Comments (8)

• Nathan

  It's also important to point out that "government policy" isn't the only reason that we have Fed expansion of money. The Fed is heavily controlled by national banks who favor practically free money. The Fed only "loans" money to national banks. When a bank can get money at 1% (or .25%) and loan it at 5% or more, that's basically free profit. Of course default rates factor into this equation, and many banks went far beyond rational limits. Government policy only encouraged these practices, and bailouts fully cemented that idea that there really was no way to lose money in banking.

  There are many industries that do better at lower interest rates, but banks are really the number one industry that benefits. As happened in Japan, there are now many banks now that refuse to lend, but have billions in assets. As long as they can keep getting cheap easy money they will continue to exist as phantom banks, and it may take decades to expose them as worthless.

  The Keynesian criticism: Why does the whole economy experience recession, rather than just the unprofitable industries?

  Answer: Unprofitable industries still have some market share, and as such are able to bid away resources from profitable industries. Ultimately only the industries close to the bosom of the Federal reserve are able to succeed, and corporo-socialism has fully established it's place in our economy.

  Published: July 3, 2009 1:01 PM

• Nathan

  An aside to the above comment, I'm generally in favor of business, but I think it's valuable to point out that there are in fact somewhat evil elements in industry that are able to get policies through government lobbying that allow them to continue in perpetuity as market leaders. If we ever hope to draw those from the two main parties it is useful to point out the clear abuses legislated by current law.

  Published: July 3, 2009 1:08 PM

• Hank

  Hey Nate,

  Go read the book!

  Published: July 3, 2009 2:42 PM

• Bruce Koerber

  Undoing Socialism
  Saturday, July 4, 2009

  Now We Need To Know: "What Is Socialism?"
  
  Without pointing fingers (although that is also important, to pinpoint who is responsible for the resulting injustices), now is the time for everyone to fully comprehend socialism.

  It is something worth our while. The most powerful and revealing book for studying what socialism is and is not is "Socialism" by Ludwig von Mises.

  Gather together with friends and family and discuss it. At least one person in your group needs to be well educated because Mises is so thorough and so profound that a haphazard study does not reveal the full magnitude of the destructiveness of socialism.

  After studying "Socialism" you will definitely see the perniciousness of what is going on in America and all over the world. As the saying goes, "If you are not a part of the solution then you are part of the problem!"

  Published: July 4, 2009 12:00 PM

• joebhed

  central government planner here

  The problem with looking at the cause of the "meltdown" in the context of any market is that it was not the markets that failed - they were all results of the meltdown - what actually failed was the money system.

  Most readers oppose the Fed because it has some association with a thing called the government, This ignores or denies the real fact that the Fed system of fractional reserve banking is a system of a failed scientific and mathematic design.
  It is the debt-money system of the fractional reserve bankers that failed.
  That system, where ALL money is created as a debt, has failed to produce enough new debt-money, a.k.a. debts, to make the debt service payments due on the debt money (debts) that already exists.

  http://www.financialsense.com/fsu/editorials/2005/1212b.html

  This is the opportunity that I would think many earlier austrian advocates would call "when".
  It is time to escalate the call for an end to the fractional reserve money system and the beginning of a sound money system, one that promotes the financing by banks of all economic ativities through a full-reserve banking system.
  Government-issue of the money as a means of exchange.
  End taxation for government interest payments.
  End the growth of the national debt.
  It's pretty simple really.
  Nobody can lend anything that they do not have.

  We can argue later whether a free-banking system is either necessary or beneficial in light of these benefits of free-enterprise in capital.
  

  Published: July 4, 2009 5:08 PM

• RDiaz

  We all understand the pitfalls of fractional reserve systems, but the truth is that especially in real money banking you would want to avoid keeping the gold in house. The reason for fractional reserve systems was to keep government from pulling an FDR directly on the bank. Its the effect of a history of sacking the gold by the king or anyone else who is in "NEED" of it.

  Published: July 4, 2009 9:40 PM

• filc

  The reason for fractional reserve systems was to keep government from pulling an FDR directly on the bank.

  What on earth are you talking about? Not in defense of FDR but your history is all out of wack.

  Published: July 5, 2009 11:13 PM

• denver

  It is important to realise that there is a definite link between (aritificially) low interest rates and lax lending standards. Having not yet read Tom's book, I don't know if he makes this point, but it is missing in the article above, where these are discussed as seperate forces that deepen the inevitable bust. However, the low rates of interest and the massive expansion of the money supply, provide enormous incentives to the financial industry to increase their lendings. Firstly, just to stay even in real terms they must increase lending in the face of the (price) inflation that results from increases in the money supply, since lending is how they generate revenue. Stock markets further magnify this effect: a bank with static lending totals is losing market share in an inflationary boom, and therefore losing stock value even though it may be just as profitable in absolute terms as the year before. Additionally, lax lending standards act like a ratchet: when last years bad loans are finally revealed, the choice is between (A) making more - and worse - loans, and (B) admitting to the mistakes and tightening standards while "everyone else" is relaxing theirs, i.e. losing market share. Finally, literally millions of individuals within the financial industries gain from increased lending: new jobs are created to service increasing numbers of loans, sales commissions are a huge incentive, and intellectuals rush to prostitute themselves by "explaining" why "the fundamentals have never been so strong", and that this "new" way of doing business is better than the prudence and thrift our grandparents taught us. Hence, immense and widespread forces are at work to lower lending standards in times of infaltionary monetary policy. Indeed, the largest of even the apparent "success" of such policies in the short term is dependent on increased borrowing of the new funds.

  Published: July 6, 2009 7:10 AM