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 IgorFrankensteen
Joined: 6/29/2009
Msg: 101
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Banks and the financial systemPage 5 of 7    (1, 2, 3, 4, 5, 6, 7)
Of COURSE it's both true that a pure free or a pure government-controlled economy wont work: after all, ALL governments are made up of people, with all the same flaws that show up in an unregulated situation. Greed, thoughtlessness, fear, etc.

I stumbled across the place in those videos where the narrator did talk about "money creation." He did a very bad job of it, in my opinion, because he coyly played it both ways, without ever getting around to saying WHY he could play it both ways. He said that if you ask loan institutions if they "create money," that they will all tell you that No, they firmly do not. He then says that they do, or that everyone nevertheless thinks that they do, but he seemed to be more into having fun laughing about the confusion rather than explaining it.

Part of the confusion comes because of the aforementioned confusion between "cash" and "money." Not all "money" is cash, but all non-counterfeited cash, is money.

Another part of the confusion comes from the fact that the loan institution and the borrowers are using different TIMES to talk about "money." From the borrowers point of view, since the bank or other loan institution doesn't take actual cash from their reserves and hand it to them, they both perceive, and go about their business as though the bank DID print cash money for them to spend. But from the banks' point of view, they did nothing of the kind. They gave the borrowers part of his own future profits to use today, in order to reach and get a direct hand on that future money tomorrow. And they use their existing reserves as a "buffer" of sorts, in case they misjudged the borrower's future wealth creation, or he dies or absconds with the money borrowed from the future by the bank.

Thus though it appears that banks "create money" from one point of view, it's also completely true that they never do so, from another point of view. And, ultimately, we can see that the banks are the more correct about this, because on the occasions where the money they are said to have "created," proves not to have come into existence, the money they are said to have "created" vanishes, and what remains VERY real, as it always was, is the debt.

And in turn, since most loan institutions DO sell their loans to other loan institutions and investment groups, and they do so for a profit, every debt that is passed on, grows in size. When enough incompetent, greedy people allow debts to be created and grown based on nothing, the debt grows out of all proportion to the ability of anyone to create wealth, and we end up with the mess we are in now.

When loans are made intelligently, the problem of making loans that total higher than the banks' hard cash assets is resolved, and everything works smoothly. If we never allow loans to be made higher than the actual assets, then almost no real growth will be possible, since the " loanable " money would be reduced to only the excess profits from existing businesses that their owners decide to put in the bank for safety and for investment.

So it all boils down, not to whether we have a debt-based system or not, but whether we have a RESPONSIBLE AND COMPETENT debt-based system.
 gingerosity
Joined: 12/10/2011
Msg: 102
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Banks and the financial system
Posted: 3/13/2014 6:03:30 AM

I stumbled across the place in those videos where the narrator did talk about "money creation." He did a very bad job of it, in my opinion

Well ok, but you have to remember that those videos were made in the years BW. Before Wikipedia.

he seemed to be more into having fun laughing about the confusion rather than explaining it.

Yes, but at least you now know that that fractional reserve mechanism of money creation operating in reverse is why a third of money was 'destroyed' in the depression. Details can more easily be found if you know what concepts to look up.

Thus though it appears that banks "create money" from one point of view, it's also completely true that they never do so, from another point of view.


And, ultimately, we can see that the banks are the more correct about this, because on the occasions where the money they are said to have "created," proves not to have come into existence, the money they are said to have "created" vanishes, and what remains VERY real, as it always was, is the debt.

Did you say "ponzi scheme"? For the purposes of accounting you have to call it "created and destroyed" rather than "possibly non-existent". Otherwise you'd need solipsistic calculators to keep the records, and until quantum computing matures those are cost-prohibitive.

So it all boils down, not to whether we have a debt-based system or not, but whether we have a RESPONSIBLE AND COMPETENT debt-based system.

Aye, and how do we acheive that? You could enact regulations to increase the fraction held in reserve, reform the tax system to decrease the advantages of debt-based investing, reform or remove limited liability legislation... and so on. With the rest of your time it might come in handy to give us world peace, action on global warming and more people who care enough about responsible and competent debt-based systems to try to make one.
 IgorFrankensteen
Joined: 6/29/2009
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Posted: 3/13/2014 3:22:47 PM
I've been around too long to have any illusions that human beings CAN be made to comport themselves rationally and responsibly for any length of time, based on rule sets alone. In addition to being too creative in their nefariousness, they are too prone to mistakes. "Human error" is such an iconic phrase because it is so commonly applicable.

No, I fully expect that we will have repeats of problems periodically, and have to deal with messes like this. The best we can do, is to try not to allow the same people to make the same mistakes or commit the same crimes again.

There are times when it is quite clear that people broke EXISTING rules, but they haven't been held accountable. I think that SOME amount of prevention can be had by altering some of the penalties. It's already been done for some situations, but not for enough of them. Quite simply, financial penalties for financial crimes should all be based on taking every asset the criminal has which MIGHT have come from their having played the games they did, PLUS additionally punishing penalties. I think I read that this is done in at least some cases of bribery, but I may be misremembering that. Maybe it's only for tings like illegal drug dealing.

According to what I've read, the real estate-driven mess we are still suffering from, was a the direct result of a lot of people actively choosing to overvalue lots of properties. After they did so, they then hid their overvaluations inside of package deals called "derivatives," and sold them as though they were much higher quality loans than they were. They KNOWINGLY did this. That no one has been jailed for fraud, is rather disconcerting, since actual written instructions to hide the value of these things have been published now. Why existing laws haven't been enough to see at least SOME of these admitted fraud promulgators is beyond me.

I don't think myself that it is a matter of increasing the fractional reserve. It's a matter of removing the legal protection of corporations from the individuals committing the crimes. If CEO's were held personally responsible as individual citizens for their business decisions, they might be moved to make fewer of the obviously criminal ones. Note I said fewer, though. I am a realist, in that I know that this sort of thing is always going to be a back-and-forth game.

