Can the Rescue Plan Fix the US Economy?
At the root of the problem are not mortgage-backed assets as such but the Fed's boom-bust policies. It is the extremely loose monetary policy between January 2001 and June 2004 that set in motion the massive housing bubble (the federal-funds-rate target was lowered from 6% to 1%). It is the tighter stance between June 2004 and September 2007 that burst the housing bubble (the federal-funds-rate target was lifted from 1% to 5.25%). The rescue plan, meanwhile, could create the mother of all recessions. FULL ARTICLE
Comments (38)
Jacob Steelman
When one totals all the rescue packages and bailouts by the US Treasury and the Federal Reserve the US debt could go as high as $15 trillion dollars. In comparison the US debt in 1999 was only $3.6 trillion and the government was beginning to run surpluses. It was projected by the Clinton administration that continual annual surpluses would result in the US debt being completely paid down by 2015. With the US debt likely to be 4 to 5 times higher than in 1999 the US runs the real risk of becoming another Zimbabwe with wheelbarrows full of US dollars needed to buy a loaf of bread. Already the Chinese are flexing their economic muscle and calling for a new world currency to replace the US dollar. There should be One World Currency for One World - GOLD.
Published: September 22, 2008 10:19 AM
EnEm
This may not be the forum for it, but I'm trying to find parallels between the characters in Atlas Shrugged and Bernanke and Paulson. Any suggestions? This should be fun!
Published: September 22, 2008 10:34 AM
James R
EnEm, I think you're probably looking in vain.
In Atlas Shrugged, the main antagonists (e.g., Dr. Ferris) knew that their actions were benefiting themselves at the expense of everyone else. They were doing evil, and they knew it.
In contrast, Bernanke and Paulson think they are doing good, because they are following what Keynesian economic theory says should be good. But because Keynesian economic theory is a fraud, they are in fact doing evil, but simply don't realize it.
Adams summed up our fundamental problem over two decades ago:
"All the perplexities, confusion and distress in America arise, not from defects in their Constitution or Confederation, not from want of honor or virtue, so much as from the downright ignorance of the nature of coin, credit and circulation." - John Adams, 1787
For too long, we the people have abdicated our understanding of economics to our politicians—probably the least qualified group of people to receive it. And we are paying a terrible price for it.
Economic sanity will return to the United States when people become familiar with Austrian economy theory and recognize that the Keynesians are frauds. All of us need to be trying as hard as possible to educate our fellow man.
Published: September 22, 2008 11:29 AM
Mike
centuries
...that just means I am reading your comments, and I truly appreciate your insight and understanding of a complex subject. Please keep them coming. They benefit all of us.
Published: September 22, 2008 11:39 AM
Dan S
How exactly is this bailout being financed? Are we selling debt to China? "Selling" debt to ourselves (aka creating money)? Anyone know where I can find this info?
Published: September 22, 2008 12:07 PM
Mark Yannone
"But why should pumping more money do the trick? It seems that, for most experts, money is an agent for economic growth. Money however is just a medium of exchange and cannot create real wealth as such."
Perception is most of the answer to your question. They can talk of "pumping money" into the economy by increasing the supply of Federal Reserve Notes, but that has nothing to do with increasing the supply of money. It just seems like it for a little while, until prices catch up with the FRN surge.
You're right, of course. FRN's cannot create wealth. Worse, though, they don't even represent wealth. They represent aggression and fraud, force and destruction, theft and death. That's a far cry from the "full faith and credit of the United States" that holders of dollars were weaned on.
Published: September 22, 2008 12:16 PM
JohnnyHeck
A Gold standard can not fix the fundamental problem of borrowing short and lending long when the lenders suddenly demand liquidity. This is historically why we now have the system we've got.
The Austrian argument that if allowed, the market will clear itself of excesses is fundamentally correct but politically unacceptable as too many innocents will have to pay the price of unemployment for the excesses of the "few".
Published: September 22, 2008 12:24 PM
Dan S
So does it follow that the source of the "money" is irrelevant?
I was under the impression that borrowing from foreign countries/the public does not increase the money supply and therefore is not inflationary, while selling debt to our own Fed does increase the money supply. Is this difference insignificant?
Published: September 22, 2008 12:39 PM
mikey
Here is a quote from Bloomberg, dated yesterday.
"Paulson would gain discretion to act as he ``deems necessary'' to hire people, enter into contracts and issue regulations related to a revival of U.S. mortgage finance, according to a three-page proposal. The Treasury would ``take into consideration'' protecting taxpayers and promoting market stability. "
The 'three page proposal' is what Congress is being urged to pass into law.
It would give Paulson dictatorial powers.
That is because no court would be permitted to review any decision made by Paulson.
Paulson would be the de facto owner of all property and money in America.
The wording of the current rescue plan spells out that the fed cannot purchase any securities dated after September 17. This is to avoid the fed becoming the buyer of newly issued T-bonds and bills.And that is because this practice is recognized to be ruinously inflationary, on a par with the obsolete "print and spend" method
However the temptation to do just this will be strong for Paulson and the Fed.And there is a precedent for it, during WW II, briefly.
