What caused the economic crises?
“Greedy bankers” says some people.
There is certainly a lot of greed about. For example, the people who trampled a part time Security Guard to death at a Walmart on Long Island (as he shielded a fallen pregnant women from them) were certainly greedy. Even after it was announced they had killed a man they still did not want to give up shopping for bargains in the sale and were very angry at being removed from the store. But I doubt there were any bankers in the Walmart sale crowd – although I am open to being proved wrong.
And the lawyers who are talking about “going after Walmart” over the death are greedy also – they are targeting Walmart, rather than the mob of shoppers, because Walmart has “deep pockets”. But these lawyers are not bankers.
In fact I rather doubt that bankers are either more greedy than other people or more greedy than they used to be. Someone does not tend to go into banking as a vocation – it has always been a “for the money” job. Although (and this may shock people) I suspect a lot of bankers are rather more innocent minded than bankers, at least in Britain, were in the past. Many (although far from all) British bankers in past decades were very aware that banking (as practised in the modern world) was based on very “dodgy” foundations and limited themselves with some care – not out of lack of greed, but because they did not have a university education in progressive ideas of “economics” telling them there was nothing dangerous (for example) in lending out money that was not 100% from real savings – indeed modern bankers are taught, as students, that “savings” and “lending” (or “investment” – as all lending is considered “investment”) are automatically the same whatever they do.
A certain Scotsman (an historian who does not thinks that fractional reserve banking in England came from copying Holland – even though the main bank in Holland, the Bank of Amsterdam, was famous at that time for not being a fractional reserve bank) blames the present crises on “Enron style practices” even though Enron was not a bank, and most of the bankers in trouble have not committed fraud in the way the Enron management did – whether fractional reserve banking is itself fraud is something the Scotsman does not consider.
No doubt some bankers were corrupt. Indeed on the board of Citigroup sat (indeed still sits) the disgusting Robert Rubin – one of the very people who was paid to help Enron cover up its debts, and who was listened to because of his high place in the Clinton Administration. Mr Rubin advised Citigroup to “invest” in securities based, credit bubble pyramid style, on home loans granted to people of whom Citigroup knew nothing – and by this advice and other advice Mr Rubin has helped Citigroup build up two trillion Dollars of “toxic assets”.
Mr Rubin has now secured Citigroup a vast government bailout which will support politically connected shareholders and managers and which has so far allowed Citigroup to go on doing things like paying about half a billion Dollars to name the Mets new baseball field “Citifield” and to pay ten billion Dollars (as of Monday) to buy a road building company in Spain – a country where the construction boom went bust some time ago.
One could then talk about the corruption in the (Democrat dominated) Fannie Mae and Freddie Mac and their political cooperation with people in Congress (such as Senator Chris Countrywide Dodd and Congressman Barney I-was-just-helping-the-young-boys-out Frank) and the work on the ground of such organizations as ACORN (an alliance of groups specializing in extortion and election fraud, whose most powerful section appears to be in Chicago) and how it used the Communities Reinvestment Act to get banks and other such to make loans to people who could not pay them back – when these people really existed at all.
However, all the above could not have produced the present level of crises… The size of the crises is vast – so vast that the human mind falls over trying to fully grasp the size of it. Already in the United States alone over seven trillion Dollars have been promised to aid various enterprises. Only some of this has been spent by the Treasury and by the Federal Reserve system – but the debt support pledges and other such are there if enterprises “really need them”. For example, General Electric had been pledged 138 billion Dollars in debt support – no wonder the top managers there have long acted as if their unfocused conglomerate had a divine right to exist, and have treated the shareholders with utter contempt. Not only were the managers, like so many corporate managers, protected from the shareholders by the various regulations and statutes government has passed over the decades – but they were also certain in the knowledge that their political connections would declare them “too big to fail” a “risk to the whole financial system if they failed” and therefore bail them out.