It doesn't take "solipsistic calculators" to recognize that a financial person or company has purposely played fast and loose with both their basic responsibilities, as well as the truth about their behaviors. Claiming that is does, is one of the problems we have to address first. I'm not aiming that at you, mind you, I am very much pointing out that it is NOT acceptable to let the enforcement agencies get away with skipping out on THEIR responsibilities by pretending that it isn't possible to enforce their existing specified rules sets, with vague statements similar to the one you presented.
 drinkthesunwithmyface
Joined: 3/27/2012
Msg: 104
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Posted: 3/13/2014 4:35:28 PM

I am in complete agreement with you in all that, Demi. It is why I for one, wish it were ILLEGAL to claim that there is any such thing as "Business Science." The notion that economics CAN be handled as though it is made up of atom-like particles with easily predictable and self-limited behaviors has been among the most destructive concepts to have been foisted on humanity in modern times. Possibly THE most destructive.

Haven't followed this whole thing, so I might be off here, but...Are you serious?

This is to reveal, and encourage, wrong ideas about what a "science" even is. "Science" just means to study, investigate, think about. Whether or not something is a "science" isn't affected by whether or not there can be hard predictable rules, nor whether or not one can understand all of something.

That is similar to the irrelevant reasons why people would call something like psychology a "soft science" or just not a science at all - because human behavior can't be perfectly predictable, or because we don't know everything about human behavior. That makes no sense, because those things are irrelevant to whether or not something is a science.

Can we not think of not just one, but many, "sciences" that we don't doubt for a second is a science...yet in that field of study we don't know everything yet, and things don't discreetly work like some kind of clockwork or we can't understand or predict it all...yet it's still a science. That isn't what makes something a science.

That's like a "theory" simply being a field of study, or the best explanation so far for something...yet someone says that it's "just" a theory and no good because it isn't composed of perfect complete truth, or speaks of it as if it has to be proven or disproven. Doesn't make sense. Doesn't apply.
 IgorFrankensteen
Joined: 6/29/2009
Msg: 105
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Posted: 3/13/2014 9:18:17 PM
What I'm getting at, and concerned about, is that hand in hand with the rise of "business as science," has been the parallel idea that using the idea that if it IS a "science," that it is also by that fact, amoral, and that it has nothing to do with PEOPLE. That whatever results, positive or negative, is the way it is supposed to be, because that's the way that science works.

The version of "Business Science" that is plaguing us, isn't science in the way that you refer to the word. It's more of a cult following than anything else, most of the time. Time and again, I've seen people drive themselves and their businesses and others right over a cliff, because they decide that since it is a Science, that that means no one should question the procedures or the decisions or the preset formulas that the Business Science majors have worked out in advance.

It's not what Business Science SHOULD be about that I oppose, it's what it has BECOME that I know is bad.
 drinkthesunwithmyface
Joined: 3/27/2012
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Posted: 3/14/2014 4:01:50 AM
^ Well, hell, what you're really talking about there is a bad attitude and wrong-thinking about "science" in general, which is a problem with people about science in general...and, what it sounds like you are describing is not anything "sciencey" but instead "religious". The religious-mindset-impulse, whether manifested by the presence of any "formal institution of religion" or not, is really about being irresponsible intellectually, and being dogmatic..."dogmatic" being any time or way in which you blindly think or do something "just because" without questioning it, and "irresponsible intellectually" being basically the same thing. That's what really defines any and all religion, and that's what really defines what's wrong with it, and that's one of the most basic things at the heart of what goes wrong in the Human world most of the time, and that's what shows why religion is bad because it's encouraged and infected this religious-mindset-impulse in the human psyche that waits to spring forward in any human endeavor if one isn't vigilant against it.
 Demigod1979
Joined: 12/4/2011
Msg: 107
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Banks and the financial system
Posted: 3/14/2014 6:18:21 PM
What results in a more stable, less 'out of hand' system: taking only such risks as you yourself will bear the consequences, or taking risks without consequences to yourself? Being paid inducements to rack up debt and take short-term risks, or having no such incentives?

The big illusion that caused the financial system was that risk had been eliminated. That is, people believed that the financial wizards at Wall Street had figured out a way to make previously risky investments safe, even for things like subprime mortgages (by packaging these up into different tranches and spreading it around the market they believed that they had reduced the risk to the point of irrelevance). Unfortunately, the end-result was that risk infected the entire financial system and almost brought the entire system down.

The thing is, even those investors who recognized these investments were baloney still had to trade them, since the profits coming from them were so enormous (otherwise, those profits would go to their competitors, who would then have a competitive edge). When there's a strong bubble forming then it's difficult for anyone to stop it, even if they wanted to. After all, even those who recognize that they are taking on risky investments believe that they're smart enough to get out before these investments blow up (this is a collective illusion among the investment community).

Again, free-market economics only works if everyone had perfect knowledge and was perfectly rational. In other words, investors would have to be able to accuracy measure risk at all times and would not be subject to emotions. This is nothing close to the truth. The mortgage-backed securities that the banks created were so complex that no one could accurate measure their risk, and people are always falling for the latest fad (just look at the dotcom bubble). And of course even for those companies that were bought out, bailed out or went belly-up during 2008, the executives of those companies made a fortune (if their goal was to make a lot of money for themselves then they succeeded admirably).

Another part of the confusion comes from the fact that the loan institution and the borrowers are using different TIMES to talk about "money." From the borrowers point of view, since the bank or other loan institution doesn't take actual cash from their reserves and hand it to them, they both perceive, and go about their business as though the bank DID print cash money for them to spend. But from the banks' point of view, they did nothing of the kind. They gave the borrowers part of his own future profits to use today, in order to reach and get a direct hand on that future money tomorrow. And they use their existing reserves as a "buffer" of sorts, in case they misjudged the borrower's future wealth creation, or he dies or absconds with the money borrowed from the future by the bank.

The loans that the banks make have absolutely nothing to do with their future profits. Under the rules of fractional-reserve banking, banks can loan money up to the multiplier limit (so if the limit is 9 then the banks can loan/create up to 9 times the amount of their reserves). Furthermore, banks can only legally create money based on the value of a loan contract; since a loan contract is a legally-binding promise to pay, it has real value once it is signed.
 IgorFrankensteen
Joined: 6/29/2009
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Posted: 3/15/2014 7:41:39 AM

The loans that the banks make have absolutely nothing to do with their future profits.


