Sunday, February 22, 2009

A Trail of Coins in the Fusebox

I wrote this as a comment in response to an article about the market on the Washington Post website. There was a lot of finger pointing at Bush and Obama, so I thought I would put in my 2 cents.

I see a lot of discussion here from a lot of people who are clueless as to what is going on. The US economy has been in a bubble since at least 1994. I would have to point to Volker for keeping rates too high, requiring excessive credit creation to keep the economy from collapsing in the 1980's and creating too much cash in depositors accounts. But, then again, maybe it was Nixon in the 1970's and Johnson in the 1960's. Or Bush in the late 80's, clinton in the 1990's along with Robert GS, citi Rubin and the balancing act of Bush in the 2000's. The 1929 and 1966 markets peaked at around 80% of GDP. The 2000 US stock market peaked at 200% of GDP, a bubble more than 2 times larger than any in US history. It took a lot of Greenspan to patch that bubble and blow a new on in US real estate. Bubbles aren't any fun when you are a politician, as millions lose money when they break, after going through the euphoria of thinking they are going to be rich.

What causes bubble? An imbalance of debtors and creditors and a system that feeds the imbalance until it collapses. Banks create almost all the stuff we call money in this world and they create it by lending it out of thin air. There isn't any real money in banks, only balance sheet debits and credits for which they can get some currency and coins from the treasury or the Fed. Once the debits become impaired, the credits cannot be satisfied and the capital position of banking deteriorates. It is a flaw in the system of banking that bites the economy every 60 to 80 years and politicians take credit and blame for the actions created out of credit expansions and collapses. This is not a Republican or Democratic problem, but a part of nature as old as the invention of money. You can read about it in the book of Genesis and the laws of Moses.

There seems to be a delusion that Bush caused this mess. It was a problem in 2000 and it was probably a brewing problem in 1992 as there was so much new spending power unleashed once the Volker rates of the 1980's were finally lowered to avoid collapse. Robert Rubin too actions to keep a boom going that probably should have been allowed to cool. I recall Greenspan being asked about the stock market in 1998 by a Congressman and his response was things like this usually end badly. There was not a peep out of the press about what he said and the market mavens spun his words to mean something good and the market roared on.

America thinks there is a free lunch. FDR and HST set up a system at the end of WW II called Bretton Woods. In this system the dollar was made the reserve currency, the medium of exchange. Without this arrangement, the US would have collapsed in the 1970's, but other countries were already stuck with the dollars. There was no means of enforcing the balancing of trade, thus what we spent was immediately loaned back to the US system. The result was double money around the world, collateral for foreign money systems and loans to continue US spending. The FNMA and FHLMC systems were securitized and the energized by the US Congress to loan to every risk out there. Do some searches on the net to see the Democratic Party Congressmen shooting down every effort to rein in this excessive lending. I have been reading about the moral hazard posed by FNMA and FHLMC since 2000. Some people believe that if something doesn't fall apart immediately when it is pointed out, that the guy that points it out is crazy, but the ball for this mess has been rolling for a long time and the world has been financed out of US home equity. The inflation of home equity is a done deal in the US. The lending capacity of the American banks is broken and the rest of the world has immediately followed, as it too is addicted to US debt. Obama is going to fail just like Bush appeared to fail. Minskey said the Great Depression was caused by too many coins in the fuse box and starting with Robert Rubin and going forward to Obama and Geithner, we are seeing more put in every day. The wiring is burned up and the economy is going to burn down for awhile. The banks are all broke save a few small ones and as much as it is a short term solution, lending more money is going to make the longer term worse.


garyalan said...

Back in the late 80's I kept wondering where all the money was going to come from to bail out the S&L crisis. I remember reading a book called the Great Depression of 1990 which outlined that the normal Keynesian business cycle of debt should re-occur in 1990. It seems to me that we are long past the time when the normal business cycle show have corrected. I believe the politicians have pushed this off as long as possible without causing a systemic collapse of the dollar system. Who could have ever imagined that the dollar level would reach into the Trillions like it has. Therefore I think the correction will probably take 30 years, just like the great panic of 1873, before we begin to recover.

mannfm11 said...

garyalan. I think we are in for a long ride myself and hopefully our society doesn't totally collapse. I do believe a lot of problems of supply are going to be solved over the short run, like oil and other energy and maybe the one thing that Obama is doing, energy research will bear enough fruit that when things do pick up, this stuff will be the lead in to a new economy. If there is one thing the US government was supposed to do from what I can recall, it is support the furtherment of economic growth through science and projects like the Erie canal and the transcontinental railroads and such.

In order to get a natural solution, the tools of Keynes are going to have to fail. I think the people are going to force this issue as I am putting together some ideas from what I am reading. Texas and S. Carolina have turned down the unemployment money to avoid creating a new layer of taxation. Next we are going to see a real revolt when Pelosi tries to bail out California and most likely NYC. The rest of the country is tired of funneling money to NYC and California. We are tired of the messages these two places are cramming down our throats through the fascist controlled media. GE controls much of the press and you can see how the government is bowing to GE in order to preserve them. Why aren't they a ward of the state like AIG. They are just as broke, but they have this blackmail machine called CNBC, NBC and MSNCB. They are another arm of the Rockefellers.

The US has to do away with too big to fail. Even if it criples our worldwide financial reach, we need broad anti-trust action against banks and insurers. And, we need about 40 federally chartered companies like FNM and FRE that don't have government guarantees.