Congress expected to pass financial rescue package: Getting Ready for a Deeper Recession
Congress expected to pass financial rescue package: Financial News – Yahoo! Finance
So, Wall Street put a gun to the head of the American public two months before the election and got what they wanted. I wrote before that a liquidity crisis in a fiat money system is only possible during hyperinflation. In September of 2007, I wrote:
As I pointed out before, Bernanke’s solution to the “liquidity crisis” is utterly destructive because it implies more inflation down the road.
I never thought there was a liquidity crisis to begin with because for a liquidity crisis to exist (in the traditional sense) money should have real value. A liquidity problem can only exist if any liquid instrument is scarce.
In that same article (back when “the fundamentals of the economy” seemed solid and the Dow was 200 points off the top), I expected either a break out of the Dow Jones fueled by excess liquidity or a continued fall pointing to a recession. The second scenario came true.
This brings us to the Wall streeters pointing a gun to our head. Money is plentiful, and the banks are still able to create large amounts of it out of thin air (yes, private banks, without the need of anybody else). However, Wall Street is in a state of panic, unable to perform, and desperate for a handout.
The origin of the latest liquidity crisis that prompted the fear of Mr. Paulson is due to the banks being unwilling, not unable, to lend each other money. In their small-minded fear, they put to risk the entire economy of the United States and then some.
To be clear, in a deregulated economy, failures are expected and are needed. The alternative was always regulation and government intervention every step of the way, which is expected to create economic stability. There are historical reasons why the American public gave up on managed capitalism and opted for a revived version of free market. This nice historical exercise proved once again why, after 1929, the US turned to Keynesian Economics: the free market does not work in large economies. In the end, you always finish with government intervention.
I do not feel that this crisis is deep or cruel enough to make the American public find again Keynesian economics, as they found again free markets by the hand of Reagan after the inflation crisis of the 70s. At least, it is not cruel enough so far.
This brings me to the title of the post. As we pour 350 billion into the financial markets, we are not creating any bank of last resort. We are not nationalizing (what did I just say!!!) any banks, or creating any way to continue providing credit. We wish and hope that the same people who created the crisis by shitting their designer pants will willingly start lending money away. Why again?
Now, the savings rate of the Americans is either cero or negative, and it has been like that during the past eight years, so the only way to create or sustain consume is by extending more credit. This means extending credit to risky borrowers (as of today, about 30% of the American consumer).
So we understand. We are expecting that the same group of people who was afraid to lend money to other banks will start lending money to a public overburdened by debt and facing a recession. My take is that such scenario is unlikely.
After they receive their precious money, the banks will hoard it and will only lend to the least risky borrowers, which are those who do not need access to credit to survive until things get better. As the old lines of credits are tapped out, and new credit is hard to come by, consumption will decrease and about a half of the economy will revert to living on the bare essentials. The result will be a recession in the country that will infect the Chinese and other economies that depend on a positive trade balance with the United States.
Perhaps, when we hit that point, and the last illusion of the possibility of a “free market” vanishes in the minds of the American public, we come full circle to accept that a managed economy is the only way to produce sustainable wealth in large modern societies. This will imply the creation of institutions that now sound repugnant but that will be necessary, such as a “National Bank” that would be a lender of last resort funded by the American People moneys, and other “socialist” institutions like “universal healthcare.” These are not going to be fancy things to have, but the only way to guarantee that the majority of our people has access to the basic protections that make life in a modern society possible.
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September 29th, 2008 at 3:07 pm
The bailout was a horrible idea. People who could not financially afford to own homes and properties were given $300,000 loans – just so bank CEOs and executives could get richer. I do, however, feel that the whole subprime mortgage crisis is part of a much larger problem. Most Americans attempt to live above their means. Modern advertising and marketing campaigns try to convince us that happiness can only be achieved by possessing an abundance of material objects. People don’t take responsibility for their actions – and America has to pay for it.
November 19th, 2008 at 1:39 pm
Unfortunately you couldn’t have been more right. The $700B has done nothing except to guarantee some nice bonuses for Wall street CEO’s
January 17th, 2009 at 10:12 am
I don’t think the problem is with the government so much as it is the people. Our culture is corrupted by avarice and conspicuous consumption. Since when does a DINK couple need 5000 sq. feet of living space?
What has happened to the principles our parents and grandparents taught us? They managed to raise families in tiny 900 square foot houses, while amassing good sized fortunes to pass down to their kids.
As far as universal healthcare is concerned, I agree that something needs to be done. The first thing that should be done is to remove the obscene amounts of money that are involved. I know personally a couple of doctors who set up their own practices, and within the first year they were millionaires. It is fundamentally evil to profit from the sickness and misery of others. However, I don’t think a government administered system is workable. When has the government ever done anything efficiently?
BTW, I love your site. It’s great information. Thanks for taking the time to put it out here.
January 18th, 2009 at 11:18 am
Thanks! And I love freshmulberries!
October 11th, 2009 at 3:53 pm
Hello from Russia