I didn't say that banks are making loans against their OWN future profits, they are making loans against the BORROWERS future wealth.
 drinkthesunwithmyface
Joined: 3/27/2012
Msg: 109
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Posted: 3/15/2014 1:35:46 PM
Anybody wanna try an experiment? Probably nobody will be interested, or enough people participate to make it work. But I'm gonna try anyway. It's something that I'd like to do on a lot of subjects, but it just doesn't go anywhere those few times I think I'll try it, for lack of honest intelligent participation or interest, or it just falling apart from a lack of any real organization of posting.

Concerning what we'll call for the moment "financial and economic science", let's do a study, starting over from a beginning, and throwing away all present terminology and current understandings and opinions or practices. Ideally, as we go along, we'll connect whatever we learn, demonstrate, or reveal to present real-life or history...but I don't think the discussion will even go that well anyway.

Ok...imagine we are part of a group of exactly 1,000 people (enough for certain dynamics to emerge, but small enough to make developments transparent?), stranded somehow on a big island, with decent natural resources, and no signs of civilization or rescue within reach. We begin to do the various things necessary for surviving and building some kind of life for ourselves on our little mysterious island. Everyone...or maybe not everyone...begins to do this-or-that for themselves or for the group, towards obtaining or achieving whatever needs to be done or had...and naturally at some point a degree of barter-and-trade, and cooperation (and perhaps some conflict or competition), begins to take place.

From that point, I'd like for us to take the hypothetical state of the group through the stages, the developments, of how you think we'd do things, concerning our island economics, and what structure of how we operate begins to take form...and the pluses and minuses of that structure, and how we might attempt to modify that structure along the way to what ends.
 gingerosity
Joined: 12/10/2011
Msg: 110
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Posted: 3/15/2014 8:14:23 PM
Demi

Again, free-market economics only works if everyone had perfect knowledge and was perfectly rational. In other words, investors would have to be able to accuracy measure risk at all times and would not be subject to emotions. This is nothing close to the truth. The mortgage-backed securities that the banks created were so complex that no one could accurate measure their risk, and people are always falling for the latest fad (just look at the dotcom bubble). And of course even for those companies that were bought out, bailed out or went belly-up during 2008, the executives of those companies made a fortune (if their goal was to make a lot of money for themselves then they succeeded admirably).

You seem to have missed the point that in the non-free market system we're talking about, the limited liability laws were substantially to blame for the high risk-taking behaviour. If you're not going to be personally liable for losing but you're going to reap a lot of reward for winning, there is a huge incentive to gamble. The link I gave in message 128 should have explained it, or Igor's message 131.

I don't know where you get the perfect knowledge and perfect rationality requirement thing from. It doesn't fit in with my understanding of a free market. In a free market people are free to buy and sell wherever and whenever they want. They bear all responsibilities and consequences, so they have an incentive to do their homework and not take more risk than they're willing to bear. Knowledge and rationality are not required, but they do have value. The question is, is that a good or a bad thing?

Drink
I'd have many different continents of millions or billions of people. No need to simplify things. Each one starts with a slightly different system used now or in the past. Migration, reforms, wars and revolutions do their thing to pull down systems people don't like, and to bring in new systems borrowing from desirable systems, with random differences. Over time, all the systems become vastly more desirable to live in compared to when they started out through random mutation and natural selection.

This is why I think discussing what systems or parts of systems are desirable is great, but 'knowing' what system is best, is wrong. As long as we are trying to learn and improve, we'll be fine.
 drinkthesunwithmyface
Joined: 3/27/2012
Msg: 111
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Posted: 3/16/2014 6:57:59 AM
Would this provide any food for discussion? - The Ascent of Money: A Financial History of The World by Niall Ferguson.

http://www.youtube.com/watch?v=4Xx_5PuLIzc
 IgorFrankensteen
Joined: 6/29/2009
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Posted: 3/16/2014 11:15:23 AM
The inherent problem with idealized, TRUE "free market capitalism," is in it's fundamental requirement that all information about what is going on, be available in a timely manner to everyone.

Even the most talented schemers and scalawags would have a hard time pulling off destructive market distortions, if what they were ACTUALLY offering was accurately known to their customers, in exchange for EXACTLY what they were receiving in return. When "free market" pushers present their little example stories on how a free market is self-balancing, they invariably ignore either the inability of imminent victims to know what is going on, or they blithely step over the bodies of the people who will suffer, as the "balancing" information is recognized and acted upon.

Free market advocates like to tell cute cartoonish stories about how the market will naturally balance itself, as "bad" businesses are easily seen to BE bad, and go under due to competition from the better ones. But their stories are just cartoons.

Simple example: in the days before food markets were regulated by the government, the way that the "free market" achieved balance when an unscrupulous or incompetent business began selling tainted food, was that PEOPLE WOULD DIE. The way that the business was recognized to have been incompetent or intentionally fraudulent, was via a large number of people suffering. Only then, would the "balancing" that the free-marketers wax rapturously about would take place, and the business would go under, because people would cease buying from them. Even then, if all of the local food processors were equally incompetent (which was all too common), there would be no way for everyone to even KNOW that bad practices were the cause of the deaths, so all of the businesses would continue selling poisoned products.

THAT is the kind of world that "unfettered markets" advocates want us all to return to.
 Demigod1979
Joined: 12/4/2011
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Posted: 3/16/2014 4:41:42 PM

I don't know where you get the perfect knowledge and perfect rationality requirement thing from. It doesn't fit in with my understanding of a free market. In a free market people are free to buy and sell wherever and whenever they want. They bear all responsibilities and consequences, so they have an incentive to do their homework and not take more risk than they're willing to bear. Knowledge and rationality are not required, but they do have value. The question is, is that a good or a bad thing?