If he does resist this the Fed will eventually run out of assets to buy.There will be no way of pumping any more money into the economy.
One more thing to consider- merely expanding the monetary base does not guarantee more liquidity if people are holding cash. Banks are reluctant to lend,
borrowers to borrow.
It is hard to envision a "soft landing".
Published: September 22, 2008 12:42 PM
Curt Howland
Johnny, you have that exactly backwards. The present political "answers" to the problems that the political "answers" created, only causes far more distress and damage than would otherwise occur.
Under a commodity money standard, if a bank tried fractional reserve banking, it could easily go bankrupt. It might, and I emphasize might cause a few temporary and short-term ripples in "the market" as the over-priced assets were cleared.
But what the political "answers" have caused is a complete and fundamental melt-down that will require massive reallocation of capital, the erasure of oceans of red ink, and the destruction not of one or two banks, but of entire banking systems.
No one has ever said that the free market creates utopia. It is merely the most productive and least destructive of all the methods of human interaction.
I have only one real bone to pick with the article: Mr Shostak uses the word "decimate" when he really means "devastate".
Unless he thinks that the banking system will be reduced by exactly 1 in 10...
Published: September 22, 2008 12:44 PM
Eric
Jacob: "In comparison the US debt in 1999 was only $3.6 trillion and the government was beginning to run surpluses. It was projected by the Clinton administration that continual annual surpluses would result in the US debt being completely paid down by 2015."
The government was "saying" there were surpluses. But that was only an accounting trick they pulled with Social Security Trust Fund dollars. If the national debt increased (and it did under Clinton's surplus years) then how could there have been a surplus. If my debt goes up for the year, how can I say I've run a surplus?
And anything that Clinton says or said has to be qualified by "depends on the definition of is (were)" so I wouldn't put much faith in his explanations. There WERE no true surpluses.
Of course, it is obscene what GW has done, but the seeds of that were sown in the Clinton (and earlier) era which spent a decade bombing Iraq and ticking off the 9/11 perps who suckered us into a war with chump change that has cost the US trillions in lost wealth.
And it was Truman that first set the stage for a president being in charge of going to war, not just running the war that congress had declared. So, there's lots of blame to go around.
Published: September 22, 2008 12:58 PM
Alex
Dan S:
When the government issues $100 new bonds, they could be bought by U.S. citizens or foreigners. Whoever buys them has a future claim on the federal government (i.e. on future U.S. tax funds). Payment for these $100 of bonds would be made by a cheque drawn on a U.S. bank. So the bond buyer's deposits in the banking system go down by $100 and the government's deposits in the banking system go up by $100. There is no change in the quantity of money supply, only in its ownership.
When the fed gov sells $100 to the Fed., the bonds go on the asset side of the Fed's balance sheet, and the gov's deposit account at the Fed increases by $100 (liabil of the Fed). When the gov. spends these funds on g & S, the sellers get checks drawn on Fed. These checks are deposited in banks, who send the checks through the clearing back to the Fed, who then reduces the gov's deposits with it and increases the banks' deposits with it. The increase in banks' deposits is an increase in the money supply.
The $700 bill. that the fed gov will use to buy up bad assets from financial institutions is to be financed by the federal government issuing more bonds (to foreigners and U.S. buyers). The $700 billion represents a $700 billion tax increase (postponed tax increase due to borrowing). To the extent that, hopefully, a large chunk of the $700 billion in assets will ultimately be recoverable, the final net cost to the taxpayers will be short of $700 billion.
Published: September 22, 2008 12:59 PM
David Spellman
I find it humorous that people are saying this is the worst bail-out, bubble, collapse, disaster, reversal, etc. since the Great Depression. What was worse about the Great Depression? This is going to be bigger than the Great Depression.
Thankfully, there was an article I read over the week end where a government official said this was the worst financial disaster in the last 200 years. Still, that was a mere superlative. Nothing happened 200 years ago as bad as this is going to be.
Let's be honest with ourselves--this is the worst financial debacle in history! Virtually every bank is insolvent and a whole lot of people are about to go broke. Zimbabwe here we come!
Published: September 22, 2008 1:07 PM
Paul
I am very interested in global issues and read your last contributions to the Mises Institute and was wondering if the Austrian School has a few on the current problem with the global reserve system based on a national currency.
The main critique is the permanent need for countries that are not reserve currency countries to build up foreign exchange reservers in order to prevent speculative attacks on their currency, as well as an unwanted fluctuation in exchange rates. This build up is setting asside reserves that are mainly invested in low yield bonds.
Prof. Stiglitz wrote a proposal for extending the Special Drawing Rights in order to provide the necessary reserve assets for the global economy.
I hope you can provoide an Austrian School perspective on this topic. Is there a failure in the system or will the market solve it? Should there be a new financial architecture?
I hope you have time, to give me some hints on these questions.
