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

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.


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How Long Can We Rob Poor Old Peter?

Posted by PITHOCRATES - October 3rd, 2010

How Much for Your Vote?

Imagine that you have 5 good friends.  You meet one day each week to relax and decompress over drinks and good bar food.  Let’s say each of you spends $20 on food and another $20 on your bar bill.  So that’s a total of $40 spent each week on a frivolous benefit you don’t need but enjoy.  Your spouse isn’t all that enthused but it’s only $40.  So you get a pass.  Because you work so hard to earn your pay that your spouse can’t begrudge you this little stress reliever.

So, each week, you each spend $40 for a total weekly cost of $240 (6 X $40).

Now let’s say Friend 1 loses his/her job.  You feel bad for your good friend.  You want to help cheer him/her up during a difficult time.  So you insist that he/she still joins you on your weekly stress reliever.  The others will split his/her tab.  So that’s $240 split 5 ways.  Each of the 5 now pays $48 each, or $8 more each week.  If you do this for 4 weeks, that’s an additional $32 out of pocket per month (assuming a nice even number of 4 weeks per month).

Let’s say Friend 2 also loses his/her job.  You insist he/she still joins your weekly gathering.  So that’s $240 split 4 ways.  Each of the 4 now pays $60 each, or $20 more each week.  If you do this for 4 weeks, that’s an additional $80 out of pocket per ‘month’.

Let’s say Friend 3 also loses his/her job.  So that’s $240 split 3 ways.  Each of the 3 now pays $80 each, or $40 more each week.  If you do this for 4 weeks, that’s an additional $160 out of pocket per ‘month’.

Let’s say Friend 4 also loses his/her job.  So that’s $240 split 2 ways.  Each of the 2 now pays $120 each, or $80 more each week.  If you do this for 4 weeks, that’s an additional $320 out of pocket per ‘month’.

Let’s say Friend 5 also loses his/her job.  So that’s $240 split 1 way.  You now pay $240, or $200 more each week.  If you do this for 4 weeks, that’s an additional $800 out of pocket per ‘month’.

Get the picture?  You’re generosity will eventually cost you a house payment. 

The lesson here is that the more generous we are with other people’s money, the more those ‘other people’ have to sacrifice.   Not the people collecting the benefits.  It’s always the same.  People always have the best of intentions.  But they only make things worse in the long run.

This is what is happening in advanced welfare states all over the world.  And in the United States.  It’s not the greed of Wall Street.  It’s our greed.  And the insatiable greed of Washington.  For our money.  So they can give it to people in exchange for their vote.

Learning from the Past

Trend analysis is an invaluable tool.  People use it to determine which stocks to buy.  Businesses use it to judge the results of past business decisions.  Why?  Because we learn from history.  At least when we choose to.  And that’s the problem with government and an entitlement-based constituency.  They refuse to learn the lessons of history.

The more generous government gets with other people’s money, the more demanding we get for government benefits, the trend is clear.  The worse the life of that poor, dumb bastard who still has a job gets.

And yet people persist in blaming the greed of Wall Street.  Thomas Jefferson warned about the corruption of government by Big Finance and we see it happening.  But we blame Wall Street.  Not Big Government.  Who received boatloads of money from Wall Street for relaxing the mortgage requirements and having Freddie Mac and Fannie Mae buy up all those risky mortgages (giving us the subprime mortgage crisis and the Great Recession of 2008 – (to be determined)).  And a slew of other sweetheart deals they made with each other.

Or we blame the greed of the doctors, hospitals and the drug manufacturers.  Not ourselves for wanting other people to pay for more and more of our health care needs.  Or government for forcing doctors and hospitals to charge the private health insurers more to cover the costs they incur when the government discounts their Medicaid and Medicare invoices.  Or the lawyers for the huge cost of litigation they cause with their numerous lawsuits against the doctors, the hospitals and the drug manufacturers (so numerous that it’s a wonder anyone actually survives from using their products or services).  All which taken together provide fodder for government to take action to solve the ‘health care crisis’.

No, we the people need to point our finger at the truly greedy.  Government.  And ourselves (those who seek all those government benefits).

Give Pete a Chance

With that primer, now read America on the brink of a Second Revolution by Paul B. Farrell of MarketWatch.  It’s not necessarily a cheery outlook.  But it does note that things could get better if we had another Ronald Reagan.  And they would.  Speaking of learning the lessons of history, we all would do well to learn the very good lessons of the Reagan years.  Not the lies and misinformation put out by those in Big Government and the mainstream media.

You can’t keep robbing Peter to pay Paul.  Because eventually Peter will have no more money.  What about Paul then?  How will he get by when there is no one left to rob?  Well, stay tune, Paul.  You’re going to learn the hard way pretty darn quick.


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