See this excellent posting by Robert Higgs, who has an eye for these things. He looks at the credit markets to find that there is not calamitous shortage. “The sky is not falling. Lenders continue to lend at high rates, and the economy continues to operate reasonably well.”
I’m glad that someone has said it. The only real crisis is the one being created by the response. As the days have dragged on, it is becoming increasingly obvious that that the Bush administration is attempting to turn a series of business failures in the midst of a downturn–with traceable errors rooted in government policy–into a scary national calamity as a way of looting the country on behalf of the government and its friends.
Another way to say that is that this “crisis” is really a big fake that the policy response can turn into something real. In the same way that the Bush administration turned the criminal events of 9-11 into an act of war requiring a globalized military response–which has generated more terrorism and destruction–it is taking some splashy business failures in a few sectors of the economy, failures which signal the existence of an economic downturn, and attempting to turn them into a rationale for full-scale financial socialism that really would be our doom.
Now we have Bush himself getting in on the act, warning that we will have a scary depression unless we all fork over now. And yet, if we do follow the plan of Paulson/Bernanke/Bush, we will get the very depression of which they warn. Good thing that they don’t seem to be persuading the majority.
Here are some charts showing that the “credit crisis,” for example, is a hoax:
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This is exactly what I have been thinking. I watched Paulson and Bernanke give testimony yesterday, and the banner at the bottom of the screen read “Pauslon: ‘Average American should be scared’”, or something similar. I thought to myself, “Of course they want Americans to be frightened. They want to scare people in to believing that government intervention is necessary”. Even Jack Welch is getting in to the act. He says the credit markets are “freezing up”, and if action is not taken, the people will lose their jobs. He also said that “we have incredibly smart people working this thing out”, talking about Paulson and Bernanke. Of course Wall Street hacks want to protect the fortunes of other Wall Street hacks.
Here is a Letter to the Editor that I sent earlier this week (the last paragraph is relevent to the above post):
Most of America is cheering the fact that the FBI is launching multiple investigations into the accounting practices of Freddie, Fannie, AIG and other high profile financial institutions. Well America, you are falling for a large-scale head fake. Sure the CEO’s of the various companies that have been recently bailed out on the backs of the taxpayers need to have some level of accountability, but they are not the only ones to be blamed for this current “crisisâ€.
The very people that created the environment and enabled the behavior are going to get away with it. If the FBI does a proper root cause analysis, they will find that our President, the Federal Reserve and the Treasury Department bear much of the blame for the volatility in the financial markets. The Fed set the rates artificially low after the 911 attacks and our President encouraged us all to “go shoppingâ€. The CEOs obliged them and made it happen. Yet, the very men that are calling for action to address the crisis caused the crisis!
Are we to just sit here and let the people who created the crisis design and carry out the solution to it? It doesn’t make sense to me. The best solutions are the preventative ones. It is pretty clear that either Paulson, Bernanke or Bush either do not know what they are doing or are doing this on purpose go gain further power. Either way, none of them should be in charge of solving this mess.
I think it’s more complicated that this.
If you look at those charts, it appears that available credit has leveled off, which shouldn’t be a problem under normal circumstances.
But, the faulty monetary system we have requires ever increasing levels of credit just to sustain itself. (i.e. more borrowing is required just to cover the interest on old borrowing).
I think those charts show serious problems for our fiat money, which is, in my book, a good thing in the long run.
Bill, you are certainly right about that. The US economy runs on debt, whereas the rest of the world’s economies run on savings. Even a slight decrease amounts to a “crisis” in this sense. But what I mean is that we are seeing a shift to normalcy, and this should be welcome, not fought.
Bill,
I had the same thought. I think the more forceful point is that the prior expansion is unsustainable, being largely credit-driven and it’s long past time for the correction to begin. I mean, really, over $9 trillion in loans outstanding? And on top of the $9T in federal debt and state and muni debt and $40T in future entitlements?
Somebody better figure out nuclear fusion, the warp drive or I don’t know, SOMETHING, if that’s ever gonna be paid back.
And pardon what may be my ignorance. It occurs to me the bottom chart is amount of available credit.
Anyhoo, the points made by Jeff and Bill are both valid. There is no “liquidity crisis” and the correction is long overdue.
Yeah, Jeff, I have to disagree with you, too. The leveling off of credit is disasterous to the people who risk everything on continually higher prices (continuous credit expansion).
Again, Brent, that’s true but how is that a crisis for everyone else? It is a restoration of normalcy, just a correction of what was wrong toward what is right — and the data show that it is a tiny correction at that.