Published: September 22, 2008 2:33 PM
Robert Nathan
The cost of this and the Iraq war remind me of the quote, "a few billion here, a few billion there; after a while we're talking about some real money".
Except now the order of magnitude is close to a trillion.
So what's the word fo 1000 trillion, and will it take only another thirty or fourty years to inflate to that level?
Published: September 22, 2008 2:53 PM
Ireland
Nice article. One thing I'm missing in the week's summary is the "Almost Armageddon" event on Thursday.
http://www.nypost.com/seven/09212008/business/almost_armageddon_130110.htm
http://housingpanic.blogspot.com/2008/09/let-me-be-succinct-america-nearly.html
Thanks for some more insight on it.
Published: September 22, 2008 3:16 PM
Xeno77777, ST. Petersburg, FL, USA.
America's Modern Wealth since the US Treaty of Independence, of Paris, of 1783, negotiated by John Jay, in 1783, also Jay's First Treaty, was when the Philosophy of the United States, was based on Oxford Scholasticism, Medieval Aristotelian ism, based on Averroes, the Scholastic's name for the Spanish Moorish Philosopher, Mohammad.... Ibn Rushd. See the long essay, "The American Revolution and The Natural Law," by Ernest Barker, in his book, "Traditions of Civility." Oxford Graduate, and Professor of Political Philosophy at Cambridge, University, Barker defines the Natural Law as Aristotle's Rhetoric, Ethics, and The Seven Extant Pages of Zeno, of Citrum, Cyprus. Zeno's ideas are repeated in "The US Declaration of Independence." George III, tried to stomp out Oxford Aristotelian-ism, and recommended to US Ambassador, Slaver Leader, Senator Charles Pinckney of South Carolina, that the US Slavers do the same. The New England Slavers, being the only ones having the money, restarted Harvard and Yale, after 1800, with followers of Prussian Neo-Platonist Emmanuel Kant. plagarist of Emmanuel Swedenborg's "Heavenly Secrets, inspired by Plotinus, inspired in turn by "The Works of Philo," by Philo Judaeus of Alexandria. Philo was the first writer to use Neo-Platonism, extensively. Neo-Platonism's basis is the Irrational Allegorical Method, which can use anything to prove anything else. When the Inevitable differences arise, having abandoned rationality, Neo-Platonists have no means of rationaly and peacefully resolving any disputes; they can only shun until ready to launch violent surprise attacks; either judicial murder, as was launched against Socrates and Jesus, or Geurilla/Insurgent style attacks. Neo-Platonism was used first by Plato, in a very limited and controlled manner, to forestall being Indicted for Impiety, as was Socrates, by Athens' Euro-Baalam's. Baal was the first religion, and by changing its name and dress, etc., changed into all the rest. Neo-Platonism is an abstraction of the Baal Religion, the original Religion of Pre Semitic Indo-European Mesopotamia, origin of Most Europeans, and others. Aristotle's philosophy is based on the Species-Genera Distinction, the basis of science. The US must make Aristotle the Official Philosopher of the USA. Thomas Jefferson states "My Philosophy.... is that of Old Aristotle." America's greatest philosopher, the only one studies widely abroad is Charles Sanders Pierce, who stated "My Philosophy is that of Aristotle plus science." In 1886, C,S. Pierce published that George Booles equations could be solved by an Electronic Device using relays; Thus Pierce layed out the basis for the Electronic Digital Computer; pierce read Kant's "Critique of Pure Reason in the original German at the age of twelve, and outlined its logical flaws that made it hopelessly irrational. "Heavenly Secrets" is available online at the Baltimore Swedenborgian Church. The teaching of all other, more or less anti-scientific philosophies, needs to be shut down. Those who intend to go on further, should have a double major, in Aristotle plus the Natural Law, plus their specialty. In Germany, those who go on to Graduate school, must study and extra four years in Emmanuel Kant, plus their specialty. Emmanuel Kant's Ideology has motivated all US Wartime opponents since 1860. Communism and Fascism, and Nazism, are but minor derivations of Emmanuel Kant's Ideology; unfortunately almost all US Graduate Schools in Philosophy, teach Emmanuel Kant, a Neo-Platonism. All Inherently Irrational Neo-Platonisms are Religions; All Religions are Inherently Irrational Neo-Platonisms.
John D. Rockefeller Jr. and his father, sponsored John Dewey's System of Education, which based on Bullying and Cultural Deprivation, similar to Psychological Deprivation-a known form of torture, even denying students the use of Phonetics, the basis of Written Language. Dewey was sent to the New Soviet Russia, to obtain the adoption of his System there. After two years, Dewey was summoned into the Kremlin; when he entered the room, the Soviet Dictator, Vladimir Lenin sat behind a desk. Lenin's father had been the school supervison for a lagre district. Lenin stated, "Mr Dewey, we thank you for your political support. I admit the graduates of your system are docile. However, graduates of your system, cannot do mathematics, science, nor engineering. Evey day, from all points of the globe, we recieve new threats. Therefore, we need mathematicians, scientists, and engineers, to build weapons for self defense. So we cannot use your system Mr. Dewey. Good Day, Mr. Dewey. With that John Dewey was escorted out of the Kremlin's consideration forever. Today, Russia and the former Soviet Block Nations have very excellent eductional systems in mathematics, science, and engineering; unfortunately the US is dependent on Foreign Graduate Students. Congress and the States, must shut down the Wasteful Undergraduate Departments and Graduate Schools of John Dewey's System of Education, and invalidate their Waste full degrees in the Kant-Dewey Neo-Platonism, or Kant-Dewey Religion.
