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Mukesh Adenwala

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Yes, we can end present economic crisis if we try to solve it with something more than what I would call a Keynesian prayer.

Let me start with a cryptic, if slightly inaccurate, anatomy of the crisis:
Many banks made loans to sub-prime borrowers and expected to be repaid from rising housing prices. When prices failed to rise and even fell, they incurred huge losses. Banks foreclosed properties but presently there are no buyers.
Moreover, the banks had created a massive superstructure of varieties of CDOs and CDSs over the initial loan assets. When the loans failed, the entire superstructure increased the losses manifold. These losses were judged unaffordable and government stepped in to help the financial institutions hoping that once the economy gathers momentum, the aid given to these institutions would be repaid. As of now this hope is not likely to be fulfilled. And, not only the ability of the governments to continue supporting financial institutions in distress is greatly diminished, but ability of the governments to remain solvent has been questioned.
The crux of the problem remains the losses of the banks over sub-prime loans. If they recover the monies lent, entire superstructure of derivatives would regain much of its value and the government would regain the funds lent to the these institutions. How this can be achieved?
Presently the size of our markets are limited to affordability and willingness of the buyers to make a purchase. Foreclosed houses have no such eligible buyers at present.
However, if we allow a kind of lottery and encourage people to lose a small sum to `win' foreclosed property instead of `buying' it, there could possibly be sufficient number of punters for many of the properties. When foreclosed properties are sold, banks recover their losses. To the extent banks are able to recover their losses, the value of derivatives would be regained and losses on superstructure would also be reduced. If losses of the banks are sizeably reduced, there would be no need for government support. Economy can start functioning normally within, say, 2-3 years.

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  • Dec 20 2012: Reread Keynes's book. His ideas were for use after classical economics - Ricardian economics which were implemented before the New Deal as they have not been this time. While that is probably not politically possible in American politics now, Obama's and what Romney advocated seem only the stuff that dreams are mad of -foolish dreams- I believe. Ricardo "On Wages" is only a few pages to read. Dream On! How many silly bubbles are we dealing with No that's Mckay. If we forget everything people once knew two hundred years ago- Duh - We have real problems. Also, read Ravi Batra's book and anything you can find on carrying capacity even if its about goats.
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    Dec 20 2012: Can that be the VALIDITY or EFFECTIVITY of happiness?
    • Dec 21 2012: No, I am sure that it cannot be validity or effectivity for happiness. However, if the perceptions and expectations change, people can start working for their own version of happiness - something that is blocked in the present recessionary times. The world failed in containing undue or irrational exuberance and now it is now shying from acting to contain the negative outlook of the people too. That and that only needs to change. Beyond correcting unduly pessimistic outlook I think nothing more should be done.
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        Dec 23 2012: However
        Does economic crisis come from greed?

        Does greed come from invalid (ineffective , bad) happiness?


        (For INVALID happiness, see the 1st article, points 1-3, at https://skydrive.live.com/?cid=D24D89AE8B1E2E0D&id=D24D89AE8B1E2E0D%21283&sc=documents)
        • Dec 23 2012: Present discussion is about how to end financial crisis. Discussion on happiness is besides the point in present discussion. A separate forum for discussing what constitutes `development' was started by President Sarkozy in 2008 by establishing a commission for the purpose. However, deliberations of the commission have not gained much coverage.
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    Dec 19 2012: Mukesh, I am no economist ... I do agree with the analysis that the Keynseian theory is a risk at best and do support the Austrian approach. However, I do not see one or the other being effective until we change the manditory loan laws that Carter and Clinton initiated and Barney Franks and cohorts blessed while the ship was going down. Further the tax laws that allow the banks to claim a loss for the property at the very same time take the Feds money as a stimulus. This problem covers a lot of ground not the smallest is a growing government and expanding programs as we go broke.

    Japan is on QE 15 (I think) and the US is on QE 3 (I think) The problem is once the government starts the stimulus stuff we are stuck with it ... My opinion is that once we stop this throwing good money after bad Keynesian plan the whole house of cards will come falling down. Definately a LOSE, LOSE, LOSE situation.

    This could have been corrected at the on set .... even knowing the abayess awaiting us the politicians continued on ... we are at 16 trillion and asking for more ... someone take the checkbook away from the morons.

    If we conducted our affairs in this same manner we would be in jail ... Perhaps this should be considered for the slow learners in charge.
    • Dec 20 2012: Bob, I have done nothing more than try to address the issue of perception and expectation of the masses. One of the factors why the QEs persists and does not produce desired effect - of starting the virtuous circle in the economy - is that people's perceptions and expectations have changed. In my opinion, altered perceptions and expectations of the economic agents is one of the factors that significantly contributes to business cycles. Once the problem of bank losses is resolved, then and then only the `animal spirits' would take over the economy to next upward cycle. Once this point is agreed upon, yes, indeed there would be several micro-level decisions that would be needed to put the idea in practice.
  • Dec 19 2012: In my opinion:

    If there was a true will to end the economic crisis, it could have been turned around in the first months. For less money than has already been spent (and the spending continues by the Federal Reserve) the government could have bought all of the bad mortgages, instantly reviving the value of the toxic assets.

    The people who are really running the show have no interest in the general economy. They are interested only in maintaining the wealth of the rich. The money trail makes this clear. The actions of the government and the Federal Reserve are very successful in accomplishing their true purpose.
    • Dec 20 2012: I am not against your theory but it needs to be checked whether the value of toxic assets could have permitted such an action. In any case, we can decide to act only in future, Past, it is claimed, is immortal.
  • Dec 19 2012: Few comments: First, though the Keynesian policies were pioneering in recommending intervention of the government to prop up economic activity, there was an element of prayer in it. It recommended that government paid people even to `dig holes and fill them up'. The increased incomes was expected to reach the marketplace and generate demand for goods, which would generate momentum in the economy, leading to healthier restoration of economic activity. Thus, the intervention on the part of the government was prodding the economic agents to change their perceptions and expectations. This is the prayer part of the Keynesian Policies. As has been seen in the present crisis and in case of Japan, this need not happen.
    Second, more importantly, it is known that there are no free lunches. There would certainly be serious ethical issues involved in solving the economic problem by gambling. I invite deliberations from TED community on the topic. Gambling does not and cannot produce anything, and as is presently done, it should be relegated to a place of small and marginal diversion in normal life. It is of utmost importance that before clicking on this option in any form, involved governments should first take due steps to prevent recurrence of crisis and the excesses that caused the crisis. I think it would be necessary to limit the operation of the scheme strictly for solving the crisis and nothing beyond it.
    Finally, given that there would be more than one thousand punters prepared to gamble $1,000 each (or, say, > 10,000 punters prepared to lose $100) for winning a million dollar home, this idea should work. It is, however, necessary that banks are not allowed to make profits out of the scheme. Total size of the lottery for property should not be allowed to exceed the size of losses on the books of the banks.