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 January 5th, 2010
Four Horsemen of the Apocalypse
Despite the rising stock market, virtually everything else continues to deteriorate in the economy. An earlier post dealt with this anomaly.
There literally is not one thing that can be claimed as a positive. And that includes the phony GDP third quarter “improvement” and presumably a better (preliminary) number for the fourth quarter. Here is a quick (not all inclusive) list as to why things will get worse rather than better:
Bankruptcies and unemployment continue to increase.
Foreclosures are increasing and will get worse.
The Housing market will worsen as a result of more foreclosures and more mortgage resets in 2010
The Federal Government’s deficits continue to grow
Foreigner financing, necessary to support our deficits, is decreasing
The private sector continues to decline as evidenced by state income and sales tax collections
Private and state pensions continue to fall further behind actuarial soundness putting special pressures on local and state governments
States continue to spend beyond sustainable levels
Consumers will underspend for several years because of too much debt
Health care “reform” adds costs and problems to the out-years
Legislation passed and proposed causes small business to hunker down and refrain from expanding or hiring
The banking system continues to deteriorate
Credit is being increasingly withheld from small business and commercial real estate
The FDIC is out of money
Bailouts, promised to produce returns for taxpayers, are turning sour
Fannie and Freddie are now completely guaranteed by taxpayers
The FHA is repeating the same mistakes as Fannie and Freddie
There is no private mortgage market left; much
Continue reading 2010 Will Be Worse
By Monty Pelerin, on December 6th, 2009 FDIC Fire Sale! 11 Homes For Under $10,000 (PHOTOS)
From the Huffington Post: “But for our readers with a slightly tighter budget, we’ve compiled a list of some of the cheapest homes — all $10,000 or less — across the country. One Chicago house, sold for $280,000 two years ago, is now listed by the FDIC at the deeply-discounted price of $10,000. And one Detroit home is going for just $500 — less than the property’s estimated annual taxes.”
According to the website: “In 2007, this 3,012 square-foot Chicago home was sold for $280,000, according to trulia.com. The four-bedroom, three-bathroom home is estimated to have been built in 1889. THe FDIC currently lists the property for $10,000.:
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By Monty Pelerin, on December 3rd, 2009
Frank Capra’s George Bailey of Bailey Savings and Loan would surely not recognize our banking system or its accounting. However, Mr. Potter, George’s evil competitor, would probably be right at home with what’s going on.
The overhang to any economic recovery is the banking system. There is no way to know how bad the banking problems really are, given the accounting or lack thereof. Banks, with an encouraging wink and a nod from regulators, have refused to realistically value their assets. In some cases, these values may not even be determinable, other than to say they are currently grossly overvalued.
Some believe that the problem is so big that recognition of it would show the banking system to be insolvent, requiring massive bank closings and possibly triggering a run on the system. Actions taken by the government and the Fed are not inconsistent with this belief. The “pretend and extend” strategy that has been employed is one of desperation. Bank behavior, in terms of the accumulation of massive excess reserves, also appears consistent with this hypothesis. While excess reserves would not protect against a massive run, they do serve as excess capital that can be utilized once banks willingly or are forceably write assets down to reflect market value. The fact that regulators have tightened loan regulations on new loans may be provide additional support, suggesting that they don’t want the problem to get any bigger at the same time they are unwilling to recognize how big it
Continue reading Jimmy Stewart Wouldn’t Run These Banks
By Monty Pelerin, on November 7th, 2009
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Nearly six months ago, I taught a course entitled “Surviving the Crisis.” While not knowing how this crisis will end (either now or back then), I was pretty sure that it could not end given the economic policies put in place. At that time, I stated: “From the standpoint of economics, I don’t think I have ever seen a more harmful set of programs and policies. These started with Bush but have been taken to insane levels by Obama. It defies logic, economics, common sense and history to believe that these programs will help. If implemented and/or continued, they will seriously compromise the nation’s ability to sustain its current standard of living.”
At that point I thought we had reached bottom in terms of economic policy nonsense. Much of what happened, I thought, was the panicked reaction to the financial crisis and the euphoria of a new President. Surely, rational analysis would prevail and policies would change for the better. There was no way to imagine that policies would continue to worsen. At this point, there is no hope for a recovery, despite what one hears in the press. Now I am concerned whether our form of government can be maintained through the next decade. The economic crisis we
Continue reading Why The Economy Will Not Recover
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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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