Bush is trying to turn a downturn to normalcy into something like a grave terrorist attack. Do you see how this rhetoric is working itself out here?
Brent,
People who risk everything on the expectation that credit will expand are speculators. People who bought houses and knew they couldn’t afford the payments but thought they could make it because their house would appreciate in value, are speculators. These people took the risk, and they should be resonsible for dealing with the consequences. I think a downturn is exactly what we need to set this economy straight. Thanks Jeff.
Uh, guys… yeah, I know. Everyone here should know all that. Of course the downturn is necessary to really return to normalcy.
But you explicitly said this wasn’t a crisis. It surely is a crisis.
Assume this passes, and I own a financial institution. I probably can borrow as much as I want on a short term basis to buy up troubled assets from whatever firms don’t have access to the TARP, then flip them to the treasury and pay off the loan. High rates of return ensue for all involved. Joy.
I agree everyone in that particular food chain gets richer. But how does it encourage home lending, expansion of business credit etc?
Furthermore, as long as high, near risk free rates are available for lending into the TARP-asset consolidation-athon, as described above, why would a hypothetical lender even bother dealing with grubby, risky commercial or retail loans.
I think this program is perversely going to reduce the supply of credit for actual economic activity, not increase it.
The press is always crying wolf. Every 6 weeks we meet a new crisis. It may be oil, war, global warming, bird flu or business failure but the sky is always falling. Fear sells advertising.
Richie,
Perhaps I’m too optimistic but I don’t tend to think these “leaders” are fleecing us; rather they are operating under the wrong paradigm. Their paradigm is crumbling and they are frightened.
These fears are largely irrelevant. Capitalists must simply continue working to find the most efficient uses for our scarce resources under current market conditions. As the fiat dollar becomes decreasingly scarce, we must either inflate our cost valuation or trade for alternative scarcities. Is this not so?
That said, I slightly disagree with Sara in that I bought a house I can afford with a small mortgage. However if deflation occurs I could easily find myself the owner of a home worth a percentage of what I owe with likely lessened employment prospects and little ability to inflate my labor value. Thus I present my largely irrelevant fear. Someone is moving my cheese.
I agree this is all Chicken Little. The S&P 500 is worth around $11 trillion dollars. Exxon Mobil, Proctor and Gamble and GE are worth around $700 billion. Would everything fall apart if these companies all went bankrupt? The idea that if the financial sector fails, it will take the rest of the S&P 500 with it is false. Companies with earnings have a natural bottom price. If the price goes lower, the companies just use their earnings to buy back stock (as Microsoft, Nike and HP are currently doing).
I was amused by Stephan’s post from Michael Lewis’s article on Bloomberg. If the bailout goes through, how long is going to take the Goldman Sachs traders to figure out how to game the system?
Chris,
They are fleecing us. They are fleecing us of our freedom. You are correct that they are operating under the wrong paradigm; however, they are trying to generate fear in an attempt to persuade the public to support their socialistic bailout. You are correct again: they are frightened. They are frightened of losing the tight grip of the political power structure that has been in place since the Great Depression. Their greatest fear, I believe, is that the people will realize the dangers of the fiat money system and demand the abolition of the Federal Reserve.
Jeff, this data is just plain old. I mean, this story is old. We’ve seen it time and again already.
The data on consumer loans, C&I loans etc, from the Fed’s weekly banking balance sheet data, is something that has been on the radar screens for a while. In fact, it was that same data that made Bruce Kasman of JPM remain an optimist for far too long. Joe Lavorgna at DB remained too optimistic for too long because of this same data too.
Even bears point to it as a source of hidden strength (or possible future inflation).
One question is why it differs so drastically from the Loan Officer’s Survey. The survey clearly shows that credit conditions are at their tightest. So who’s getting the loans? High quality borrowers? It’s not so much an outright crisis as a credit stratification? Possible but not the entire answer.
What about SIVs and other off-balance sheet assets that have had to move back onto balance-sheets? This will definitely inflate the numbers since this report is the from the weekly aggregate balance sheets.
Existing lines of credit? We know a great many firms (and individuals) who have locked in financing well in advance. It doesn’t register in this report until it is drawn down.
So, while it is possible to explain that credit is continuing to be extended to higher quality borrowers, the involuntary drawdowns and assets moving back onto balance sheets (all of which require further financing by banks who are unable to borrow at anything but distressed rates) probably explain a good deal more and is in more agreement with the general crap the economy is currently go through.
I can not believe I am reading a post like this here on mises.org.