We need to divide up the US Presidency, in to Social Security Presidency-including financing Medicaid/Medicare; an Industrial Security Presidency including financing Graduate Education in mathematics, science and engineering; and a National Security Presidency. Let all three jointly appoint the Justice Department, the Internal Revenue Service; but each have its own treasury department. The best source I have read on the currency, is the book, "The Paper Aristocracy," which advocates basing the currency on Silver, as there is not enough Gold. Britain was Great when it was based on the Pound Sterling Silver, but fell when based on Gold. Everyone speaks of the need to get the third world, China, India, etc., to reduce their numbers of offspring; but only if the United States can demonstrate a Social Security System that works, for the world to emulate, can we get the third world to depend on Social Security, instead of very large family's. Each of France's Departments, the equivalent of the US States has a population of about 600 Thousand people. The US would need 500 of these, 600 Thousand person states/departments. Florida's Hillsbourough County is larger that Six States, and nearly as populous and a seventh, so Florida is not represented fairly in today's US Senate, and neither is any other large State. Change is needed.
Published: September 22, 2008 3:59 PM
Xeno77777, ST. Petersburg, FL, USA.
America's Modern Wealth since the US Treaty of Independence, of Paris, of 1783, negotiated by John Jay, in 1783, also Jay's First Treaty, was when the Philosophy of the United States, was based on Oxford Scholasticism, Medieval Aristotelian ism, based on Averroes, the Scholastic's name for the Spanish Moorish Philosopher, Mohammad.... Ibn Rushd. See the long essay, "The American Revolution and The Natural Law," by Ernest Barker, in his book, "Traditions of Civility." Oxford Graduate, and Professor of Political Philosophy at Cambridge, University, Barker defines the Natural Law as Aristotle's Rhetoric, Ethics, and The Seven Extant Pages of Zeno, of Citrum, Cyprus. Zeno's ideas are repeated in "The US Declaration of Independence." George III, tried to stomp out Oxford Aristotelian-ism, and recommended to US Ambassador, Slaver Leader, Senator Charles Pinckney of South Carolina, that the US Slavers do the same. The New England Slavers, being the only ones having the money, restarted Harvard and Yale, after 1800, with followers of Prussian Neo-Platonist Emmanuel Kant. plagarist of Emmanuel Swedenborg's "Heavenly Secrets, inspired by Plotinus, inspired in turn by "The Works of Philo," by Philo Judaeus of Alexandria. Philo was the first writer to use Neo-Platonism, extensively. Neo-Platonism's basis is the Irrational Allegorical Method, which can use anything to prove anything else. When the Inevitable differences arise, having abandoned rationality, Neo-Platonists have no means of rationaly and peacefully resolving any disputes; they can only shun until ready to launch violent surprise attacks; either judicial murder, as was launched against Socrates and Jesus, or Geurilla/Insurgent style attacks. Neo-Platonism was used first by Plato, in a very limited and controlled manner, to forestall being Indicted for Impiety, as was Socrates, by Athens' Euro-Baalam's. Baal was the first religion, and by changing its name and dress, etc., changed into all the rest. Neo-Platonism is an abstraction of the Baal Religion, the original Religion of Pre Semitic Indo-European Mesopotamia, origin of Most Europeans, and others. Aristotle's philosophy is based on the Species-Genera Distinction, the basis of science. The US must make Aristotle the Official Philosopher of the USA. Thomas Jefferson states "My Philosophy.... is that of Old Aristotle." America's greatest philosopher, the only one studies widely abroad is Charles Sanders Pierce, who stated "My Philosophy is that of Aristotle plus science." In 1886, C,S. Pierce published that George Booles equations could be solved by an Electronic Device using relays; Thus Pierce layed out the basis for the Electronic Digital Computer; pierce read Kant's "Critique of Pure Reason in the original German at the age of twelve, and outlined its logical flaws that made it hopelessly irrational. "Heavenly Secrets" is available online at the Baltimore Swedenborgian Church. The teaching of all other, more or less anti-scientific philosophies, needs to be shut down. Those who intend to go on further, should have a double major, in Aristotle plus the Natural Law, plus their specialty. In Germany, those who go on to Graduate school, must study and extra four years in Emmanuel Kant, plus their specialty. Emmanuel Kant's Ideology has motivated all US Wartime opponents since 1860. Communism and Fascism, and Nazism, are but minor derivations of Emmanuel Kant's Ideology; unfortunately almost all US Graduate Schools in Philosophy, teach Emmanuel Kant, a Neo-Platonism. All Inherently Irrational Neo-Platonisms are Religions; All Religions are Inherently Irrational Neo-Platonisms.