It's all about having a stable economy. One of the ideas of the free market system is that rational self-interest can, by itself, preserve the markets and keep the economy stable (this is one of the reasons why free market advocates so oppose government regulation/intervention). Among the many who have come up with rationales for this idea is mathematician John Nash, who won the Nobel prize in economics for his "Nash equilibrium", which showed how non-cooperative and selfish actions can lead to stability. However, even Nash admitted that the assumptions made in his models do not always reflect real life (his equations depend on the players having knowledge of all other market participants and always choosing the most rational, self-preserving strategy based on that knowledge). It should go without saying that if market participants only have partial knowledge, or choose to make a non-rational/emotional choice then the equilibrium is lost. And as the business cycle shows, these things have a tendency to snowball (e.g., if someone is doing well flipping houses then others will have the courage to do the same). My thinking is that the laissez faire system that people like Friedman endorsed are, more often than not, prone to economic crashes, and that strong government regulations are needed to prevent market participants from taking undue risks.
 flyguy51
Joined: 8/11/2005
Msg: 114
Banks and the financial system
Posted: 3/17/2014 10:06:07 AM
Gingerosity:

Being downunder I have been spared the GFC, and the politics of GFC.

You might want to ask yourself how your country has been spared the majority of the crisis.
 gingerosity
Joined: 12/10/2011
Msg: 115
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Posted: 3/19/2014 5:32:33 AM
Drink
Thanks, will watch it later. 4 hours is a lot to take in. This one is only 6 minutes https://www.youtube.com/watch?v=LCRNI04tnN8

Igor

Simple example: in the days before food markets were regulated by the government, the way that the "free market" achieved balance when an unscrupulous or incompetent business began selling tainted food, was that PEOPLE WOULD DIE. The way that the business was recognized to have been incompetent or intentionally fraudulent, was via a large number of people suffering. Only then, would the "balancing" that the free-marketers wax rapturously about would take place, and the business would go under, because people would cease buying from them. Even then, if all of the local food processors were equally incompetent (which was all too common), there would be no way for everyone to even KNOW that bad practices were the cause of the deaths, so all of the businesses would continue selling poisoned products.

THAT is the kind of world that "unfettered markets" advocates want us all to return to.

Not really. The argument is well made, but the objection to this kind of argument isusually that it doesn't count the good effects of free markets that we don't currently see, only the bad effects that we would see. The net effect is what we need to know. How many people die of starvation becuase the cost of food is too high, perhaps because of regulations, tariffs, etc? What is the nutritional content of the foods that people can afford, and what diseases are therefore more abundant? How many deaths do the food regulations actually prevent?

These questions are not a counter-argument, they are just questions to illustrate the point that we need more information. The statement 'absence of food regulations results in fewer deaths than presence of food regulations' is a testable hypothesis. On what evidence shall we rejected it?

On a related note, when did we decide that 'numbers of deaths' is the sole metric we must use to determine the desirability of an economic system? Does freedom, equality of opportunity, equality of results, happiness, and whatever else you want to include need to be weighed up as well? What good would it do to have a world of misery where no-one dies before 100? Not much, so obviously we need to take into account other factors affected by system changes as well.

Can anyone here really say they have done in-depth study of ALL of the overt and hidden consequences on every desirability factor in considering whether this system vs that system is better? I certainly haven't, that's why I don't apologise for trying to keep an open mind.

Demi

One of the ideas of the free market system is that rational self-interest can, by itself, preserve the markets and keep the economy stable (this is one of the reasons why free market advocates so oppose government regulation/intervention). Among the many who have come up with rationales for this idea is mathematician John Nash

I've never heard anyone use an argument from stability or mention Nash equilibria when discussing these things. It is always about what effects do we observe in the real world.

My thinking is that the laissez faire system that people like Friedman endorsed are, more often than not, prone to economic crashes, and that strong government regulations are needed to prevent market participants from taking undue risks.

What evidence have you used to come to that conclusion? We've just been discussing how the 20th and 21st century examples such as depressions and financial crises occurred within regulated systems, so in my view are not particularly valid data to use for examining free market behaviours.

You're also assuming that economic crashes are bad. I may agree with you, but our methods may differ. What criteria are you measuring? Inequality, unhappiness... what? We can't just assume these things if we're going to do this properly.

Flyguy

You might want to ask yourself how your country has been spared the majority of the crisis.

As far as I have been able to tell it was mainly becuase the crisis was concentrated in North America and Europe, and as you can see here http://topforeignstocks.com/2012/10/06/australias-major-trading-partners-in-2012/
all of Europe and the Americas account for only 8% and 6% of our exports respectively. It's true our biggest trading partner, China, did come off double-digit growth in the crisis, but it's still growing at around 7.5%. As well as the coincidence of favourable geography and geology, we were fortunate to have a cultural legacy of egalitarianism and distrust of authority due to our imperial convict past that helped us evolve some differences in governance. We required our banks to have higher fractional reserves than you guys did, and when the bubble burst we had single-digit government debt compared to your 60-odd% of GDP (now more like 100%, isn't it? Ouch!).
 flyguy51
Joined: 8/11/2005
Msg: 116
Banks and the financial system
Posted: 3/19/2014 7:41:12 AM

As far as I have been able to tell it was mainly becuase the crisis was concentrated in North America and Europe, and as you can see here http://topforeignstocks.com/2012/10/06/australias-major-trading-partners-in-2012/
all of Europe and the Americas account for only 8% and 6% of our exports respectively. It's true our biggest trading partner, China, did come off double-digit growth in the crisis, but it's still growing at around 7.5%. As well as the coincidence of favourable geography and geology, we were fortunate to have a cultural legacy of egalitarianism and distrust of authority due to our imperial convict past that helped us evolve some differences in governance. We required our banks to have higher fractional reserves than you guys did, and when the bubble burst we had single-digit government debt compared to your 60-odd% of GDP (now more like 100%, isn't it? Ouch!).

Yeah, you are pretty much correct-- although Canada also avoided the crisis, so that goes against the idea that being in North America means being in the crisis. So, a bit of luck, a lot of preexisting prosperity, and common-sense banking regulations. To that last bit, include "preventing the creation of mega banks." Canada and Oz have similar principles in banking. It was not through having more free market principles or whatever you are espousing here.

