to diagnose.

You in Washington - are you listening???

Posted by: tomg51 at March 24, 2010 10:37 AM

In both cases - reduce the adjustments. Leave it alone. Stop trying to control everything.

Overcorrecting on a helicopter's controls is a common problem with new flight students. We teach them to make small corrections, then *stop* and see what the aircraft does.

If the unwanted movement ceases, don't make any further corrections until the next excursion -- if the unwanted movement slows, but continues, make another small correction, then *stop* and observe.

Make one large correction will result in an overcorrection, and they build and compound to the point where a novice loses complete control, and, unless his instructor takes the controls, he crashes.

The bad news is, we have now have novices at the controls of the economy, and the worse news is, they're flying solo...

Posted by: BillT at March 24, 2010 11:31 AM

What would actually happen if the surplus was used to check government spending by not expanding the welfare state?

There is no surplus -- Congress has been repaying the raids with IOUs. Which is why the SS just told that august body that it was calling in the markers.

But to answer the question, if the welfare state ceased to expand, Democrats with urban constituencies would cease to be re-elected.

Posted by: BillT at March 24, 2010 11:41 AM

Hm. Would tinkering with the economy to keep it in check be analogous to the checks and balances to keep government from getting so bloated?

Just asking.

Posted by: Cricket at March 24, 2010 12:02 PM

BillT - not just helicopters. "You don't have to strangle it" was a phrase I seemed to use fairly often with some of my fixed-wing students. Especially in the gliders.

It's interesting to contrast the .gov's plans for saving everyone from themselves with the Midwestern response to the last two years' floods. Neither Iowa's nor North Dakota's citizens seem to have waited for FEMA/ HUD/ et al to come in and save them from the rivers. But then I guess they (and folks like them) are just ignorant of the wonderful benefits of sitting around and waiting to be rescued/fed/housed/doctored/have noses blown.

Posted by: LittleRed1 at March 24, 2010 12:13 PM

One of my friends lives close enough to Fargo that it affected them. She and her husband and three sons bagged sand until their arms nearly ripped from their sockets.

She said it was such an amazing experience to have the whole town pulling together to save it.

In this situation, though, what can you do if you are forced into buying insurance you really cannot afford? Car insurance is barely affordable, but it is mandated in the states, and the military requires proof of insurance if you buy a car. So, laws do affect the economy since they tend to favor one group at the expense of another.

Posted by: Cricket at March 24, 2010 01:08 PM

I think about 20-22% of drivers are uninsured, regardless of state of residence.

I think Obama will simply make health care available to all, and eliminate insurance.
And tax everything and everybody.

"I'm sorry, your health card isn't working - seems you wrote "American" under race on your census form - end of the line, please."

Posted by: tomg51 at March 24, 2010 01:31 PM

Just go and change the "Emergency Entrance" to "Free Clinic" and be done with it.

It creates or saves jobs! I'll stand in line for you - 20$ and hour.

Posted by: tomg51 at March 24, 2010 01:35 PM

I think Obama will simply make health care available to all, and eliminate insurance.

BammyCare does just that.

Nowhere in that mess is a requirement that you be a US citizen to obtain the "benefits" -- and there are at least two paragraphs requiring hospitals hire *facilitators* for non-English speakers.

So, when Obie and his Krew were swearing that illegal aliens would *not* be covered -- they were lying about *that*, too.

Posted by: BillT at March 24, 2010 01:41 PM

The human species needs an apocalypse every once in awhile to make sure we have real guts and balls. Otherwise, nature may decide to wipe us all out and start over with idiots like Stupak as the model just for galactic entertainment's sake.

Posted by: Ymarsakar at March 24, 2010 01:59 PM

Ymar, that was cruel :p

I just snorted most of my cup of coffee....

Posted by: Cassandra at March 24, 2010 02:40 PM

Wrong thread for that, darlin' girl.

Posted by: BillT at March 24, 2010 04:18 PM

Well, Ymar is still cruel :p That's my story and I'm sticking to it.

Posted by: Cassandra at March 24, 2010 04:48 PM

tomq, I did some checking. Some states require a bond of certain amount, as opposed to insurance. I think you are correct and there is underinsured and uninsured motorist coverage for those times when of the non-insured is involved with an insured driver.

@ Ymar. Heh. Wonder what the mice will come up with next time.

@ BillT: County hospitals usually cover non-resident immigrants. One of our neighbors was an ER doc. While she couldn't tell us a whole lot, what she did say would be unprintable and banned in all four quandrants of the galaxy.

Posted by: Cricket at March 24, 2010 05:05 PM

Cricket - TX rate is low 20's. I figured it was just us, until hearing a news report last year that its everywhere.
Un-insured coverage is a wonder. Much lower limits. And the odds of getting anything from a civil suit would be low.
You need proof of insurance for annual inspections here.
What I don't understand is if the inspection is good for a year, the isurance certificat should be too - no monthly payments you can cancel at any time.
But I'm rich, you know.

I just figure if nearly every state requires insurance, but it doesn't happen, whats different for health insurance.
Oh yeah - the IRS. FBI, too.
But now, if you don't have the health insurance, they will give it too you.

I'm about ready for debtors prison.
Let you family save you if you can't buy insurance you need.

Posted by: tomg51 at March 24, 2010 06:01 PM

Without pain, we will not regain our Republic.

This is going to be fun, and I am not being sarcastic. We either win and face down our Leviathan government, or our children and children's children will be serfs to the State.

My parent's generation had to struggle greatly in the first third of their lives; the Great Depression, WWII. Our struggle is going to be in the last third of our lives. We've had it pretty cush for a lot of years, but now, we are going to be in the fight our lives.

To live in such times.......