Of course there is a “grave crisis”.
What do you think happens on the road to normalcy?
Even if there is no deflation certainly a tight money policy is in order. This means interest rates rising ona lot of banks going bankrupt.
That also means financing costs of regular companies increase. Suddenly Coca Cola, Wallmart, or American Airlines, etc financing costs are more than their operating profit and they start shrinking thus laying people off. Some smaller companies can not even stay alive because the interest rates are so high and collateral assets are depressed.
It wont be like “wow homes are affordable now”.
I am betting even some of the people following this site will lose their jobs.
Paulson and Bernake are right to be scared. If they stop inflating things will get ugly.
I know it is necesarry but don’t ever think the bust will be easy or not grave.
We are giving Bush and his Executive branch buddies to much credit for the “chicken little” comments. Credit also must go to the folks who actually approve the spending; the folks in Congress. The politican’s mantra is “We must make everyone sick, and vote for me to make you well.” In other words, “The economy is in a crisis, vote for me I can change it!” This is just political positioning. We have accepted this faulty premise for the last century. The end result is loss of individual savings or wealth accumulation and the gradual loss of Freedom. Who said slavery ended in 1865?
ok what ever the numbers read fine.. but lets all be realistic as with any situation where you allow FEAR to decide your actions, it is most doomed for failure. We are people living together on this planet, we can still breathe the air right? Are things really that BAD? Now if we continue to believe THINGS are BAD, do you really think anything GOOD will come out of it. Lets stop listening to the fear mongers and really look at the facts and what ever needs to be fix lets fix it. Not out of fear but out of sound educated economics, and that is something im not seeing at all happening.
Well it looks like the financial “Coke addicts” are sobering up after years on the stuff, they cant repair their nasal septums and are now asking for some Crack, to have a huge credit bubble rammed right up their noses in extra quick time, to make them feel better. Only thing is, the Cops obligingly fleece the public to pay for their habits. What goes up, must come down. “Gold mitt Uns” would be a nice starting point.
I can definitely believe that it’s a hoax developed by Paulson/Bush, Inc. Why else the frantic rush to get to the money; the demand for no oversight, no checks and balances? What proof did they submit to Congress of this impending financial crash? Let the glib tongued wizards stew in their own cauldrons of lies and deceit.
Americans have been hoodwinked and played for fools ever since GW Bush and Dick Cheney have been in the Oval Office. Why should we believe a word either of the rattle snakes utter? Their chosen war has us further in the hole than the failure of Wall Street.
If the markets tumble, let it be a lesson for the boys who get their kicks from throwing around billions of other people’s money. The arrogance of the players, knowing much of it was junk, is hard to take. No concern for the people who trusted them to do the right thing with their cash. This bunch is without conscience. Why should the American worker extend help to the people who would bury them? It’s all a backwards philosophy but one that has worked for Bush in the past. He just figured he’d give it a shot again. Oh yeah, poor GW needs several hundred billion [more] dollars to see him through his old age!
I realize that America is in trouble but I don’t think it’s as severe as Bush/Paulson would have us believe. I hope that Congress will consider that this could be the biggest heist in the history of mankind before they make any deal.
Where are the financial indicators, other than asset devaluations of Mortgage Backed Securities, that reflect a supposed financial market collapse? Without a market correction, and true equilibrium asset values on investment instruments and devices, then we are literally in a stagnant cycle of pseudo rises and falls in market values. There must be some sorting out process in order for the financial industry to valuate their asset positions. This bail-out is not about a collapse, it is about shoring up overinflated prices on financial instruments (MBS, default asset-swaps, derivatives). Stop this madness!!!
“That also means financing costs of regular companies increase. Suddenly Coca Cola, Wallmart, or American Airlines, etc financing costs are more than their operating profit and they start shrinking thus laying people off.”
When I attended business school, the profs taught the party line that there was no difference between raising capital by stock offering and raising capital by borrowing. Of course there is, because if you don’t make the loan payments you’re in receivership.
This article and those who believe this need to smack themselves. I think you are confusing the news with reality. Fear sells and gets people to watch the news/advertising. That’s why I don’t watch it. But that has nothing to with the facts. The article claims that bush is trying to loot the government which is absolutely absurd. If that were true the fed and the all of congress is in on the scam too. People have been predicting this calamity for years. These banks continue to give out loans because that’s what they do! They are still open for business! Those charts are meaningless. If you ask me a bailout is like trying to pump up a tire with a whole in it. It will buy us time but a lot more inflation for an already strained economy.