Demi:

Looking into fractional reserve banking just a little bit here-- I see that money is "created" not when a loan is issued, but when that money is redeposited into another bank (or the same one, even). It is then counted as assets twice-- once in two banks or twice in one bank. I see how that is created in one sense (counted twice) but not created in the central bank sense. Even 100% reserve banking does this, though, just not with its demand deposits (checking account $).

Perhaps this is what you have been trying to say all along, but it just didn't make much sense the way you were explaining it-- "loans creating money and paying back loans 'un creating' money."
 IgorFrankensteen
Joined: 6/29/2009
Msg: 117
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Posted: 3/19/2014 2:31:17 PM
gingerosity:


The argument is well made, but the objection to this kind of argument isusually that it doesn't count the good effects of free markets that we don't currently see, only the bad effects that we would see. The net effect is what we need to know. How many people die of starvation becuase the cost of food is too high, perhaps because of regulations, tariffs, etc? What is the nutritional content of the foods that people can afford, and what diseases are therefore more abundant? How many deaths do the food regulations actually prevent?


Doesn't count the good effects? Net effect? I take it you support the idea that "if some people die, but some get rich, everything balances out." I can'tr read "net effect" any other way, since it has never been shown that requiring food processors to sell clean food, caused starvation and death.

I disagree 100% with your reasoning in this response. My point is, that if someone insists on and gets a 100% "free market," we already know from prior experience that we WILL see deaths.

You are suggesting that people who choose to have regulation and other government-organized ways of doing things, will either choose on purpose to let people starve, or that the act of making sure that food is not poisonous REQUIRES that starving people be ignored. That is abject nonsense. You also imply that nutritional content of food will be NEGATIVELY impacted by requiring that it not be poisonous, and that food industries follow best practices and so forth. There is NO EVIDENCE WHATSOEVER that this has EVER happened.

So: lack of proper regulation HAS resulted in horrible conditions; regulation has NOT resulted in the things you describe.

Where is this "net effect" you refer to so vaguely?
 Demigod1979
Joined: 12/4/2011
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Posted: 3/19/2014 5:37:28 PM

I've never heard anyone use an argument from stability or mention Nash equilibria when discussing these things. It is always about what effects do we observe in the real world.

Stability is a big part in any debate about competing economic theories (a system that isn't stable obviously isn't worth anything). I mean, the entire point of having an entity like the Federal Reserve is to maintain stable prices. And if you haven't heard about the Nash equilibrium then you have some homework to do ;)


What evidence have you used to come to that conclusion? We've just been discussing how the 20th and 21st century examples such as depressions and financial crises occurred within regulated systems, so in my view are not particularly valid data to use for examining free market behaviours.

And the fact that the two greatest financial disasters happened during a time of lax government regulations doesn't suggest something? The fact that the financial inventions that almost brought the system down in 2008 were deliberately non-regulated derivatives?


You're also assuming that economic crashes are bad. I may agree with you, but our methods may differ. What criteria are you measuring? Inequality, unhappiness... what? We can't just assume these things if we're going to do this properly.

What criteria? Well, just the fact that the Great Depression led to millions of people being thrown into abject poverty (and may have also been one of the triggers for World War II, which led to the deaths of millions of people). The Great Recession of recent times also led to millions of people losing their jobs (could have been much worse, and thankfully wasn't). Frankly, I don't see any positives here, do you?


Looking into fractional reserve banking just a little bit here-- I see that money is "created" not when a loan is issued, but when that money is redeposited into another bank (or the same one, even). It is then counted as assets twice-- once in two banks or twice in one bank. I see how that is created in one sense (counted twice) but not created in the central bank sense. Even 100% reserve banking does this, though, just not with its demand deposits (checking account $).

It's certainly true that when you deposit into a bank, you are left with an IOU. However, since the money supply increases by the exact amount of a loan when it is issued, it is also accurate to say that issuing loans creates money (as the Wiki article explains, when a bank makes a $80 loan from $100 [$20 as reserve], a new $100 IOU is created, and the total money supply is now $180). And yes, only commercial banks duplicate deposits like this (central banks do not do this).
 flyguy51
Joined: 8/11/2005
Msg: 119
Banks and the financial system
Posted: 3/19/2014 6:38:29 PM
And the fact that the two greatest financial disasters happened during a time of lax government regulations doesn't suggest something? The fact that the financial inventions that almost brought the system down in 2008 were deliberately non-regulated derivatives?

One thing I have sadly come to learn in these sorts of things is that loyal proponents of pure, free market economics (not saying gingerosity fits this description... yet, at least) have almost limitless space with which to move the goalposts. The free market would work if... if government would get out of the way... if the government didn't bail anyone out, if countries didn't bail each other out, if this country didn't use fiat money, if no country used fiat money, if there were only 100% reserve banking, if the Fed didn't set interest rates, if the Fed were externally audited, if the Fed were abolished, if people didn't vote in regulations and social safety nets at the first sign of trouble... the list of excuses is almost endless why we don't have THE "one true" market system. It exists only in the imagination.

It's certainly true that when you deposit into a bank, you are left with an IOU. However, since the money supply increases by the exact amount of a loan when it is issued, it is also accurate to say that issuing loans creates money (as the Wiki article explains, when a bank makes a $80 loan from $100 [$20 as reserve], a new $100 IOU is created, and the total money supply is now $180). And yes, only commercial banks duplicate deposits like this (central banks do not do this).

I think it was the phrasing you used that caused my confusion. Judging from the posts here, I wasn't the only one. A better way to put it is that when one gets a loan, both the borrower and the lender can claim to possess the amount in question-- it is counted twice at that moment. If that money is redeposited, then it is counted as actual assets twice as well. But as far as money creation, that is the Fed. And currency (paper and coins) creation is the Treasury. These are important distinctions to make for the sake of clarity.

So, what do you suggest as a better way, then?
 drinkthesunwithmyface
Joined: 3/27/2012
Msg: 120
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History
Banks and the financial system
Posted: 3/20/2014 3:38:20 AM
I used to have a perhaps naive idea that there should be the following rules about two particular things, and that this would go well towards making the system work better - 1) You cannot have a business larger than a certain size. For example, either no chains, or a very low limit on such. Of course, this might present the problem of several businesses still being owned or run by one party unofficially and illegally; 2) Money is not sold. In other words, if someone loans someone else money, the loan is paid back according to whatever otherwise practical arrangements, but with no interest. If it costs someone anything to loan, then they just don't loan. And of course if you don't repay a loan, there are simple strict consequences and solutions. And, whenever credit is extended, this can be a slightly different dynamic, but still with likewise simple and strict consequences and solutions.

