This guy seems to think it’s “deregulation”
And I think he’s an idiot that is spoonfed gov’t propaganda.
-Jon
Haha,
Because of course all the liquitity the Fed provides at it’s discount window doesn’t encourage the risk taking that leads to insolvancy at all!
(note: sarcasm)
So what is this guy’s explanation of stagflation and the recessions during the so-called Keynesian years?
Specifically, what caused the problem from Mises’ Business-Cycle economic theory?
What did the central bank do (wrong) so that the banks went into insolvency? Didn’t Katrina add to the lack of confidence in the real-estate market? Couldn’t the banks have prevented this by a more prudent crediting strategy?
I think globalresearch.ca are the “social credit” folks. One of those bad ideas from the earnest and well-meaning Canadians who seem unable to comprehend the law of scarcity.
^ Are those rhetorical or serious questions?
The housing market crash is being caused by oversupply. Basically, easy credit drove the demand of houses high, sending the prices skyrocketing. Construction companies responded by building more houses while speculators responded by buying houses for their future value. When the construction companies began building and supplying the necessary amount of houses, the market “crashed.” This lead the speculators to dump all of their supply on the market as well. This really is nothing more than a correct market response to a government created problem.
Another issue with the housing market is that the HUD mandated that something like 40% of mortgages go to subprime borrowers. When the market crashed and a lot of those subprime borrowers defaulted, we saw banks becoming insecure since a lot of those loans were effectively underwater.
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How exactly did the government encourage easy credit? As I understand it, each bank (at least in my country, Romania) is permitted to set their own interest rate.
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Why did the market crash when the construction companies bagan building the houses?
The Fed’s discount rate. It encourages easy credit by setting the discount rate really low, which increases borrowing by banks. Since banks have more credit, they set their interest rates really low. The result is a temporarily low real interest rate unbacked by saving. This, in turn, causes rising inflation which forces banks to eventually raise the real interest rate in some way, either by directly raising rates or by increasing requirements for borrowing (an indirect increase). Usually, it’s a combination of both.
The housing market should have crashed a long time ago, but it was being blown up by the Fed and increasing government housing subsidies.
How I see it, banks get their money from 2 main sources: people and the central bank. While people (depositors and debtors) are part of the market, the CB is outside it.
The CB lends money with interest, and when the CB lowers the interest on the money it borrows to the private banks, the private banks will also lower the interest on the money they lend out. The questions that arrise are these:
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the money the CB lends, is it “legit” or is it printed out of thin air?
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why would they borrow money at a lower interest rate? What is the CB’s stake in this?
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if the CB acted like any other bank in the free market and loaned at the fre-market interest rate, would we have the problems we face now?
The Fed does have a certain amount of assets on hand, cash and US government bonds for the most part, though now they have added stock in Fannie and Freddie and AIG to their portfolio. They also swapped a number of their USG bonds for mortgage-backed securities. Presumably these assets could be sold to raise cash. Did the Fed just “print” the $85 billion it used to buy shares of AIG? I do not know and hope someone can answer this.
As far as loaning to member banks, I think the CB operates just as all banks do: it pyramids loans on top of its assets to one extent or another. I don’t know how far the CB is leveraged and I don’t think anyone does. Its books are not audited so far as I know. To the extent they are not actually loaning cash on hand then yes, it is printed out of thin air and repaid with “real” dollars. That is why banking is otherwise such a profitable business.
Now, so far as I know, it is also true that every check issued by the USG, all $7 trillion worth, is ultimately presented for payment to the Fed. Since the USG is overdrawn on its current account to the tune of $300 billion+, then the Fed just gets the Treasury to print up whatever amount is needed to honor the checks, and debits the Treasury’s account accordingly. The Treasury must then issue more bonds to cover the deficit. I read once that these auctions routinely result in one-half to two-thirds of the issue going unsold, so the debt just piles up and the paper money flows out like Niagara. I would defer to anybody with greater knowledge of these matters.
The banks are borrowing money at, e.g., 2% and loaning it out at 6%. They make their profit off the spread. Since banks are competing for debtors, the interest rate at the upper end is competitive and elastic to the rate at the lower end.
No, because loans would then reflect the “true” rate of interest as determined by the free market. Capital would flow toward productive ends rather than being diverted to ends that, absent CB intervention, are not viable. There would still be speculative bubbles and busts, but they would be short and non-systemic.
There are a lot of more knowledgable folks here and hopefully they’ll chime in too.
[Edited to correct some errors]
I agree with this statement 100%.
Darn that ideology of deregulation! Of course, such ideology doesn’t exist in Washington, but hey, if it serves our interest we’ll say it does. And of course regulation and re-regulation aren’t ideological. Deregulation is, but regulation and re-regulation are the opposite of deregulation, which would mean regulation is not ideological, right? Isn’t my logic great? /sarcasm
Any person who thinks that our “corporate financial markets” are deregulated is a fool. I’ll concede that maybe “important” regulation has been repealed, and perhaps certain regulations aren’t followed at all (however, this would be a problem of bureaucracy abover anything else). But what difference does it make if it’s the financial companies who essentially write the legislation/regulation anyway? The same regulators and the guys who work/used to work for the same firms they’re regulating, and there are often incentives for Congress to give firms the regulations they want. (I haven’t even gotten into the fact that the federal government itself has had progams for people to buy homes they couldn’t afford.)
Regulation/“deregulation” wouldn’t have solved this problem, since it isn’t a problem of regulation to begin with. One might want to look into the dubious concepts as, oh I don’t know, credit expansion and systemic risk or moral hazard.
Not to worry, Obama will soon be coming to the rescue!
So the whole problem is caused by that 2% interest rate the CB charges for the loans?
Yes mostly, you lower rates you cause a boom of malinvestment. When a CB sets the rate at an artificially low level that is not realistic to market conditions, you cause booms of lending, which are full of malinvestment. You compound this with the apr mortages with the so called “teaser rates” which were really rates that were discount due to the lowered CB rates, you factor in that these inevitably went up and you get even more defaults. Also the lax lending laws and the government created high risk mortgage companies like fannie mae and freddie mac, then you start to see where the government is the culprit behind this whole mess.
So the solution is simple then: the private banks should only have money from deposits, right?
These all have good bits and pieces:
The CRA Scam and its Defenders
http://mises.org/daily/2963
More Awful Truths About Republicans
http://mises.org/daily/3098
What’s Behind the Financial Market Crisis?
http://mises.org/daily/3111
If deregulation of the banking industry is to blame its funny he didn’t mention Clinton, who made banking deregulation one of his priorities.
Couldn’t you in part trace the problem back to the government creating Fannie Mae back in 1938?
And CDs and the like.
Not just the 1970s but how about prolonging the Depression. Hoover and later Rosevelt with their socialist policies and regulations turned a Central Bank caused stock market crash into a full blown depression. The sad part is that the socialists like the commentator believe that Rosevelts policies helped? It is sad but that is the socialized education system from pre-school through graduate school at work.