Financial Crises: The Fed Giveth and the Fed Taketh Away

Posted by PITHOCRATES - December 3rd, 2010

Great Depression vs. Great Recession

Ben Bernanke is a genius.  I guess.  That’s what they keep saying at least. 

The chairman of the Federal Reserve is a student of the Great Depression, that great lesson of how NOT to implement monetary policy.  And because of his knowledge of this past great Federal Reserve boondoggle, who better to fix the present great Federal Reserve boondoggle?  What we affectionately call the Great Recession.

There are similarities between the two.  Government caused both.  But there are differences.  Bad fiscal policy brought on a recession in the 1920s.  Then bad monetary policy exasperated the problem into the Great Depression. 

Bad monetary policy played a more prominent role in the present crisis.  It was a combination of cheap money and aggressive government policy to put people into houses they couldn’t afford that set off an international debt bomb.  Thanks to Fannie Mae and Freddie Mac buying highly risky mortgages and selling them as ‘safe’ yet high-yield investments.  Those rascally things we call derivatives.

The Great Depression suffered massive bank failures because the lender of last resort (the Fed) didn’t lend.  In fact, they made it more difficult to borrow money when banks needed money most.  Why did they do this?  They thought rich people were using cheap money to invest in the stock market.  So they made money more expensive to borrow to prevent this ‘speculation’.

The Great Recession suffered massive bank failures because people took on great debt in ideal times (low interest rates and increasing home values).  When the ‘ideal’ became real (rising interest rates and falling home values), surprise surprise, these people couldn’t pay their mortgages anymore.  And all those derivatives became worthless. 

The Great Depression:  Lessons Learned.  And not Learned.

Warren G. Harding appointed Andrew Mellon as his Secretary of the Treasury.  A brilliant appointment.  The Harding administration cut taxes.  The economy surged.  Lesson learned?  Lower taxes stimulate the economy.  And brings more money into the treasury.

The Progressives in Washington, though, needed to buy votes.  So they tinkered.  They tried to protect American farmers from their own productivity.  And American manufacturers.  Also from their own productivity.  Their protectionist policies led to tariffs and an international trade war.  Lesson not learned?  When government tinkers bad things happen to the economy.

Then the Fed stepped in.  They saw economic activity.  And a weakening dollar (low interest rates were feeding the economic expansion).  So they strengthened the dollar.  To keep people from ‘speculating’ in the stock money with borrowed money.  And to meet international exchange rate requirements.  This led to bank failures and the Great Depression.  Lesson not learned?   When government tinkers bad things happen to the economy.

Easy Money Begets Bad Debt which Begets Financial Crisis

It would appear that Ben Bernanke et al learned only some of the lessons of the Great Depression.  In particular, the one about the Fed’s huge mistake in tightening the money supply.  No.  They would never do that again.  Next time, they would open the flood gates (see Fed aid in financial crisis went beyond U.S. banks to industry, foreign firms by Jia Lynn Yang, Neil Irwin and David S. Hilzenrath posted 12/2/2010 on The Washington Post).

The financial crisis stretched even farther across the economy than many had realized, as new disclosures show the Federal Reserve rushed trillions of dollars in emergency aid not just to Wall Street but also to motorcycle makers, telecom firms and foreign-owned banks in 2008 and 2009.

The Fed’s efforts to prop up the financial sector reached across a broad spectrum of the economy, benefiting stalwarts of American industry including General Electric and Caterpillar and household-name companies such as Verizon, Harley-Davidson and Toyota. The central bank’s aid programs also supported U.S. subsidiaries of banks based in East Asia, Europe and Canada while rescuing money-market mutual funds held by millions of Americans.

The Fed learned its lesson.  Their easy money gave us all that bad debt.  And we all learned just how bad ‘bad debt’ can be.  They wouldn’t make that mistake again.

The data also demonstrate how the Fed, in its scramble to keep the financial system afloat, eventually lowered its standards for the kind of collateral it allowed participating banks to post. From Citigroup, for instance, it accepted $156 million in triple-C collateral or lower – grades that indicate that the assets carried the greatest risk of default.

Well, maybe next time.

You Don’t Stop a Run by Starting a Run

With the cat out of the bag, people want to know who got these loans.  And how much each got.  But the Fed is not telling (see Fed ID’s companies that used crisis aid programs by Jeannine Aversa, AP Economics Writer, posted 12/1/2010 on Yahoo! News).

The Fed didn’t take part in that appeal. What the court case could require — but the Fed isn’t providing Wednesday — are the names of commercial banks that got low-cost emergency loans from the Fed’s “discount window” during the crisis.

The Fed has long acted as a lender of last resort, offering commercial banks loans through its discount window when they couldn’t obtain financing elsewhere. The Fed has kept secret the identities of such borrowers. It’s expressed fear that naming such a bank could cause a run on it, defeating the purpose of the program.

I can’t argue with that.  For this was an important lesson of the Great Depression.  When you’re trying to stop bank runs, you don’t advertise which banks are having financial problems.  A bank can survive a run.  If everyone doesn’t try to withdraw their money at the same time.  Which they may if the Fed advertises that a bank is going through difficult times.

When Fiscal Responsibility Fails, Try Extortion

Why does government always tinker and get themselves into trouble?  Because they like to spend money.  And control things.  No matter what the lessons of history have taught us.

Cutting taxes stimulate the economy.  But it doesn’t buy votes.  You need people to be dependent on government for that.  So no matter what mess government makes, they NEVER fix their mess by shrinking government or cutting taxes.  Even at the city level. 

When over budget what does a city do?  Why, they go to a favored tactic.  Threaten our personal safety (see Camden City Council Approves Massive Police And Fire Layoffs Reported by David Madden, KYW Newsradio 1060, posted 12/2/2010 on philadelphia.cbslocal.com).