These two things certainly conjure up many thoughts and ideas about why or how it wouldn't work, but also why and how it could be made to work...tweaking everything else accounting for these...and going down those roads might be fun and educational.
 gingerosity
Joined: 12/10/2011
Msg: 121
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History
Banks and the financial system
Posted: 3/20/2014 4:02:39 AM
Igor

Doesn't count the good effects? Net effect? I take it you support the idea that "if some people die, but some get rich, everything balances out." I can'tr read "net effect" any other way, since it has never been shown that requiring food processors to sell clean food, caused starvation and death.

You know that I support a method, not a conclusion. I am interested in discussing ideas and learning, not in waving a flag for a team. I said "the objection is usually"... not "my objection is usually". Here is evidence to support my claim that this is the usual objection. https://www.youtube.com/watch?v=EU_4vanP04I

I disagree 100% with your reasoning in this response. My point is, that if someone insists on and gets a 100% "free market," we already know from prior experience that we WILL see deaths.

'Knowing from prior experience' isn't evidence.

You are suggesting that people who choose to have regulation and other government-organized ways of doing things, will either choose on purpose to let people starve, or that the act of making sure that food is not poisonous REQUIRES that starving people be ignored. That is abject nonsense. You also imply that nutritional content of food will be NEGATIVELY impacted by requiring that it not be poisonous, and that food industries follow best practices and so forth. There is NO EVIDENCE WHATSOEVER that this has EVER happened.

On purpose or not is irrelevant. Actions have consequences. On "net effect", I was asking whether you'd considered all of the consequences. Have you? Have the regulations actually decreased food related deaths since they came in? For each bad food product that is blocked by the regulations, how many good ones are also blocked? What effects would those no-shows have had on health & nutrition, food prices, employment, environment...? How many lives would have been saved if the money that had been spent on food regulations was put into something else? Give me but a glimpse of the rigour of your analysis and I will agree wholeheartedly that your conclusion is well supported by the evidence.

ps. did you agree with the idea that we need to look at more than just mortality, and if so, what else do you want to measure? Usually the argument is about whether equality of opportunity (your opponenets) and equality of results (your compadres) is more important.

Demi

Stability is a big part in any debate about competing economic theories (a system that isn't stable obviously isn't worth anything).

Why not? And what do you mean by stable? What frequency and amplitude of fluctuation in the key varibales is acceptable? What are the key variables? We have to know what we're aiming for before we work out how to get there.

And the fact that the two greatest financial disasters happened during a time of lax government regulations doesn't suggest something? The fact that the financial inventions that almost brought the system down in 2008 were deliberately non-regulated derivatives?

Perhaps there is a correlation between lax government regulations and financial disasters. Is it a causal correlation? Is there a trend demonstrating that as government regulations become less lax, financial disasters become less frequent and/or severe? It may well be the case. I don't accept it as a given until I've seen the evidence. Especially not when I know that there were government regulations in place such as limited liability and tax incentives favouring high debt that were probably not stabilizing influences.

What criteria? Well, just the fact that the Great Depression led to millions of people being thrown into abject poverty (and may have also been one of the triggers for World War II, which led to the deaths of millions of people). The Great Recession of recent times also led to millions of people losing their jobs (could have been much worse, and thankfully wasn't). Frankly, I don't see any positives here, do you?

Poverty>millions, unemployment>millions and war>millions. That is good, but is there anything else to add to the list before we use it? My intent is to say that any system that increases the frequency and/or severity of Poverty>millions, unemployment>millions, war>millions is not preferable to systems which decrease those things, since you appear to hold the crises as the key to determining preferential systems. Would you agree with that? If so, then it should be relatively simple to narrow down which systems are preferable according to your selection criteria.

Flyguy

One thing I have sadly come to learn in these sorts of things is that loyal proponents of pure, free market economics (not saying gingerosity fits this description... yet, at least) have almost limitless space with which to move the goalposts.

The free marketeers I have taken the time to listen to refer to the most free markets for which they have evidence. Friedman refers to Britain and Japan in the mid 19th century and Hong Kong in the 20th century as his most free markets, certainly as far as duties, tariffs and trade regulations. I haven't verified his claims that these are the most valid examples. If you go back a few posts of mine, I confess that it seems to be quite difficult to get data on free markets from which we may draw valid conclusions. As Demi suggests we can get some local information on the regulation vs disasters curve, though even this is invalid for extrapolation beyond the extent of the data range. It may well be that there is an increase in disasters as regulation decreases, which then decreases again with even less regulation.

I'm frankly surprised that anyone has firm opinions on such a complicated subject when there is so much that needs to be taken into account to come to any balanced and objective conclusions. My comment earlier about being spared the politics of the GFC was becuase I think you guys have probably been copping a lot of crap and I can sympathise. Just don't fall into the trap that becuase hitler was a vegetarian, therefore vegetarianism is bad. If you have interesting stuff to share I'd like to see it.

https://www.youtube.com/watch?v=bJ8Kq1wucsk
For example, this Ted talk is very good on how we rationalise advantage. There is a decent socialist argument that could be made with it, even though the conclusion is hinting at a free market solution.
 IgorFrankensteen
Joined: 6/29/2009
Msg: 122
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History
Banks and the financial system
Posted: 3/20/2014 5:03:58 AM

Have the regulations actually decreased food related deaths since they came in?


Yes.


You know that I support a method, not a conclusion.


I have no idea what this means. It seems to mean something along the lines of "I support a way of doing things, and take zero responsibility for what happens to others as a result."


I said "the objection is usually"... not "my objection is usually". Here is evidence to support my claim that this is the usual objection.


You presented things as though it IS your objection. If it is not, then say what YOUR objection is.


'Knowing from prior experience' isn't evidence.