It would be nice if you can explain, in detail, your assertion: “Here are some charts showing that the credit crisis, .. is a hoax” The step between the charts and hoax is not transparent to me.
Is it possible that banks keep extending credit because they think they can do whatever they want and get bailed out?
Gold Money and Paper Money
=======================
Gold as currency : Miner finds gold he cannot eat it, so exchanges it with farmer for food, farmer exchanges it with carpenter to build home, carpenter exchanges it with tailor to buy shirt……. the transactions progress like this and the last person holding the gold cannot sustain life with it he/she has to do one more exchange to realize value/energy, when there is a resource crunch / famine the last person holding gold cannot make one more exchange and he/she ends up as the looser in the series of transactions. Essentially it ends up as a ponzi scheme.
Ancient wisdom of becoming rich while doing business with gold currency is to understand the “secret that gold is worthless substance” and hold on to it for minimum amount of time. As soon as one gets gold, exchange it for something valuable like food grains and store it, food grains like rice, wheat can be stored for 20 years. When food scarcity hits the market negotiate favorable terms while exchanging food grains against gold with clear understanding that gold is worthless substance while food is essential for survival.
This is why using gold as currency without redemption obligation by issuer was the longest running scam in the world. Gold does not have a inherent value/energy so exchange value has to be negotiated during each transaction, so it cannot act as store of value. During times of scarcities like famine, exchange value of gold goes down drastically.
Food as currency : Farmer produces food grains consumes some, gives rest to carpenter to build a home, carpenter consumes some and barters rest to tailor to buy cloths. Consider a series of transactions like this as the last transaction happens the final recipient of food currency can simply consume it to realize energy, essential for sustaining life. All transactions are complete everybody in the series of transactions has realized value out of transactions. Then the next cycle of transactions starts with farmer producing food…… this is how the ecosystem works…..
Today we have one more important ingredient fuel in the economic system, fossil fuels are used to produce food, or stating more clearly today we need fossil fuels to produce food to feed 6+ billion population of earth.
The only substance we can use as “currency” without redemption obligation is food. All other substances when used as currency needs redemption obligation by the issuer in terms of food/fuel/energy otherwise market manipulation is very easy resulting in 7% of people owning 80% of resources world wide. This is what is happening today and is the basis for current economic crisis.
Sadly the federal reserve bank does not have food/fuel/energy reserve hence it cannot regulate markets.
I would just like to pose a possible reason for this “crisis”. GW has put into place a system by which, at the cause of any national crisis, the current Commander-in-Chief may stay on longer than his term allows, and forestall any election, based on “Executive Privilege”. It provides quite the motive to interrupt an election..
I would welcome any challenges to my opinion since I am still trying to grasp the extent of this but I believe there is a crisis. However, the credit crunch is just a symptom of the real problem. Its about cash flow. So yes, everyone is still lending but a business does not conduct its daily operation on credit, its cold hard cash i.e. liquidity. The graphs that need to be put up alongside these are the ones showing the rate of default on credit. The only way a lender can function is if he receives payments on the loans he has made or borrows money from others to meet daily obligations. The problem is everyone is defaulting on their obligations so no cash is coming in and there is only so much you can borrow to keep yourself afloat. The American economy has been built on credit where everyone has been borrowing from everyone else to the point where it has become unsustainable. Economic growth cannot come from credit. Which leads me to the other important set of data required – the level of savings. What America needs is for that bubble to pop so that everyone can scale back their operations and start living within their means. It will be painful but it is necessary.
Can you pleae stop using the word “normalcy”. It doesn’t exist.
The word is Normality.
The UK has it all worked out
http://bastardoldholborn.blogspot.com/2008/09/unemployed-black-man-in-string-vest.html
The grave crisis is not completely phony. It is real. Just look again at the bank credit of all commercial banks chart. Actually this one is better:
http://research.stlouisfed.org/fred2/series/TOTBKCR
Notice how the rise of credit has been **exponential** since the abandonment of the gold standard?
Do you see how bad it is for a credit based economy to have “normality”?
Yes under a free market a tapering off of additional credit would be normal, but we are not living in a free market. This credit “crunch” is real. There are independent news reports all over the country stating that people are not able to get credit. Business is collapsing, banks are going bankrupt, and all because there has been a tapering off of additional credit into the economy.
Considering how a credit based economy needs, as Mises showed, increases in the rate of increase of the amount of credit in order to stave off a recession, any leveling off to “normality” can be disasterous in the short term.