John D. Rockefeller Jr. and his father, sponsored John Dewey's System of Education, which based on Bullying and Cultural Deprivation, similar to Psychological Deprivation-a known form of torture, even denying students the use of Phonetics, the basis of Written Language. Dewey was sent to the New Soviet Russia, to obtain the adoption of his System there. After two years, Dewey was summoned into the Kremlin; when he entered the room, the Soviet Dictator, Vladimir Lenin sat behind a desk. Lenin's father had been the school supervison for a lagre district. Lenin stated, "Mr Dewey, we thank you for your political support. I admit the graduates of your system are docile. However, graduates of your system, cannot do mathematics, science, nor engineering. Evey day, from all points of the globe, we recieve new threats. Therefore, we need mathematicians, scientists, and engineers, to build weapons for self defense. So we cannot use your system Mr. Dewey. Good Day, Mr. Dewey. With that John Dewey was escorted out of the Kremlin's consideration forever. Today, Russia and the former Soviet Block Nations have very excellent eductional systems in mathematics, science, and engineering; unfortunately the US is dependent on Foreign Graduate Students. Congress and the States, must shut down the Wasteful Undergraduate Departments and Graduate Schools of John Dewey's System of Education, and invalidate their Waste full degrees in the Kant-Dewey Neo-Platonism, or Kant-Dewey Religion.
We need to divide up the US Presidency, in to Social Security Presidency-including financing Medicaid/Medicare; an Industrial Security Presidency including financing Graduate Education in mathematics, science and engineering; and a National Security Presidency. Let all three jointly appoint the Justice Department, the Internal Revenue Service; but each have its own treasury department. The best source I have read on the currency, is the book, "The Paper Aristocracy," which advocates basing the currency on Silver, as there is not enough Gold. Britain was Great when it was based on the Pound Sterling Silver, but fell when based on Gold. Everyone speaks of the need to get the third world, China, India, etc., to reduce their numbers of offspring; but only if the United States can demonstrate a Social Security System that works, for the world to emulate, can we get the third world to depend on Social Security, instead of very large family's. Each of France's Departments, the equivalent of the US States has a population of about 600 Thousand people. The US would need 500 of these, 600 Thousand person states/departments. Florida's Hillsbourough County is larger that Six States, and nearly as populous and a seventh, so Florida is not represented fairly in today's US Senate, and neither is any other large State. Change is needed.
Published: September 22, 2008 4:16 PM
web guy
Speaking in layman's terms, how can a bail out of 700 billion dollars for financial institutions drive the price of oil up 20 per barrel on assumption of increased consumer demand. Americans are still hurting and I can only assume the increase in crude prices will only make it worse. I fail to see the logic.
Published: September 22, 2008 6:08 PM
Geoff
"When every bank is guaranteed interest on its deposit with the Fed, banks will not lend to each other ..."
The potential stoppage of inter-bank lending has extreme consequences.
Just last week banks paid as much as 26% for overnight deposits. The following day, banks lent to the Treasury (I think that's who it was) at negative rates.
If the difficulty lies with the movement of deposits this measure can only encourage it to get worse. After this, only the Fed will take or make deposits with banks, and at this stage the curtain is fully drawn on the Wizard. The Mystery of Banking (best book ever BTW) will be no more.
Bernanke needs to be very careful what he wishes for.
Published: September 22, 2008 9:39 PM
Don
How does "pumping money" exert downward pressure on the fed-funds rate? Is it simple supply and demand (increased money supply decreases the demand for and cost of borrowing) or is there more to it than that?
Published: September 22, 2008 11:43 PM
Steve P
Zimbabwe may not be a good example of what's in store for the USA. Hyperinflation would allow debtors off the hook. I don't see U.S. homeowners being allowed to pay off mortgages and credit cards with rapidly depreciating dollars. It seems to me that at some point the Fed would want to defend the dollar or risk losing the value of its own reserves. They are bankers after all.
Published: September 23, 2008 12:32 AM
free_sovereign
From the bailout proposal
"Sec. 6. Maximum Amount of Authorized Purchases.
The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time"
As I read this, Treasury will be able to cycle all of FNM and FRE plus what ever else they want to buy
Published: September 23, 2008 12:37 AM
fundamentalist
Paul: "Is there a failure in the system or will the market solve it? Should there be a new financial architecture?"
The failure is in the system. The current system with reserves based on the dollar, euro and yen is not too different from the post-WWII system which contributed to the Great Depression. Under the current system, it was just a matter of time before the blow up happened again.
People like Stiglitz are constantly searching for a better system not based on national currencies. They have a wide range of proposals, but the bottom line is that we had a truly international currency in gold and they refuse to return to it. They don't like gold because they can't manipulate it, yet it's the past manipulation of money that caused the Great Depression and the current crisis. A return to gold as the only reserve asset would be painful in the short run but would create a system that would ensure long term prosperity.
