By Monty Pelerin, on March 6th, 2010 Can We Have Another Banking Holiday?
“But most commercial banking is “deposit banking” based on a gigantic scam: the idea, which most depositors believe, that their money is down at the bank, ready to be redeemed in cash at any time.” Murray Rothbard
One of the most painful and important aspects of the Great Depression was the failure of banks. It has been estimated that before the Depression there were more than 25,000 banks in this country. At the end of 1933, 14,207 were left.
Depositors lost all or much of their money when their bank failed. Most banks were small, not unlike the one depicted in Jimmy Stewart’s classic movie “It’s a Wonderful Life.” When a bank failed in a town, fear spread. A contagion developed that caused depositors to remove money from other banks and “hoard” it. This reaction put pressure on otherwise sound banks and the banking system. A self-reinforcing spiral reduced the availability of money resulting in additional closings.
One of the first New Deal legislative acts was the closing of the banks, known as a national banking holiday. Banks were closed for about a week. Neither deposits nor withdrawals were allowed.
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The Federal Deposit Insurance Corporation was formed in 1934. Its intent was to prevent future runs on the banking system that had occurred in the early years of the Depression. Sheila Bair, current Chair of the FDIC, referenced Milton Friedman who “once called
Continue reading Can We Have Another Banking Holiday
By Monty Pelerin, on February 28th, 2010
“Crowding out” is an effect claimed to occur when governments run deficits and have to borrow to finance the deficits. It refers to the government using funds via borrowing that otherwise would go to private borrowers. Hence, they are “crowding out” the private borrowers.
In normal times, when government deficits are small relative to the economy, crowding out probably has little effect. Today, deficits are huge and the reality of crowding out is real.
Why can’t private firms “crowd out” the government? Private firms must make a profit. When they don’t they disappear (unless they are favored by the Government and get bailed out). If the interest rates private firms have to pay for new funds rises, it makes fewer investment opportunities possible. Governments do not have a profit constraint and have access to a printing press. If interest rates rise, so be it. They can and will keep on borrowing.
Businesses and consumers are claiming they cannot get credit. Some do not deserve it, but many do. The Fed has pumped enormous funds into the banking system but these funds are not being used to make loans. Loans outstanding are declining. So, what is happening? Some of the funds are being held as excess reserves (i.e., banks do nothing with them) and some are being used to finance the Federal Government deficits (an indirect way of QE). According to James Turk:
If we mark the beginning of the financial
Continue reading Crowding Out Your Future
By Monty Pelerin, on February 22nd, 2010
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“Monetary Crank” was a derogatory term used in the past to refer to crazy monetary theories and/or schemes. Its use has fallen out of favor, yet its applicability today is as relevant as it was in the past. Unfortunately what used to be subsumed under the term, now appears to be considered normal monetary policy.
Lawrence Reed indicates:
Maybe we don’t hear the words “monetary crank” these days because the culprits truly have vanished and everybody has smartened up when it comes to money. But wait a minute! If that were the case, how do we explain a dollar that’s now worth about a nickel of its 1913 value, the year something called the Federal Reserve was created?
Hmm. Maybe the only people who have smartened up are the monetary cranks themselves. They’re now wearing pinstripe suits and instead of selling inflation per se, they’re hawking “stimulus” and “full employment.”
For a short but interesting history of Monetary Crankism (was another “ism” just created?), read Lawrence Reed’s piece in FEE.
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By Monty Pelerin, on February 19th, 2010 Bill Bonner is one of the more incisive and entertaining writers. His post below ostensibly deals with Greece but has warnings that should be heeded for the rest of the Western world.
The Daily Reckoning Presents
Government Sachs
Bill Bonner
Paris, France – It’s Goldman this. And Goldman that. And Goldman rhymes with greed. But it’s “Thank you, Mr. Blankfein,” when it’s money that you need.
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Last week, Greek Finance Minister George Papaconstantinou slipped. He said not what he should have said, nor what he wanted to say. Unwittingly, he said something that was true: his country’s budget was “out of control.” He begged for more time to straighten it out. “We’re trying to change the course of the Titanic,” he said. The EU ministers gave him a month.
Mr. Papaconstantinou was speaking of Greece. But he described much of Europe, Britain, Japan and the US. And, in his fortunate metaphor, he prophesied. The big ships can’t be turned around. They’re going to sink.
Greece has been taking on water for many years. But this was the first time a finance minister of any country signaled to lenders that they should head for the lifeboats. Then, looking around, the press noticed that one of the lifeboats had already been launched. In it were no crying widows and no shivering orphans. Just one very satisfied Lloyd Blankfein, chief executive of Goldman Sachs. He had sold the Greeks their debt, said the papers; now he has sold
Continue reading Government Sachs
By Monty Pelerin, on February 18th, 2010
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Nothing has changed in Washington as evidenced by the Reuters article below.
The government is still run by the banking industry. What happened to the good old days when you bought a politician and he didn’t stay bought? That was the kind of corruption that worked, at least partially for the people. They took money, but sometimes they turned on their benefactors. Apparently not so much any more.
Is it because the banking industry pays so well for their support? Is it because touching these sacred cows would stir up such a mess that would destroy many politicians? Or is it just that our pols are comfortable the way things are and don’t want any changes?
The answers to these questions are unknown. What is known is that without putting something back in place comparable to the old Glass-Stegall rules, we have solved nothing.
If we ever get out of this mess, we will be right back on the road that led us here.
Washington is a disgrace!
The Volcker Rule: It’s not happening
Feb 16, 2010 14:07 EST
2010 election | financial regulatory reform | Paul Volcker
A few points:
1) The much-hyped Volcker Rule proposal is failing fast in the U.S. Congress. But Paul Volcker himself probably isn’t that surprised. The former Federal Reserve chairman joked he was “just a photo op” even after President Barack Obama’s public embrace of his proposal to limit bank proprietary trading. More evidence that the moment
Continue reading Washington Cesspool
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Friedrich von Hayek
Friedrich von Hayek founded the Mont Pelerin Society.
“Monty Pelerin” is a pseudonym chosen by this blogger to convey general agreement with the philosophy, goals and spirit of the Mont Pelerin Society. No other connection exists between the blogger and the Society.
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