Saturday, November 08, 2008

Trickle Down

Spiegel: 'Financial Contagion' Spreading in Developing World -- G&M: Ford loses $129-million, will cut more jobs -- Reuters: Retail sales worst in decades; holiday view cut -- Spiegel: Sinking into a Recession. Economic Crisis Mounts in Germany -- G&M: JPMorgan warns consumer loan losses may rise --NYT: U.S. Jobless Rate Hits 14-Year High -- G&M: AGF Trust cuts staff by 10% -- NYT: A $50 Billion Bailout in Russia Favors the Rich and Connected -- G&M: Mattel to cut 1,000 jobs worldwide -- Spiegel: Global Recession? ECB Drops Rates amid Gloomy IMF Forecasts -- Reuters: USG cuts 900 jobs as economy deteriorates -- NYT: Tough Times Strain Colleges Rich and Poor -- World Bank head warns financial crisis could drive up number of poor -- Nortel cuts another 1,300 jobs -- GM adds 1,900 more layoffs

22 comments:

Neil' said...

What we need is trickle-up economics. The people must demand it, they won't get it otherwise even with Obama at the helm of the USA. I'll let anyone debate just what that should consist of.

Bee said...

Hi Neil,

I think we've seen enough trickle-up. How do you think all the managers with the high bonuses got rich? Their job is to distribute and invest capital to spur innovation and progress. That's what they get paid for. Not only did they a miserable job, they got incredibly rich with doing a miserable job. All that is money that is not there for the people who actually do the hard work, the families with three children trying to make ends meet with underpaid temporary contracts, having no health insurance or anything to put away for savings. All that is money that went into excess luxury, trips to the Bahamas, and is not there for education and infrastructure. Everything that is excess at the top of the income ladder is lacking at the bottom. Trickle down is a myth - as one can see by looking at the widening income gaps, nationally and globally. The only thing that's trickling down is debt - whenever we have to endure a hickup in the financial system due to mismanagement the problem gets passed on to the taxpayers.

Anyway, even though I find 'trickle-up' a misnomer, I think I roughly know what you are aiming at. I've made my suggestion on this point here: reestablish trust. The problem is right now that everybody is insecure about what's going on and what's going to happen and thus suddenly there isn't much left to redistribute and invest which causes a huge problem. There is a real world aspect of the issue in that de facto money ended up in the wrong places and was not used optimally. That trend has to be corrected. But what is far worse is that people are losing faith in the future, which is the first round in a downwards spiral. Best,

B.

Phil Warnell said...

Hi Bee,

Despite the fact that many recognize that this lack of trust is at the heart of our current problems, most are not prepared to take action to do much as to attempt restore it. The banks still refuse to lend, the Bulls have retracted their horns to expose the teeth of Bears and consumers are curtailing their spending. I find this to be similar to when players who are losing at a craps table start betting the "don’t pass line" rather then the "pass line", thinking that this may somehow improve their chances. By the time they figure out that it makes no difference either way and start realizing one can have a good future only if it is planed for and worked towards, rather then gambled with, they will have run out of chips.

The first thing we must do then is to replace wanting ‘good fortune’ with ‘good future’. For me the only way to improve the odds is to change the rules of the game and to realize these changes only need be and should be subtle rather then drastic ones. In craps for instance that would simply equate to be to say that a 2 or 3 at the first roll you will not have you lose your wager.

The point you are making is to ask what would the rule changes be in this case? How about all mortgages must be backed by an insurance policy issued by the government paid for as a initial part of the down payment. Actually Canada has such an entity and it’s called CMHC, for Canada Mortgage and Housing Corporation. The rule I believe that must be extended is that if a owner sells a home so insured within the first five years, all profits realized above the direct costs involved and inflation will be returned to the fund. One must not forget that unwarranted speculation is also a large part of the equation as to being the problem to begin with. This of course is not the complete answer yet only a start as to suggest a direction.

Best,

Phil

Anonymous said...

Phil,

CHMC

Yes I woud agree with you as to the the mortgage issues and insurance, but is this the real issue, or is there some underlying cause for this economic downturn that we have ignored or were not aware of??

Best,

Phil Warnell said...

Hi Anonymous,

The issue now is trust and insurance equates with assurance which manifests trust. As I said with the second part being to illuminate unjustified speculation, which when not realized causes many to renege on their own promise to the lender or forms to be their sole reason for buying a home in the first place. It is true that many want a home to call their own, yet is it reasonable to expect they should profit from their desire rather then becoming simply more secure? That was my point in changing the expectation and goal from “good fortune’ to “good future”.

Best,

Phil

Anonymous said...

Hi Phil
The Consumer Price Index has no bearing?

Anonymous said...

Liquidity Trap

Injection of cash by government devalues dollar. Was done to prevent deflation?

Phil Warnell said...

Hi Anonymous,

“The Consumer Price Index has no bearing?”