Published: September 23, 2008 10:47 AM
fundamentalist
Great analysis! Thanks!
For more examples of flat-earth economic thinking, check out the WSJ article “Bad Accounting Rules Helped Sink AIG” at online.wsj.com. The author blames the crisis on SOX and complicated derivative pricing models. Of course those played a role, but the key to derivative pricing is forecasting the value of the underlying assets. When the Feds money with interest rates, prices change and forecasts go bad. The Fed’s actions since 2001 have distorted prices and made forecasting impossible. It would be similar to smearing Vaseline on a pilot’s instrument screens so that he can’t read the output while flying. Yes, you can blame the pilot for crashing the airplane, or you can blame the instrument makers for making such complicated instruments, but shouldn’t the vandal who spread the Vaseline on the screens bear some responsibility?
Published: September 23, 2008 11:27 AM
Deacon
#######
#######
Attn: Peter
Your censorship has
prompted my refusal
to visit your Web
pages ever again.
Curiously, one of the
topics Michael Gilson
de Lemos and I had
discussed was the
penchant for libertar-
ians to carry a very
bad MEAN STREAK,
which manifests in
attacks against any-
one who doesn't
abide their philoso-
phy of opposing any
coercion.
At the end of that ex-
change - after I had
explained that the ROOT
CAUSE of that MEAN
STREAK is a certain
family dynamic, where
an overly aggressive
father-figure causes a
child to come to hate
ALL authority - he
was persuaded that I
may have uncovered the
psychological genesis
of libertarianism.
Are you such a one,
Peter? Was your
father overly aggres-
sive with you?
#######
#######
Published: September 23, 2008 11:41 AM
Mark Humphrey
I'd like to express my gratitude to Frank Shostak for his illuminating articles on the topic of money, banking, and the economy. Having read all his articles posted on Mises.org, I have learned more from his writing on this topic than from any other source. The power and clarity of his writing is really remarkable.
Does anyone know of a text book that thoroughly explains Federal Reserve operations and their specific impacts on the money markets?
Published: September 23, 2008 12:00 PM
michael
Dan S asks "How exactly is this bailout being financed? Are we selling debt to China? "Selling" debt to ourselves (aka creating money)? Anyone know where I can find this info?"
What we are doing is debt creation. The USG is positing $700 billion. And to create the appearance of that sum, our Congress has raised the debt ceiling to include that limit, i.e. from $10.6 trillion to $11.3 trillion.
So how can we back that fresh debt, to strengthen the illusion that it's actual money? We have to sell some T-bills.
Our prospective purchasers are far from being so gullible that they'll buy them at the current offering price. Yesterday's jump in the oil price is evidence of that. They all understand that the dollar will be eroding in the exact degree to which it invests itself in the total bailout.
So my guess will be that the next Treasury auction will be something of a washout. A record sum in notes will be offered and there will be few takers. Thus the interest rates will have to rise.
Such a thing will have interesting repercussions in the structure of the federal budget. To wit, the amount being spent merely to service existing debt will become larger and larger, until it stands to become the biggest line-item in the budget.
As of FY 2006, when we only spent $406 billion on debt service, it was already the fourth largest line-item. What will the federal budget look like, I wonder, when that number doubles? And what will be the value of the dwindling dollar? (Or should we, at this point, begin calling them "credits"?)
Published: September 23, 2008 2:02 PM
Adam
I am confused. Since the fed will be able to pay interest rates to the banks on their deposits, what is the need for t-bonds to prevent the lowering of the target. To take it a step further, what would be the need for the US treasury dept.?
Published: September 23, 2008 10:56 PM
Charles Pierce
I was interested to find this blog and the comments. 20 years ago I had a book published on different economic concepts to point the way to a sustainable world economy. Someone who liked the book recently contacted me to suggest that I update and re-publish it as a blog. She set up the blog, and the book is now complete on the blog in a series of postings. Here is the link:
http://www.economicsforaroundearth.com
With all good wishes,
Charles Pierce
Published: September 24, 2008 9:45 AM
Janet
This is an email currently circulating, I do not know Birk, but I wish I did. So, I wanted to get other's thoughts: Enjoy....
Okay...
I'm against the $85,000,000,000.00 bailout of AIG.
Instead, I'm in favor of giving $85,000,000,000 to the We Deserve It Dividend.
To make the math simple, let's assume there are 200,000,000 bonafide Citizens 18+.
Our population is about 301,000,000 +/- counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up..
So divide 200 million adults 18+ into $85 billion that equals $425,000.00.
My plan is to give $425,000 to every person 18+ as a We Deserve It Dividend.
Of course, it would NOT be tax free.
So let's assume a tax rate of 30%.
Every individual 18+ has to pay $127,500.00 in taxes.
That sends $25,500,000,000 right back to Uncle Sam.
But it means that every adult 18+ has $297,500.00 in their pocket.
A husband and wife has $595,000.00.