Posted by: Don Brouhaha at March 24, 2010 06:11 PM

Re. non-resident medical expenses:
While I was working for an air-evac company, an already poor county in a certain Great Plains state got to pay for transportation and care of two, ah, non-resident workers shall we say, who took a non-existent curve on a highway. Alas, they killed some folks in the ensuing wreck, but survived themselves. One was going to be a quadraplegic, the other a para at best, if he was very lucky. And once these fine, upstanding non-citizens got patched up (at the county's expense) at State Capitol General, they would be sent back to their home country, where the quad would probably die because there was no way his family had the resources to get him the continuing care he would need. My med crew had some very pungent phrases for the situation, once the patients had been dropped off and we were en route back to our base. They estimated that the minimum cost would be $250,000, payable by Poor County's taxpayers. Verily, it sucketh.

Posted by: LittleRed1 at March 24, 2010 06:26 PM

The difference between car insurance and health insurance? You only need car insurance if you own/operate a car. You don't HAVE to own a car (especially if you live somewhere with efficient public transportation like DC or NYC). With this mandate, the only thing you have to do in order to be required to carry health insurance is be a living, breathing citizen of the United States. Nice "free" country we've got here, huh?

Posted by: Miss Ladybug at March 24, 2010 08:30 PM

Protesting Health Reform, GOP Attempts To Bring Senate Hearings To A Standstill By Blocking All Proceedings

– - And they stomped their feet, pushed out their lower lips as far as possible and pouted, and screamed uncontrollably.

You LOST, grow the fcuk up.

Posted by: YeaForHC at March 24, 2010 11:44 PM

County hospitals usually cover non-resident immigrants.

All hospitals do, Lady Cricket. The taxpayers wind up paying for it. How BammyCare is an improvement on that is a question for the duplicitous.

You LOST, grow the fcuk up.

Run along and play, child -- the adults are having a conversation.

Posted by: BillT at March 25, 2010 05:23 AM


"By 57-42, Democrats rejected an amendment by Sen. Tom Coburn, R-Okla., barring federal purchases of Viagra and other erectile dysfunction drugs for sex offenders. Coburn said it would save millions, while Sen. Max Baucus, D-Mont., called it 'a crass political stunt.'"

We lost, you and convicted sex offenders with erectile dysfunction won.

"Democrats also deflected GOP amendments rolling back the health law's Medicare cuts; killing extra Medicaid funds for Tennessee and other state-specific spending; barring tax increases for families earning under $250,000; and requiring the president and other administration officials to purchase health care from exchanges the statute creates."

We lost, Medicare recipients lost, doctors lost, and families making less than $250,000 per year lost.

But you, convicted sex offenders with erectile dysfunction, Teh Won and the Insane Clown Posse won.

And that's all that counts, right? Oh, wait -- do you make less than $250,000 per year?

If so -- surprise! -- you *lost*.

Posted by: BillT at March 25, 2010 07:44 AM

I guess we can pay the $2000 fine for not having health insurance if we have a catastrophic need and then get the "free" govt health care. I find it only slightly surprising that most of this mess doesn't go into effect until after the next presidential election.

Posted by: Steve at March 25, 2010 08:27 AM

The Houston Chronicle is suddenly opening up. Yesterday they admitted, page 1, that Houston has 80,000 - 120,000 uninsured illegal aliens. With predicted influx of new patients due to recent legislation, they are worried about the ratio of customers that pay below hospital cost to those that have historically had to cover the shortfall.

Posted by: tomg51 at March 25, 2010 08:32 AM

I find it only slightly surprising that most of this mess doesn't go into effect until after the next presidential election.

I have some thoughts on that Steve. Just haven't had time to develop them.

Posted by: Cassandra at March 25, 2010 08:58 AM

I find it only slightly surprising that most of this mess doesn't go into effect until after the next presidential election.

The single thing that torqued me most about the Republican counterfire was this -- if, as the Dems were saying, it was so important to pass this bill *immediately* to save all those poor folks dying right now because they couldn't afford health insurance -- why don't the benefits kick in immediately, rather than four years from now?

That was the point the Dems were most vulnerable on. They could (and did) lie their way past the other provisions, but they *couldn't* lie about the waiting period without revealing themselves as crapweasels.

Meantime, they'll be collecting the checks for four years before they have to make any payouts...

Posted by: BillT at March 25, 2010 09:51 AM

"Meantime, they'll be collecting the checks for four years before they have to make any payouts..."

Two stupaks that they'll raid their war chest and in 4 years we'll find out that somehow all the money collected has been 'spent' somehow.

Posted by: Ymarsakar at March 25, 2010 12:44 PM

Don't worry about YF, he's just gotta do the only job he's got in this economy.

One good thing about economic crisis is that you can get cheap labor in the form of agent provocateurs. Very important to making stuff up as one goes along.

The Left has also somehow been able to convince people that uninsured people are somehow paying out of pocket. So they got two avenues of attack. The uninsured don't pay out of pocket, but because they don't have an issue except bankrupting their host place, people can be convinced just with the ominous numbers that people don't have insurance. ON the other hand, the people with insurance are also in trouble because insurance companies can 'cut' their benefits. This may not be unsurprising, given that the Left also convinced people that Lincoln was a Democrat.

You can get people to agree with you by convincing them that you have something that they will want. Or you can convince them by becoming their reality. By telling them what they want through manipulation. With the proper techniques, it is very feasible to make people even like any surprise gift simply by priming feelings before hand. All it takes is a bit of hypnosis, some kines, and word play.

On requirements:

When the Bill wanted people of all stripes and colors to be under the same requirement to buy insurance, it's just an easy way to keep track of slaves. Slaves can't be allowed to decide when they will or will not be slaves. It is not very economical.

Posted by: Ymarsakar at March 25, 2010 12:56 PM