Camden City Council, as expected, voted Thursday to lay off almost 400 workers, half of them police officers and firefighters, to bridge a $26.5 million deficit.

There’s a word for this.  And it’s not fiscal responsibility.  Some would call it extortion.

It’s never the pay and benefits of the other city workers.  It’s always the cops and firefighters.  Why?  Because cutting the pay and benefits of a bloated bureaucracy doesn’t put the fear of God into anyone.

Here we go Again

We never learn.  And you know what George Santayana said.  “Those who cannot remember the past are condemned to repeat it.”  And here we are.  Living in the past.  Again.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Tax and Spend and Raise Your Taxes: The Ultra-Left Liberal Agenda

Posted by PITHOCRATES - November 7th, 2010

Fiscal Extortion Responsibility:  Approve Our Millage to Raise Your Taxes or Else

Whenever the government wants to raise your taxes, they use fear.  What does the typical family in suburbia hear?  “If the city doesn’t get this millage approved, the city will have no choice but to lay off police officers and fire fighters.”  It’s never, “If we don’t get this millage approved, the city will have to cut pay and benefits of our bloated and overpaid city bureaucracy.  Or lay off some of the deadwood.”  No.  It’s always the cops and the fire fighters.  Because it’s more scary.  Mothers worry about the safety of their children.  And will do anything for them.  Even pay more taxes.  If it was anyone else talking like this, we’d call it extortion.  But when our government shakes us down for protection money, they call it fiscal responsibility.

The federal government works much in the same way.  Of course, there are no federal police officers or fire fighters protecting our communities day in and day out.  So they go for the jugular.  That third rail.  Social Security.  When the White House and Capitol Hill were staring each other off into a government shutdown in the 1990s, what did Bill Clinton do?  He threatened Social Security (see GOP to Use Debt Cap to Push Spending Cuts by Damian Paletta posted on The Wall Street Journal).

Eventually, the debt ceiling was raised, but only after a brief government shutdown and warnings from the Clinton administration that the government might temporarily stop mailing Social Security checks.

One thing not on the table was lawmaker pay and benefits.  Little old ladies would lose their Social Security checks before they would ever let that happen.  Fast forward to today.  Federal deficits and the debt have never been higher.  In the discussion of spending cuts, that discussion included the other third rail of politics.  Lawmaker pay and benefits.  There’s talk now about cutting their pay.  Of course, that will never happen.  Even though they could afford it (see Boehner under fire: First cut should be lawmakers’ salaries by Jordy Yager posted on The Hill).

Boehner is slated to receive a $30,100 pay increase next year when he becomes Speaker of the House. His annual salary will be $223,500. The base pay for House and Senate lawmakers is $174,000, while majority and minority leaders each make $193,400 per year.

And this doesn’t include any of their benefits or graft.  How does this make you feel?  These are the people that are bankrupting our country.  Destroying our jobs with their anti-business policies.  And forcing us to get by on less.  While they live the good life.  Yes, let’s cut their pay.  If we slash it by $100,000, they’d still be making more than the majority of their constituents.  Something just wrong with that.  Our servants living better than us.

President Obama:  Typical Tax and Spend Liberal Who Hates Tax Cuts

With the loss of the House in the 2010 midterm elections, President Obama’s FDR/LBJ spending has hit a snag.  Nancy Pelosi is not there to rubberstamp his ultra-left liberal agenda.  In fact, the new House leadership is talking about repealing some of that ultra-left liberal legislation to reduce that projected annual deficit of $4,125 billion (see Barack Obama Outspends George W. Bush and Ronald Reagan Combined from this same website). 

Front and center in this debate are the George W. Bush tax cuts scheduled to expire at the end of this year.  And all of a sudden, President Obama is concerned about deficit spending (see Obama calls for compromise, won’t budge on tax cuts by Kevin Cullum posted on The Hill).

“At a time when we are going to ask folks across the board to make such difficult sacrifices, I don’t see how we can afford to borrow an additional $700 billion from other countries to make all the Bush tax cuts permanent, even for the wealthiest 2 percent of Americans,” the president said. “We’d be digging ourselves into an even deeper fiscal hole and passing the burden on to our children.”

Oh, he’s concerned now.  He wasn’t with his bailouts to help fund union pensions.  Or the biggest explosion in federal spending ever.  The trillion dollar+ per annum Obamacare.  But he’s being a little devious here.  Earlier, he said that $700 billion cost of the Bush tax cuts was over ten years (see the above link to this same website).  That comes to $70 billion annually.  Compared that to his projected $4,125 billion annual deficit and he loses all credibility.  He doesn’t care about $4,125 billion in deficit spending but will put his foot down about a paltry annual $70 billion in tax savings.  Why?  He’s a tax and spend liberal.  Any spending (other than defense) is okay.  But any tax cut is simply irresponsible.

We Rejected Obama’s Ultra-Left Liberal Agenda on Tuesday

The message on Tuesday was that the people have rejected Obama’s ultra-left liberal agenda.  America is a center-right country.  That center-right is made up of conservatives, moderates and independents.  Obama, Nancy Pelosi, Harry Reid, et al, belong to that far left minority called liberal.  The clear message is that the 80% rejected the 20%.  Of course, Obama sees it differently. 

The president said that the “message was clear” from voters on Election Day, and that he was also “frustrated” by the sluggish pace of economic recovery. “You’re fed up with partisan politics and want results,” Obama said. “I do too.”

No, we’re not upset that Democrats and Republicans weren’t working together.  We were upset that the liberal Democrats used their majority in Congress to govern against the will of the people.  That is the true message.  It wasn’t the partisanship that bothered us.  It was the lack of it to stop the far-left liberal agenda that did.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,