What would you do with $297,500.00 to $595,000.00 in your family?
Pay off your mortgage - housing crisis solved.
Repay college loans - what a great boost to new grads
Put away money for college - it'll be there
Save in a bank - create money to loan to entrepreneurs.
Buy a new car - create jobs
Invest in the market - capital drives growth
Pay for your parent's medical insurance - health care improves
Enable Deadbeat Dads to come clean - or else
Remember this is for every adult U S Citizen 18+ including the folks who lost their jobs at Lehman Brothers and every other company that is cutting back. And of course, for those serving in our Armed Forces.
If we're going to re-distribute wealth let's really do it...instead of trickling out a puny $1000.00 ( 'vote buy' ) economic incentive that is being proposed
by one of our candidates for President.
If we're going to do an $85 billion bailout, let's bail out every adult U S Citizen 18+!
As for AIG - liquidate it.
Sell off its parts.
Let American General go back to being American General.
Sell off the real estate.
Let the private sector bargain hunters cut it up and clean it up.
Here's my rationale. We deserve it and AIG doesn't.
Sure it's a crazy idea that can 'never work.'
But can you imagine the Coast-To-Coast Block Party!
How do you spell Economic Boom?
I trust my fellow adult Americans to know how to use the $85 Billion
We Deserve It Dividend more than I do the geniuses at AIG or in .
And remember, "The Birk Plan" only really costs $59.5 Billion because $25.5 Billion is returned instantly in taxes to Uncle Sam.
Ahhh...I feel so much better getting that off my chest.
Kindest personal regards,
-Birk
Published: September 25, 2008 5:28 PM
AgentOrange
Hi Everyone,
The reason I am writing this is to remind all those that may have forgotten, or never even heard of, how our current economic crisis mirrors the Stock Market crash that created the Great Depression. I understand that many people know about how terrible the Great Depression was and how it effected our economy. What most people don't know is how it was manufactured and how closely our current economic crisis resembles the Great Depression.
In the roaring 20s Wall St. banks decided it would be a good idea to allow regular people play the stock market by buying stocks with only 10% actual currency while the bank retained the remaining 90% ownership, yet allowing the trader to maintain 100% of the control. The catch was that the bank could call in these loans at anytime and the loan had to be paid within 24 hours. The loan was called a margin loan and when it was called in, that was called a Margin Call.
So, the sleeze behind the Banking system, names like Warsburg, J.P. Morgan, Rockefeller, Roosevelt and most notoriously, Rothschild, made the decision to deliberately crash the market by doing a widespread Margin Call. Calling in all these loans simultaneously resulted in many thousands of traders being forced to sell their stocks in order to immediately pay back their Margin Loans. This in turn led directly to the collapse of the Stock Market. There is a lot more to this story and many other BIG names to mention, but you can go Google that yourself. Just look it up and you'll find the truth.
Now let's come to present day with the Predatory Lending scandal that has ultimately led our economy to this point. Back in 2003 and 2004 several huge lenders owned by the same family names as mentioned above decided it would be a good idea to lend a great many billions of dollars to millions of Americans that simply could not afford the large loans they were receiving from these people. In turn, this created an inflated market value of Real Estate because so many people were competing to "flip" homes with their overrated loan approvals. This process created a housing market bubble that would last across a 3 year period. By late 2005 this bubble began to deflate, real estate values dropped like a rock and the crisis had begun.
At this point I would like to deviate for a moment to another event that occurred around Christmas time in 2005 that most people don't even know about. While most of Washington was away on winter vacation for the holidays, a most sinister agreement was pushed through Congress, the Senate and signed off on by President Bush himself. This agreement is called the North American Union Agreement (NAU) and basically makes Canada, the United States and Mexico borderless. This agreement ties the three economies together and essentially "Unifies" the three sovereign nations under one umbrella.
Coming back to our current economic crisis, we now see that 3 years after this agreement was passed and 5 years after the housing bubble was manufactured, our government is on the verge of striking the final blow to our economy by diluting the value of our dollar with zero value "bail out" loans. It doesn't take a macro-economist to see what's happening here. Think of the American dollar as a glass of whole Milk. Left alone the Milk is tasty and healthy. However, once you start to mix water with it, the Milk loses it's flavor and begins to have no flavor or nutritional value. If you mix enough water with it, it becomes worthless and is nothing more than Milk colored water. This is exactly what these sinister bastards are doing to our economy.
First, they allow people to think they're getting a generous deal on a loan, little did they know the motive behind it and how widespread these valueless loans were. Then, the same lenders sell these loans to another bank under their umbrella of companies and change the terms. The new terms increase the payments, which in turn leads to foreclosures, bankruptcies and utter financial chaos for many average people. Eventually this outward disease spreads inward and upsets the top of the economic food chain. Once that happens our government injects zero value currency into an already teetering economy. Once this dilutes our dollar to a certain point, we will suffer economic collapse.