Of course over the long term the market will adjust but politicians do not think long term. They really truly believe this is the end of the world because they can only see up until the next election.
It is not a “hoax”.
By the way, normalcy is a perfectly great word with a long American heritage. I don’t know what kind of English is spoken on the other side of the pond, but in these parts, normalcy is normalcy.
As for the crisis, the government understands this term to be: something the market can’t handle. The market is handling this just fine. Tight times ahead? Sure. But that’s better than the crack-up boom the government has planned.
Joe D
Gold does not have a inherent value/energy so exchange value has to be negotiated during each transaction, so it cannot act as store of value.
Actually when societies are on the gold standard the value of gold does not have to be negotiated. You may be observing the fact that prices are constantly being negotiated and renegotiated. Gold has acted as an excellent store of value for the past 3000 years.
The only substance we can use as “currency” without redemption obligation is food.
Laughter is the best medicine. Using food as currency would lead to major inflations during harvest seasons and deflations during winter. That is hardly a recipe for economic stability. [Pun intended]
There are some wonderful resources on the mises.org website. Read something.
“I don’t know what kind of English is spoken on the other side of the pond,”
Erm… English. In England
If you are going to borrow our language, because you have none of your own, then please, make a little effort to get it right.
You could of course, develop your own. But that would require educating 250 million people. Something you have failed miserably at….
Saying there is no great crises now is, with the greatest respect Dr Tucker, like saying there was no great crises in 1921 or in 1929.
Of course there is a crises, the question is how should government respond. In 1921 President Harding’s Administration cut taxes and government spending – and allowed markets to clear by allowing both prices and WAGES to fall.
After 1929 both Herbert “The Forgotten Progressive” Hoover, and F.D.R. followed wildly statist policies.
This is why the economy was in recovery within six months after the 1921 crash – but was totally messed up over the whole decade of the 1930′s.
Sadly modern ideas are a lot closer to the policies followed after 1929 than they are to polices after 1921 – bailouts and other absurdities are all the rage now.
Point on Joe D.
Of course gold has economic value – if people voluntarily give it value. Economic value is subjective.
As for “objective” uses – gold does have them but that is not what is important.
But, by the way and to all people, do not say “gold standard” (that causes endless confusion). Either the gold is the money or it is not – once one claims that bits of paper or book keeping entries are money all is lost. After all the great credit money bubble of the late 1920′s was created when the United States was on the “gold standard” and shows why such a “standard” is not to be followed – gold as money is.
Or silver as money – or whatever people choose to make contracts in.
No “legal tender” with people being told “of course we have the gold to back these notes or cheques” when they do not.
1. Gold currency era is over, it was one of longest running scams in the world.
2. Fiat currency era is almost over it is a scam that lasted about 30 years.
3. Going forward only viable option is “energy based currency system” since all life forms need energy to sustain life, “energy is essence of life”.
Reserve banks should have food/fuel/energy reserves and redemption obligation against currency they issue to be called reserve banks.
@ Lowell Sherris
“There are some wonderful resources on the mises.org website. Read something.”
Any economics book that do not define “wealth” on the first page of the book is not worth reading……
Joe D,
A fantastic resource on your “energy-based” economy can be found at http://www.thezeitgeistmovement.com, and for anyone who still believes in a currency based system, watch the movie, and google search “Money as Debt”. Both excellent explanations of why our present system is bat-shit crazy.
If these people in this blog know anything about economy I will be surprised… I think you still believe this is a soft landing and sentimental… All these funky ideas come from southern and poor states such as Alabama. Please go have a life and strip your political thoughts from economics… lets discuss as scholars… some real facts for the speculators:
“Orders for costly durable goods like cars, machinery and computers dropped by 6.2 percent in October, more than twice as much as Wall Street economists had forecast, as demand weakened across nearly every major sector of manufacturing.”
Consumer spending falls 1%… This should be the best time of the year for retailers… if they can not make profits we will see some bankrupticies in retailing sector and then commercial real estate…
where is the claimer of phony crisis???
Ryan McKenna,
The http://www.thezeitgeistmovement.com site, looks like it is sponsored by some elitists desperately trying to save their own asses.
Key concept of Zeitgeistmovement
- if one set of oppressive hegemonic elites are removed another set will take its place so please please don’t try to remove the hegemonic elites, Nice concept.
Reality is history tells us that whenever hegemonic elites where removed, substantially long periods of peace and prosperity prevailed until another set of hegemonic elites emerged. We can see this in the aftermath of French Revolution, American Independence etc.
I am always invstigating online for articles that can aid me. Thanks!
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