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 25th, 2010 A Wall Street Journal article reported: “The Treasury said it will borrow $200 billion and leave the cash proceeds on deposit with the Federal Reserve, reviving a program that will make it easier for the Fed to raise interest rates when the time comes.” I had to read that sentence several times to try and understand what it said. I still have no idea what it means.
You see, if the Treasury were able to borrow money, we would not have QE (quantitative easing). QE is when the Fed, directly or indirectly purchases Treasury Bonds because others won’t. Furthermore, I cannot see anyway that setting this fund up will “make it easier for the Fed to raise interest rates when the time comes.” What has this fund to do with raising interest rates? Is raising interest rates a difficult thing? Does the Fed need help doing so. Possibly, but only because they are so out of practice. Isn’t raising interest rates so simple a Caveman could do it, without help from the Treasury?
I read through the entire article several times. There is no way to make any sense of this move unless you believe the Fed intends to continue its machinations of adding more questionable assets to its balance sheet. After all, that was what the program was originally intended for. If the Fed is truly done with stimulating, there is no need for this fund.
It is likely this is merely Fed “smoke” or
Continue reading FED Bunkum
By Monty Pelerin, on February 24th, 2010
In Jimmy Carter’s reign, the Wall Street Journal editorialized about “Ratcheting to Ruin.” The title derived from the fact that each cycle high in unemployment was higher than previous ones, and each cycle high in inflation was also. “Stagflation” was coined to describe what up until then was believed to be impossible in the Keynesian world. This period ushered in a new era in both politics and economics. Carter was replaced by Reagan, and Keynes was replaced by Friedman.
Thirty years later Keynes is back in vogue, Obama has ascended to the White House and times are again reminiscent of the Carter era. The economy is awful. Fear and dissatisfaction prevail. Politicians are held in contempt. There is one major difference – Carter did not face an “ides of March” event.
In Shakespeare’s Julius Caesar, a soothsayer warned Caesar to “beware the Ides of March.” The prescient warning did not help Caesar. As Obama approaches his March moment, no warning can change his fate.
Ben Bernanke promised to end Quantitative Easing (the printing of money to stimulate the economy and fund the deficits) by the end of March. Some believe his commitment was a “campaign promise” to ensure his Senate reconfirmation. Others believe it was a real commitment, necessary to maintain a stable dollar. Shortly, the world will find out.
Mr. Bernanke, quite unintentionally and through no fault of his own, will be Obama’s Brutus, regardless of his decision. To understand why, some numbers are necessary. Government needs funding this
Continue reading Obama’s “Ides-of-March” Moment is Near
By Monty Pelerin, on February 12th, 2010 “US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.” Niall Ferguson
The idea that our debt is somehow a safe-haven is a sad reflection on the rest of the world. Europe may be in a pickle with the Greece (and more generally, PIGS) problem, but it is not unique. All western economies suffer from overleverage, which itself brings risk. All are interdependent with one another.
A problem in Greece affects Europe more directly than it does the US. But it would be wrong to assume that the US is immune to such “noise!” In an unstable world, a grain of sand can start an avalanche that swallows the entire system. In the the late 1990s the Asian Contagion that threatened the world’s financial system was started by just such a grain of sand — the Thai baht.
The interconnectedness of countries via an unstable currency system makes us and everyone else potentially vulnerable to seemingly “insignificant” events in galaxies far, far away. The amount of debt around the world is especially conducive to what might seem like small change triggering major events. The metaphor of a butterfly flapping its wings 10,000 miles away affecting outcomes locally is probably more correct today than any other time in history.
Niall Ferguson in “A Greek Crisis Coming to America” states:
It began in Athens. It is spreading to In an Economy (Galaxy) Far, Far Away …
By Monty Pelerin, on January 1st, 2010 Stock your bunker. 2010 is apt to be ground zero for financial markets.
Sixty years later, a bomb-shelter strategy once again seems in order. But this time it will used for financial as opposed to physical protection. The year 2010 is likely to be the pivotal year where pundits stop referring to the recession and begin openly talking about a Depression.
Our economic problem is rather simple, at least to describe. There is too much debt relative to income and/or wealth. Below is a single graph that depicts the condition of our economy. It shows total debt of the US as a percentage of GDP from 1870 forward. The debt figure includes all private and public debt. It does not include liabilities associated with unfunded government mandates like Social Security and Medicare. (Note: according to the US trustees of these funds, the present value of the liabilities is about $106 Trillion. Including them, would boost the ratio below to nearly 1,000%.)
The amount of debt relative to GDP is staggering from an historical perspective. Several points are worth making about the graph:
The long-term “norm” for the ratio appears to be around 150%. The red lines band the “norm” at 130 and 170%, respectively.
Other than the two boom periods that commenced in the 1920s and the 1980s, the ratio never exceeded the upper band.
Each cross resulted in enormous credit-driven booms.
Continue reading HAPPY NEW YEAR, NOW GO TO THE BOMB SHELTER
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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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