Please, keep in mind that this will happen no matter what the average citizen does now. Also keep in mind that this economic crisis, just like the Great Depression, is 100% manufactured and backed by nothing but lies. Mark my words on this: Once the economy reaches a critical low, the government will propose unifying the United States and Canada's economies in order to stabilize both. This is the ruse, so you better WATCH FOR IT!!! Mexico will not be unified in the early stages of this process because we need to raise the Mexican economy up a little higher and reduce the United States and Canada's economy even further. This is how the equilibrium is forged and the way all 3 economies will be balanced in order to finally create the NAU.
Many people might ask, "Why is a North American Union such a bad thing if it get's our economy right?"
The first problem is how all this was manufactured to happen. From the housing bubble, to the liquidation of the American economy, to the hurried and hidden passing of the NAU, this crap stinks to high heaven! The second problem is how this will affect our Constitution and basically shreds it under a whole new legal structure. Finally, and this is the worst of it, America will no longer exist as it has for more than 200 years. So goodbye to everything our forefathers sacrificed to make this nation, the international banking cartel now owns you, me and everyone else.
What's even worse is where all this puppeteering is leading us to as a planet. Look far enough into this evil crap and you'll soon realize that once we have an EU, a NAU and soon to follow Asian Union along with an African Union that most people don't even know exists, it's only a matter of time before those four unions are UNIFIED. Then we get a lovely Global Union with one currency, one leader and zero freedom. This is big brother at his finest and all thanks to one family that started this process about 500 years ago, Rothschild.
Now realistically I don't think the founder of the Rothschild name, which came from Germany and started as a jewelry business, had any idea this is where things would lead. Yet here we are and all thanks the diabolical evil this family has slowly spread like a creeping disease over 5 god damn centuries. DAMN THE ROTHSCHILDS and the lot of underlying puppets they control. We need to rise up as a single voice and SAY NO!!!!!
NO I WILL NOT SERVE YOU! NO, I AM NOT YOUR SLAVE! NO, YOUR MONEY IS WORTHLESS TO ME! NO, YOU CANNOT HAVE MY FREEDOM BECAUSE IT IS THE MOST VALUABLE THING I POSSESS!!!!!! NO, IT IS YOU, THE GREEDY SCUM, THAT HAVE NO POWER OVER ME!!!!!
When the time comes, will you be a head of cattle to be counted or will you rise up and SAY NO WITH ME?!!!
A.O.
Published: September 27, 2008 9:38 PM
newson
to johnny heck:
yes, you're right about the inherent instability of fractional reserve banking. i recommend you read de soto's magnificent "money, bank credit and economic cycles". it's on the lengthy side, but the first three chapters are a good primer on the evils of frb.
it's on pdf in the "literature" section of mises.
Published: September 28, 2008 5:03 AM
Ethan
Could someone please explain the effect paying interest on deposits held at the Fed will have. Why will this keep the fed funds rate from rising, and why is this a 'good' solution for the pump job? I have re-read Shostak's explanation a bunch of times but I don't quite understand the significance this move will have. What is Bernake gaining and how does the government benefit, and ultimately how do we lose.
Published: October 11, 2008 10:05 AM
Gerry Flaychy
Ethan has writed: "Could someone please explain the effect paying interest on deposits held at the Fed will have. Why will this keep the fed funds rate from rising, ..."
This will keep the fed funds NOT from RAISING, but from DECLINING.
Re-read Shostak's explanation with that in mind and see if your comprehension improve.
Published: October 19, 2008 6:51 PM
JR
1. "So how can the Fed boost the money supply without pushing the federal-funds rate to below the target? One way of achieving this is by asking the Treasury to issue more debt"
If the U.S. Treasury sucks money out of the federal funds market by selling treasuries, and the Fed then buys treasuries to increase the money supply, don't we end up with a net zero change?
2. "Contrary to popular belief, the rescue package cannot help the economy; it will only severely weaken wealth generators."
I don't doubt this statement, but I would be interested in a little more explanation to better my understanding. What exactly are wealth generators (I assume profitable businesses?) and how does the bailout negative impact them (inflation?).
3. With everything the government is doing, do you expect to see a period of deleveraging and deflation, followed by rapid inflation?
Published: October 23, 2008 9:44 PM
Jon D
Stimulus of $500.00 for every aduldt in the country.
For every dollar spent on New American made products you would recieve a additional dollar back on your taxes. The product would have a made in the usa code and date. Help put Americans back to work. If the idea helped stimulate job growth fast it could be much better than sending TAX dollars (Debt. Spending) just to create jobs outside the USA. I would suggest some products be excluded like alcohol.
Published: November 8, 2008 11:46 AM
Jon D
Stimulus of $500.00 for every aduldt in the country.
For every dollar spent on New American made products you would recieve a additional dollar back on your taxes. The product would have a made in the usa code and date. Help put Americans back to work. If the idea helped stimulate job growth fast it could be much better than sending TAX dollars (Debt. Spending) just to create jobs outside the USA. I would suggest some products be excluded like alcohol.
Published: November 8, 2008 11:48 AM