Credit, Monetary Policy, Depressions, and More!

[tedteague]

to your first point, money is not as glorious as you lead on. You say a car has no inherent value; well money does not either. That is why the value of money changes with inflation, deflation, and exchange rates. Money can quite literally be worthless if people choose not to accept it, which is always a hypothetical option, and usually happens in places with hyperinflation. Money is simply paper, legal tender. It is a commodity widely accepted. Furthermore, money is not the promise of work, if anything, it is a token of work already done. Nothing is being promised. You dont get paid then do the job (if you do, lucky you), it is more like a token os accomplishment. "I worked for ted for 10 hours, and because shaws doesnt accept 4 chickens in exchange for steak, ted has given me the equivalent of 4 chickens on cotton blend i can do whatever i want with." Furthermore yet again, if it is the promise of work, what do you call it when the fed prints money?
The circular flow is right, for the most part. If you get into the paradox and thrift and all that, thats a whole nother issue
2. this sort of goes out the window with the first point. Credit has to be repaid by someone, most of the time
3. The first thing that comes to mind is that there is more than 800 billion in cash. Quite a bit more. 1.7 trillion actually. People also have confidence in banks because of FDIC insurance. It seems you have a problem with the fractional reserve lending system. Quite simply, whats the alternative? Without banks lending money to create more money through interests on loans, the economy turns into a zero-sum game, where by one person making money someone else has to lose the same amount
4. You seem to have confused cause and effect here. The forclosures and defaults contributed to the popping bubble. Prices can only go so high until people simply cannot stop paying them or turning houses over. It is when everybody grabbing money realizes theres too few that bubbles pop. Secondly, the banks stopped lending not because of fear it wouldnt be paid back, but because they needed assets to recover from the bad mortgages and stay in the green (or not too far in the red). Third, interest rates shot up again as a result of the rapidly expanding economy. The Fed sets the interests rates, not banks.
5. Recessionary monetary policy expands the money supply. It more than doubled since '07. The lack of money is because of the liquidity trap, which is caused by sticky wages, which is caused in this case by the high unemployment.
6. Again, your last point is incorrect. When money starts leaving the banks because employment rises, there will actually be a massive inflation problem, not a deflationary heaven
7. You can't raise taxes to fund increased spending because raising taxes decreases consumption spending. If theres not enough money moving, you raise spending and cut taxes and fire money from both barrels. Furthermore, surprisingly, the stimulus spending is not much of the federal budget. 85% of the federal budget goes to defense spending (war on terror and whatnot) as welll as medicaid/medicare/social security. and good luck cutting any of that
8. Again, can't raise taxes in a recession. Its basic macro theory. Furthermore, you don't really have to worry about a concentration of wealth because again, we dont have a zero-sum economy. And even those who are very wealthy are still spending. Buying yachts employs skilled laborers to make those yachts. The wealthy may have a lesser marginal propensity to consume, but the disposable income they use to consume is only brought down by higher taxes.
9. The government can buy it all. At the very least, if the fiscal policy makers were moronic, they'd monetize it. Furthermore the bailout hasnt worked. Job creation has not occurred. And the bailout is supposed to be immediate. the long term solution is market self-correction. Which is what should have happened. And banks do know who they should lend money to. They have rooms filled with Harvard financers who crunch those very numbers all day
sorry for the lengthy reply, but you have some mistakes in your first post