No, that is the very essence of "evidence."


For each bad food product that is blocked by the regulations, how many good ones are also blocked?


No one anywhere that I have heard of has ever presented any examples of such. Can you name any, or are you making up a mystery food to try to deflect attention away from the poisonous stuff? Unless you are going to claim that somehow poisonous food, and food prepared for market in filthy conditions has been shown to enhance public health.


On purpose or not is irrelevant. Actions have consequences. On "net effect", I was asking whether you'd considered all of the consequences. Have you?


Yes, I have. That is precisely what I said. I studied actual history, so I KNOW about the way life was before we set up safety procedures, and established health requirements for producers. I also know recent history, wherein every day that it is found that producers somewhere in the world are NOT required to make health and safety a priority, that they discard those values in favor of profits.

It is you, you seem to want to avoid connecting consequences with "methods."


The free marketeers I have taken the time to listen to refer to the most free markets for which they have evidence. Friedman refers to Britain and Japan in the mid 19th century and Hong Kong in the 20th century as his most free markets, certainly as far as duties, tariffs and trade regulations.


Those examples are not "free market" systems. Those are "free trade" systems, which are almost entirely different. And when "free trade" people talk, they also tend to ignore the overall situation they propose, and focus entirely on the tiny aspect of final cost of goods.

Yes, it is true, that if a producer can make his stuff in the cheapest way possible, without regard to his workers health, the cleanliness of his facilities, the damage done to his neighbors by his resource extraction methods, the quality of his resources, the quality of the goods produced, and so on, the final selling price CAN certainly be reduced. As with the "free market" fanatics, most of the modern "free trade" fanatics, want us to take advantage of the lack of attention to health and morality in overseas countries, in order for the rest of us to have cheaper stuff to buy, and higher profits for them to import.. and they want to deflect the fact that real damage is being done to humanity, by pretending that because it was done by the foreigners they hired, instead of directly by themselves, that therefore they aren't responsible for any of the messes.

On a side note, just as not ALL regulations are done correctly or for the right reasons, not all tariffs and other trade regulations are done for the best of reasons. But the fact that the very same kind of people who want to sell us poisoned food and defective death trap cars, manufactured by slave labor overseas, ALSO want to use government to keep their competition from offering something better than they do, and undercut their business...doesn't mean that the entire idea of regulations is wrong.

We used to have a poster here who did take responsibility for supporting Free Markets. I questioned him carefully, trying to find out what he really believed, because I had never run into anyone who ACTUALLY wanted "free markets" at all: just lots of people who wanted to do something in particular that current regs stopped them from doing, and so they wanted to overturn EVERYTHING in a fit of laziness and personal greed. I have never yet run across even a single "free market" proponent who DIDN'T assume that everyone who is currently "playing nice" would continue to do so without the presence of legal requirements to do so, and this guy proved to be no different. Shortly before he moved on (hopefully because he found a mate), he admitted that what it all really boiled down to, was that he personally wanted to conduct a loan business in a different country, and that country had regulations requiring him to do more work, and take more responsibility for his actions than his home country did, which meant limiting his profits too much. He really DID like regulated markets, he just wanted them to be regulated in a way that catered to his own profits.
 gingerosity
Joined: 12/10/2011
Msg: 123
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History
Banks and the financial system
Posted: 3/20/2014 7:18:52 AM
Drink:

1) You cannot have a business larger than a certain size. For example, either no chains, or a very low limit on such. Of course, this might present the problem of several businesses still being owned or run by one party unofficially and illegally;

Not-quite-free-marketeers would agree with the aim, but point out that big business and big government tend to go together. It is the regulatory environment that promotes the big corporations. I don't know what data they have, but I thought it was an interesting hypothesis.

2) Money is not sold. In other words, if someone loans someone else money, the loan is paid back according to whatever otherwise practical arrangements, but with no interest.

Don't the muslims do that? Should be plenty of data around to see if it is a good idea. I suspect it would be harder to get loans, but that might not be a bad thing. It should also increase other investments if no interest is obtained by leaving money in a bank account.

And of course if you don't repay a loan, there are simple strict consequences and solutions. And, whenever credit is extended, this can be a slightly different dynamic, but still with likewise simple and strict consequences and solutions.

Yep, definitely has a Saudi feel. When credit is extended... why would people bother to extend credit? What's in it for them? Is it a government plan or are we relying on some kind of community spirit/proven oil reserves?

Me: I support a method, not a conclusion.
Igor:

I have no idea what this means. It seems to mean something along the lines of "I support a way of doing things, and take zero responsibility for what happens to others as a result."

I was talking about the scientific method. You're making factual claims and wondering why I'm asking for evidence before I believe you.

You presented things as though it IS your objection. If it is not, then say what YOUR objection is.

I don't have an objection. I'm just learning stuff by discussing ideas and getting other people's perspectives. Isn't that the point of a forum?

Me: 'Knowing from prior experience' isn't evidence.

No, that is the very essence of "evidence."

Ok smarty. I meant [the claim of] 'knowing from prior experience' isn't evidence. You still haven't provided a single data point to support your claims. No references, nothing. Just 'believe me because I say it is so'.

Me: For each bad food product that is blocked by the regulations, how many good ones are also blocked?

No one anywhere that I have heard of has ever presented any examples of such. Can you name any, or are you making up a mystery food to try to deflect attention away from the poisonous stuff? Unless you are going to claim that somehow poisonous food, and food prepared for market in filthy conditions has been shown to enhance public health.

How could I name one if they were prevented from ever making it to market? That's the point, we never know about them. That Friedman video I linked to in my last reply to you did go into examples of this exact question with the drug regulations. What I'm talking about is the false positives. Things which are fine but which are blocked anyway, either directly because of excess caution in setting or interpreting safety thresholds, or indirectly by the effort and expense for (small) businesses to go through registration processes.

I studied actual history, so I KNOW about the way life was before we set up safety procedures, and established health requirements for producers. I also know recent history, wherein every day that it is found that producers somewhere in the world are NOT required to make health and safety a priority, that they discard those values in favor of profits.

Yes, that is what you said. But I asked for evidence, not opinion or anecdote.