Even fractional reserve banking, on its own, can not be held responsible for a crises of this size. Lending out money that is not from real savings (i.e. money that does not really exist) is self limiting in the end – although not in the way the early 19th century “Banking School” said it was. It is self limiting in the way that the credit boom quickly turns to bust, and the castles-in-the-air wealth of mal-investments is liquidated, a long with a lot of people’s fortunes which depend upon the bubble.
A credit boom can only carry on if it is supported by a Central Bank – whatever this Central Bank is called.
This is why the credit-money bubble of the late 1920′s was bigger than previous credit-money bubbles of American history. Because the Federal Reserve system, specifically New York Federal Reserve Bank Governor Ben Strong, had pushed it up and up.
Do people remember the newspaper headlines every so often between 1987 and 2007?
Specially the “Alan Greenspan saves the world” stories?
Ever wondered what the great Alan Greenspan, Chairman of the Federal Reserve, had actually done?
What he had done is as follows:
Every time the credit-money bubble looked like it was finally going to burst Alan Greenspan jumped in and increased the money supply to “save” things. And he did prevent the credit bubble bursting – but at the price of making it bigger and bigger. Without this increase in the money supply, ACORN and Chris Dodd and Barney Frank and Freddie Mac and Fannie Mae, and the private banks, insurance companies (like A.I.G.) and other such would have no funny money to work with. They could not have wreaked everything without the ammunition (the money) Alan Greenspan was indirectly giving them. Of course he did not work alone, for example the present head of the New York Fed (who will be Treasury Secretary soon) has been involved in almost every bailout since Mexico in 1995.
And nor was it confined just to United States – for example the Bank of England has been supporting the wild expansion of the credit money supply for years, and even if one is just talking about notes and coins (not bank credit) the money supply in Britain is still going up at a about 6% a year (last time I checked).
The Fed in the United States is desperate to prevent the “deflation” of the credit money balloon it has created, but the Bank of England is no less desperate – indeed the Governor of the Bank of England has talked about nationalizing banks (those who have not already been nationalized) that does not “resume normal lending” – i.e. keep up the All Fools Festival with the bailout money they have been given rather than using the money to try and bring some sanity to their balance sheets. We live in a country where everyone is connected to the credit bubble and it is considered normal and respectable (rather than a sign of desperation) for a business to borrow money even to cover normal expenses – such as payroll.
This is not a serious credit money bubble in an otherwise sound economic system (as were the credit-money banking boom-busts that occurred in the United States before the creation of the Federal Reserve System in 1913) this, in both United States and Britain, is a system that is rotten to the core.
However, of course, that can not be admitted. Already there is a search for scapegoats as I mentioned at the start of this bit of writing – greedy and corrupt bankers are top of the list, but there are others. Already former Senator Phil Gramm is under fire – because he led the charge to “deregulate banking”.
I have no time for Phil Gramm as a monetary economist, he is a Chicago School man and I am a student of the Austrian School. And the two schools do not get on when the questions are about monetary policy. However, to say that allowing merchant banks to engage in retail banking and retail banks to engage in merchant banking is the primary cause of the present crises is, to use technical language, a load of dingos kidneys. But attacking “deregulation” like attacking “tax cuts” is always popular with such things as the mainstream media. And, at the margin, there is even a grain of truth in the charge against Gramm – as the deregulation made it more straightforward for the banks to play with the tidal wave of funny money that Alan Greenspan let lose on the world. But it is the tidal wave of new money (the increase in the money supply) that is the key.
Will the bailouts continue? Will the Federal Reserve Board continue to push the money supply up (according to some measures – I do not have any M3 statistics) 7.5% a year and direct it at the banks?
Will the official bailout number grow from 7 trillion to 9 (already the number of 700 billion is regarded as small) – are we really going to talk about tens or (perhaps) even hundreds of thousands of Dollars for every man women and child in the United States?
Actually it hardly matters any more, because the “financial system” is already broken. All the demented attempts to “save it” will achieve is to prolong and deepen the agony. However, as I hope I have made clear, if this system has anything to do with free enterprise “Capitalism” then I am a Communist.