First, as to have things made clear I’m not an Economist and what I say should be taken as being offered as only opinion. The index you mention however which at its root attempts to express the value of things in a relative fashion rather then an intrinsic way. The fact is within a free market economy things are only worth what someone else will pay for them and as such there is no such thing as intrinsic value. In the main it is thought by many that it all comes down to supply and demand, yet it actually goes further then this since it also has to do with speculation.

As an example despite the fact that there has been not much great change in consumption of oil in the last few months the price of it currently has halved (despite OPEC’s recent supply tightening). As the high price was not actually reflected by consumption/supply, neither is the current low one. What has affected both the highs and the lows is mostly speculation that relates to neither supply nor demand. That’s what I meant by my suggestion representing only a beginning, for as I understand it unwarranted expectations as it relates to such speculation being as like housing largely artificial and therefore must also be addressed.

Best,

Phil

Phil Warnell said...

Hi Anonymous,

“Liquidity Trap”

There is a old saying that goes ” if you borrow a little money from a bank you are in its debt, if it is a lot of money they become your partner”.

The same can be said between the types of relationships banks have with government. In Canada for instance to become a Chartered Bank can happen only as the result of an act of parliament, which in effect pronounces their mutual responsibilities as formed by that relationship. This doesn’t nationalize the banks, yet has them tend to act more nationally responsible as being so created and assured. In many other nations banks are only mainly made responsible to first the shareholders and second the depositors.

This is not to say that such a diference makes it bullet proof yet it would seem to me that liquidity traps would form more easily in the latter situation more so then the former. This then is better addressed by way of policy as it relates to initial structure, rather then having to invent a method in hast and only after the fact. Again what ever the method one chooses it must form to be only a subtle difference, rather then one that alters the system fundamentally.

Best,

Phil

Uncle Al said...

As massive engines of remunerative inequity crash abusers see their perfidious bloated wealth massively uncreate. Let them crash.

Capitalism works. Intervention does not, ditto social engineering. Price and cost must couple. People must suffer consequences of poor decisions, grade school to life itself, or they need not make good decisions.

Bee said...

Hi Uncle,

It is pointless to say something works without specifying towards what goal it is supposed to work. Best,

B.

Phil Warnell said...

Hi Uncle Al,

Although I would agree economic Darwinism would guarantee that only the species most adapted by the process of chance to survive, it lends little solace as your argument leaves me unconvinced it will necessarily be our own. I’d rather think that being conscious in our case extends further then to being only ‘self’ aware.

Best,

Phil

Bee said...

Uncle Al, as most other people, like to forget that capitalism itself provides the best and most abundant examples for social engineering. Open an average magazine and try to tell me that it's not trying to change your behavior into buying more crap.

Phil Warnell said...

Hi Bee,

As I sit here swilling a high energy beverage, eating my third bag of chips, while desperately looking for my Viagra prescription renewal I was unaware that capitalism is what I should give the total credit for all these wonderful things I simply couldn’t live without. That is since all along I thought human nature as it relates to weakness should also at the very least be given honourable mention :-)

Best,

Phil

Neil' said...

Hi Bee, "trickle-up" has become a catch phrase for the opposite of trickle-down. It means trying to uplift the lower and middle classes with adequate minimum wages, social security that is really secure, universal medical care, etc. - and let that promote the best overall per capita GNP etc., instead of trying to help or even promote the rich and then hoping the results leak down onto the others. I suppose you could support that idea, maybe you weren't clear what I meant. In any case I know you are trying.

I do agree it is important to re-establish intangibles like "trust" and not just consider this a technical economics exercise about interest rates, loan exposure, etc. Many economists don't really appreciate that.

Imam Yahya said...

"It means trying to uplift the lower and middle classes with adequate minimum wages, social security that is really secure, universal medical care, etc. - and let that promote the best overall per capita GNP etc., "

This has been tried. It doesn't work, except in extremely disciplined and homogeneous societies, where for example people feel ashamed to be seen as parasites. It might work in Germany or Japan. It won't work in the US or China.

Imam Yahya said...

Bee said: "Open an average magazine and try to tell me that it's not trying to change your behavior into buying more crap."

I think you ought to be careful here. It's all too easy for intellectuals to dismiss "consumerism" as people buying silly "crap" that they don't "need", because they need to fill some vacuum in their lives blah blah blah. What we tend to forget is that our research is also mostly silly "crap" that neither we nor anyone else really "needs" and which we do in order to fill some vacuum in our lives etc etc. When I am tempted to sneer at someone getting enthusiastic about that fancy bike or car they just bought, I force myself to ask: is it more stupid to get excited over a new car, or over a new paper I wrote which [like 99.9% of papers] will be forgotten long before that car begins to rust? It's easy for us to pretend that our preference for ideas over things somehow puts us on a higher plane, but it's pretty silly really. And our activities cost the taxpayer money too. Maybe paying people to do unimportant research is another example of money "ending up in the wrong places" as you put it? "Wrong" according to whom?

