Don't Blame Subprime Lenders
Why would a businessperson choose to lend and borrow in an artificial boom once they've seen several business cycles? Because, even though business investors know that the bust will come, writes Jim Bradley, it makes no sense to refuse funds while other businesses are using the new funds to compete.
And why doesn't the population at large just refuse to participate? Because Congress has established high transaction costs (capital gains taxes) and legal tender laws that prevent common citizens from the use of alternative assets to replace government money.
As a result, expanding businesses get to use cheap socialized financing. That financing gains its value from diluting existing money. But the real negatives occur not in the booms and busts, but their additive result over time. FULL ARTICLE
Comments (13)
Daniel M. Ryan
You can't justly blame the businesspeople who 'refuse to learn from experience'. Currency, after all, isn't fungible; there's no way to distinguish between good money and bad in a fiat regime.
There's also the example of Sewell Avery in the 1950s. Convinced that fiat money would eventually wreck the economy, Mr. Avery held back from expanding Montgomery Ward throughout the first part of that decade. As a result, Montgomery's competitors overtook the chain, and Mr. Avery was thrown out through a proxy fight - a lesson that more "modern" businesspeople never forgot.
The fiat-money economy is, come to think of it, a lot like an Irish town with a town pub. Each fella says (perhaps to his wife, perhaps to himself or someone else) "I know, if I go to that bar on Saturday night, I'll get drunk and possibly get in a fight, get rousted, and get another black mark on my name in the constabulary's books. But, no-one seems to care, and if I don't go, I'll be the town loser."
So on it goes.
Published: January 22, 2008 10:25 AM
J. Wilcox
Isn't there enough blame to go around? Certainly FED policy is awful but should shortsighted lenders and borrowers be held entirely unaccountable? After all, there were at least of few of us who have warned against FED policy as well as subprime lending and borrowing over the last few years.
Published: January 22, 2008 11:02 AM
J. Wilcox
Isn't there enough blame to go around? Certainly FED policy is awful but should shortsighted lenders and borrowers be held entirely unaccountable? After all, there were at least of few of us who have warned against FED policy as well as subprime lending and borrowing over the last few years.
Published: January 22, 2008 11:03 AM
billwald
The business people have learned well. They know that a recession doesn't hurt the rich. It gives them an opportunity to buy real assets from the working class at bargain prices.
Published: January 22, 2008 11:04 AM
fundamentalist
j. wilcox: "at least of few of us who have warned against FED policy..."
Unfortunately, for every voice of reason like yours, 10K Keynesians are screaming just the opposite and calling you some unpolite names.
In defense of business people, the herd mentality plays an important role in decision making. It's safe to be wrong when the herd is wrong; dangerous to be right when the herd is wrong; deadly to be wrong when the herd is right. So people follow the herd and the herd borrows when the Fed lowers interest rates.
What would happen if the Fed lowered rates and no one borrowed? The Fed would do the same thing it did today, lower interest rates even farther and keep lowering them, as Greenspan did after 2001, until the banks are paying people to borrow money.
Yes, it would be nice if all economists, financial advisors and managers were Austrian economists, and had self-discipline, but they're not. They're 99% Keynesian.
The Fed bears the greatest burden because it launches artificial booms and fake recoveries by lowering interest rates. If the Fed didn't initiate the process, business people, including banks, would have less room to make mistakes.
Published: January 22, 2008 12:33 PM
Matt
"Not only do business people lack the power to reject "funny money," they find themselves in a catch-22. "
The public at large is in the same position
they too must use the funny money.
Let's not forget why the FED was created.
It's a seemingly perpetual inflation machine that only benefits Washington and Banks, all others loose. However sooner or later the con game is found out by enough involuntary participants, then hopefully we will have some honest money.....One can dream, can't one?
Published: January 22, 2008 5:15 PM
J. Wilcox
fundamentalist: "...it would be nice if all economists, financial advisors and managers...had self-discipline..."
We can only hold these individuals accountable for their own lack of self-discipline. "But I'm a Keynesian" or "the FED made me do it" are not acceptable as excuses.
Published: January 22, 2008 5:36 PM
aaCharley
Creating "private" money would not be much better valued than "private" homes have been appraised. Seems that it would just be an invitation for putting out the paper and walking away.
Back in the old days there was some punishment for the operators. Today? Not even a reason for them to say they are sorry.
Published: January 22, 2008 10:50 PM
Mathieu Bédard
Great read!
I'm looking at ml-implode dot com, the site referenced in the article, and I can't find their definition of what's "major" operation and what isn't, and what is an imploded operation vs. an exploded operation... Anyone figured that out?
Published: January 23, 2008 8:43 AM
Bob Roddis
I would ALWAYS point out that Fed action ALWAYS involves the DILUTION of the existing money supply (as this article points out). Your opponent cannot dispute this, whatever else he might dispute. Your opponent is then stuck with defending, both morally and practically, monetary dilution as the cure-all for all economic problems.
Published: January 23, 2008 11:46 AM
Paul Marks
The point about Capital Gains Tax was a useful reminder of how reducing the source of honest investment, pushes enterprises towards funny money credit expansion.
Investment should be 100% financed by real savings.
Whether those savings come from rich people or poor people or from working people (working people can be very rich indeed by the way) or people who have retired or inherited their wealth does not matter. What matters is that the savings are real - not book keeping tricks to hide a credit money expansion.
As for "the rich" not being harmed by economic downturns and profiting by buying assets from "working people" (someone who owns an important asset must at least once have been rich of course)......
Well billwald could always (sadly) get a job at most of the colleges in the United States or most other nations. And he could could get a job with the New York Times (and most of the rest of the print media) or with N.B.C. or C.B.S. (or P.B.S. or.....).
Sadly Marxists and neoMarxists dominate the institutions.
Published: January 23, 2008 1:21 PM
Rbrown
The subprime meltdown has led hundreds of companies to change their investment strategies, while multiple lawsuits are threatening the industry causing what are sure to be sweeping changes to the regulatory landscape. Therefore, events like
www.iqpc.com/us/subprimemortgage are very informational and provide business professionals with the solutions to arising problems as a result of the Subprime crisis.
Published: February 1, 2008 8:27 AM
George
I think the financial CEO's and staff were not even thinking of the problems but only the profits. The problem was that their bottom line was losing blood for years from high default sub-primes and they kept right on doing the same asinine procedures. For that they should be blamed.
Land For Sale
Published: September 24, 2008 5:10 PM