Those examples are not "free market" systems. Those are "free trade" systems, which are almost entirely different. And when "free trade" people talk, they also tend to ignore the overall situation they propose, and focus entirely on the tiny aspect of final cost of goods.

Fair enough, but I didn't say they were free market systems. I said Friedman used them as the nearest thing to free markets which we had data on, and that I hadn't verified that. Do you know of any more complete examples of free market systems we can examine?

As with the "free market" fanatics, most of the modern "free trade" fanatics, want us to take advantage of the lack of attention to health and morality in overseas countries, in order for the rest of us to have cheaper stuff to buy, and higher profits for them to import.. and they want to deflect the fact that real damage is being done to humanity, by pretending that because it was done by the foreigners they hired, instead of directly by themselves, that therefore they aren't responsible for any of the messes.

How much of that is the responsibility of the consumer though? We buy fair trade and boycott offending companies, not becuase we're forced to but because we have decent ethical and social values. The internet and social media are powerful tools for this kind of sharing of information. Look at the recent backlash against particular companies in the garment industry for exploiting bangladeshi workers. There are market forces that go beyond mere dollars.

On a side note, just as not ALL regulations are done correctly or for the right reasons, not all tariffs and other trade regulations are done for the best of reasons. But the fact that the very same kind of people who want to sell us poisoned food and defective death trap cars, manufactured by slave labor overseas, ALSO want to use government to keep their competition from offering something better than they do, and undercut their business...doesn't mean that the entire idea of regulations is wrong.

That seems like a sensible sentiment to me. The question arises then, what are the types of regulations that are both required and are likely to acheive their stated objectives? I think we need to know exactly where market failure occurs - is it only in third-party effects such as pollution as Friedman believes? Or do we need it to provide information that we otherwise would not be able to obtain? To mandate safety requirements, to test efficacy, to impose tariffs, restrictions on competition, price controls... where can we draw the lines between which we must test individual propositions on a case-by-case cost-benefit basis?

I have never yet run across even a single "free market" proponent who DIDN'T assume that everyone who is currently "playing nice" would continue to do so without the presence of legal requirements to do so, and this guy proved to be no different.

That's just silly, of course there would be more people who don't play nice. I would have thought they would argue that even though there are more people who don't play nice, those people have significantly less or no ability to use monolithic power of government for their own nefarious purposes.

He really DID like regulated markets, he just wanted them to be regulated in a way that catered to his own profits.

And that is the big problem if you want an objection from me (objection with society). It is quite sickening to see in the friedman discussions when industry, politicians, academics and unions admit that no matter whatever happens to anyone else, the most important thing is to make sure they are protected.
 IgorFrankensteen
Joined: 6/29/2009
Msg: 124
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History
Banks and the financial system
Posted: 3/20/2014 5:01:21 PM
Okay, since you aren't presenting any of your own opinions, and are just doing research, I will leave you to do that on your own.

Look up the history of any of your favorite government regulations, and you will find that they were all created in response to some situation where private industries did SOMETHING that upset voters enough that legislators were pushed to act (or they saw vote-profits in acting, at least). In a few occasions, you will find that especially wealthy and or powerful people, managed to arrange for some regulations to be put into place, to restrain their competition.

I suggest you start your personal research by reading about the reason why the Meat Packing industries were subjected to strong Health regulations back in the early 20th century. It's easy enough to read about, and will serve as a straightforward example that you called for.

As for your imagining that regulations MUST have resulted in something wonderful being prevented, I will leave you to that as well. Trying to prove to someone that something DIDN'T happen, isn't logically possible, since it requires that ALL of what happened be certified as whatever it was, and further show proof that what DIDN'T happen, WOULD have happened, had it not been for some specific preventive. It's a game some people play to pretend to win arguments, when all they are doing is saying "yeah, but what if? Aha!"
 Demigod1979
Joined: 12/4/2011
Msg: 125
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History
Banks and the financial system
Posted: 3/20/2014 7:35:43 PM

Why not? And what do you mean by stable? What frequency and amplitude of fluctuation in the key varibales is acceptable? What are the key variables? We have to know what we're aiming for before we work out how to get there.

Stable, as in a system that does not result in economic crashes. For the US, that would be the Great Depression and the Great Recession, both of which exceed the technical definition of a recession by significant margins.


Perhaps there is a correlation between lax government regulations and financial disasters. Is it a causal correlation? Is there a trend demonstrating that as government regulations become less lax, financial disasters become less frequent and/or severe? It may well be the case. I don't accept it as a given until I've seen the evidence. Especially not when I know that there were government regulations in place such as limited liability and tax incentives favouring high debt that were probably not stabilizing influences.

Evidence? The very fact that the entire financial system was almost destroyed by unregulated financial instruments is proof positive that lax regulations are (one of the) causes of financial crisis (you'd have to be willfully blind not to see it!). There is no other explanation for the monumental financial crisis that unfolded in 2008 (if you were in the market like I was, then you'd know that it was an extraordinary event... WHEN DO YOU EVER SEE THE YIELD ON A T-BILL GO NEGATIVE???). No amount of cheap credit would have caused such a crisis, with banks writing off several billion dollars every quarter! Of course cheap credit from low interest rates might have added fuel to get the credit bubble going, but that decision was also made by a private bank, the Federal Reserve.


Poverty>millions, unemployment>millions and war>millions. That is good, but is there anything else to add to the list before we use it? My intent is to say that any system that increases the frequency and/or severity of Poverty>millions, unemployment>millions, war>millions is not preferable to systems which decrease those things, since you appear to hold the crises as the key to determining preferential systems. Would you agree with that? If so, then it should be relatively simple to narrow down which systems are preferable according to your selection criteria.

You asked for criteria that would make an economic crisis a bad thing, and I gave it to you (I actually found it funny that you would ask for such a thing - it's like asking what 1 + 1 is :p). Economic crises, like the one causing the Great Depression, did all of these things, and no one in their right mind would consider it anything other than bad. Like I said before, lax government regulations can be one of the causes of this, which means that strong government regulations are needed to keep the market stable (private-sector bankers alone cannot be trusted to keep the economy stable).
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