Bee said...

Hi Imam,

Oh, I have nothing against people who like to buy crap, or produce crap for that matter. If it makes them happy, or makes other people happy, so be it. I am not asking for any 'meaning' beyond that. Neither do I say consumerism is necessarily a bad thing. One might ask every once in a while whether the increase in happiness is indeed still present, but that's another question. I was just trying to make the point that the game of convincing others to do things is very common already without what Uncle is dismissing as 'social engineering'. Best,

B.

Tkk said...

I should remind that the 'trickle down' ideology and the kind of capitalism that has resulted is overwhelmingly a phenomenon of the USA. The rest of the G8 countries did not follow that ideology - not UK and certainly not Canada. (UK, however, come closest to America's brand of capitalism but under a different ideology branding.)

Trickle down has run it's course and is being abandoned. It has worked wonderfully for the minority of elites who received the benefits of trickle down. They laugh off to the sunset in splendid retirement with their billions. What they left behind is a country nearly destroyed financially, impoverishing the rest of the population and the younger generation, and the real prospect of social unrests and massive human misery down the road.

Bee said...

Hi Neil',

Ah, sorry, I wasn't aware it's become a phrase for something. I agree with what Imam said above. Whether or not that works depends on tradition, culture, social values. I must have said it previously many times, there are no panaceas that will work globally. I am not sure however one can generally say in advance in which country under what circumstances it does work. Here as in many other cases I would insist to keep the system able to learn from its results. Anything that is fixed and not able to react to its effects is bound to fail. Best,

B.

Plato said...

Evolving the group effort?

In mainstream economics, deflation is caused by a combination of the supply and demand for goods and the supply and demand for money, specifically the supply of (demand for) money going down (up) and the supply of (demand for) goods going up (down). Historic episodes of deflation have often been associated with the supply of goods going up (due to increased productivity) without an increase in the supply of money, or (as with the Great Depression and possibly Japan in the early 1990s) the demand for goods going down combined with a decrease in the money supply. Studies of the Great Depression by Ben Bernanke have indicated that, in response to decreased demand, the Federal Reserve of the time decreased the money supply, hence contributing to deflation.

From a monetarist perspective deflation is caused primarily by a reduction in the velocity of money and/or the amount of money supply per person.


To begin to trust, it is very important that one is aware of factors that are going on today in our economy and to know that to deal with "dissipating the fear and to begin to trust," you have to become informed.

If this is done then you get to see what has taken place, and what history is involved to show that the current practise was to entice the creation of money, and to use the banks to allocate,"without the appearance of Government" controlling the value of that money.

While one would like to distance themself from certain factors not calculated in the evolution of the CPI, it is very important that one undertands the value added "too transportation" that ensues along the line of products that we buy, to know this has been transferred from the profits of oil, to the consumers in a another way. The trickle down effect?:)So why is it not involved then while seeing it's control of the "market price" is plunging?

Wouldn't want to appear out front that it set the pace for "inflation and pass it off as the mortgage crisis, while seeing favourable price declines tied to the price of the barrel already based on a price far surpassed the profit margins of the inflation rate? I am just trying to think this out.

What the government will not do is allow deflation? So Government created the money supply? Government then "devalued the dollar?"

I am not economist either, yet it is both important, that to understand what is taking place is to put proper decisioned making into the process to evolve the economy not just in relation to "adverse effects of the depression" but an enlightened view from the "economist elites" who have a science degree as well?:)

Best,

Plato said...

Again for the group effort.

People must suffer consequences of poor decisions, grade school to life itself, or they need not make good decisions.

The significance of the insurance plan pointed out by Phil is one that helps to "orientate some perspective about investment into the home for one's future." Equity built on the inflationary cost rising over the years based on the decision to enter the market place and ownership, and the 5% required.

So you use a number like three hundred thousand while working to pre-approve oneself, it helps to orientate whether you can accept the debt according to the overall debt load you have( my advice to my children has always been based on one wage, this allows flexibility to raise the family enduring with the one wage ).

So while you are working here you are stabilizing the process, and providing for perspective on negotiation, that allows a different attitude then one of "hope beyond belief." Accepting the burden without understanding where this places you immediately in terms of the debt load.

So without an interest by this minimum down payment then what use to accept "the burden of loosing" then to realize that it was bought on mistaken notions of stability and while not helping to secure the system from such collapses.

These are "self allocated works in understanding the process" that help to shape security in the housing industry, real-estate etc.

Provides for helping to build happy lives while living a dream.

So where to get the 5%? 15000 subtracted from the 300,000 and you see what remains to mortgage and the terms etc. If the cost of the home and personal debt exceeds 40% of your your income, then walk wisely and look what it may cost the family life to accept such extenuation of circumstance unexpected.

Best,