You, sir, are clearly totally ignorant of economic history.
Panics from the 19th century. The Federal Reserve was organized in response to the Panic of 1907. The second half of the 20th century, post Fed, was remarkably stable economically, thanks to the Fed and to our somewhat better understanding of economics.
Again, most of the panics in the 19th century were due to consolidation of power. A lot of it revolved around the government changing currencies, developing centralized banking structures. Also, historically, many of the economic emergencies of the past have come from rumors/gossip that caused the population/markets to react negatively, creating conditions of a panic that would likely not have existed were certain rumors/gossip not being spread. Oddly, all of these events serve to centralize banking/economic power.
Regardless, I didn’t mean to imply that our economy was perfect without the Fed, just that the economic shifts were not nearly as drastic and catastrophic as they have become. There have been extended periods of stability, but they have been interspersed by violent economic turmoil. Yet each time, the government has taken more control and power away from the private sector. Honestly, I believe we have yet to see the impacts from this current situation. We are just in the beginning stages of the meltdown from where I sit.
The latter half of the 20th century is a financial fraud. How can you say a country is wealthy when it’s debt has constantly gone up during that time and the dollar has depreciated 96% of it’s value? That’s like saying I’m wealthy because I have 6 credit cards that I use to buy porsches and big screen TV’s. We’ve been on a borrowed dollar for the last 100 years and now our chickens have come home to roost. We had the illusion of stability and now it’s catching up to us. We can’t keep pretending that we are the richest nation on earth when our national debt is nearly as high as our GDP.
Cite? Clearly many of the problems at the end of the 19th century were money supply problems - thus cross of gold. Deflation then made bank loans dangerous things to have.
Now rumors do cause things like bank runs - at least they did before the FDIC, started by FDR who I assume is one of your heroes.
The fifties and much of the sixties were a time of real financial growth, a rising standard of living and increased productivity. The statement that the time from 2001 to 2008 was a financial fraud is one I agree with completely.
That a paperback now costs 10 - 20 times what it did when I was a kid means nothing. You have to look at its cost relative to average wages.
Wow, thanks for all the responses to my OP. I guess some of the “facts” I got from the news and magazines were not so factual after all. It seemed from my uniformed perspective that the housing boom. Started in the early nineties and became insane in the early 00’s. I assumed, incorrectly, that a tax break enacted in 1986 began the trickle, which became a torrent. Now as far as I can understand it the bubble began when people began viewing homes as a source of income rather than a place to live. The reason for the shift in viewpoints was clever marketing and shady financing. The tax exemption on interest did not help matters but it was not the root cause.
http://www.pbs.org/wgbh/pages/frontline/creditcards/?utm_campaign=homepage&utm_medium=proglist&utm_source=proglist If you have the time .watch this Frontline. it is about credit cards and how they become what they are. The guy who came up with most of the credit card tricks that have caused so much trouble admits that they are designed to get the poorer to pay more. that they are financing the cheap credit that the wealthy enjoy. It was no accident that caused this mess. It was risk taking to get rich.
I will have to spend time collecting data to cite information, which I don’t have now.
FDR is not a hero of mine. He started the trend of the government as the nanny state which is one of the biggest hurdles we face to financial security. Also, most of the great society programs were supposed to be “temporary” but they never went away. That’s kind of a different discussion, but still relevant. The FDIC may have been instituted for a noble endeavor, but they are just as corrupt as all the other government beheomeths that bow at the altar of money. They’ve been aiding the Fed and the government in all the bailout madness (that is further crippling us - it’s like putting a bandaid on a spurting artery, and we aren’t allowed to know where the bandaids went or how many were used).
Again, it looked like financial growth, but when our dollar value is decreasing and we’re just inflating money by getting more on loan (through Treasury stocks and bonds), I have a hard time calling that wealth. Our deficit has never stopped growing since the time of FDR. If I keep making more money, but keep spending more money, I’m not really making anything. The numbers keep getting bigger, but percentages and ratios aren’t improving. We’ve just kind of hit the event horizon on it all. If a lot of countries start dumping the dollar (I think some have already started to do so), it could spell disaster for our debt laden culture.
It’s not one person, or one agency, or one policy. It’s been a steady decline, where financial and monetary authority has slowly been consolidated and capitalism has slowly dissolved into this mock capitalism, where everything in the market is artificially controlled and looks more like a socialist oligarchy. If we were truly capitalist, we wouldn’t have public, private, or government sectors that are “too big to fail” to use a popular phrase.
If government has the majority of control in the financial markets (they are the ones who OK’d these shady housing loans) who else do we have to hold accountable for this mess? Again, it’s unfair to say it was the 110th congress, or the 109th congress, or this president or that president by themselves. It’s been a steady degredation of things on all fronts.
And here we are.
But here is the problem. More potential homeowners + same number of homes for sale lead to increased prices. Now more people can’t afford these loans, but the government is still pushing for low income people to be part of an “ownership society” and subsidize the loans. Private banks are under pressure to continue to issue regular mortgages, but premiums are unaffordable under traditional terms due
to higher home prices. Enter creative financing.
Also add that you have many of these low or no down payment mortgages leaving “owners” with no real ownership of the problem (no equity). Walk away if times get tough. You aren’t out any money.
Frank and Bush are both to blame because they fell into the typical liberal trap of believing that the only reason some people can’t succeed is because there isn’t a government program there to help them. Frank can be forgiven for this because that is what he always believes. Bush deserves scorn because he is supposed to be a conservative.
First, more potential homeowners = more building, which tends to level out prices to a certain extent. The number of homes is not fixed.
None of the laws required banks to issue loans to those who don’t qualify. There was a requirement to not assume that certain groups did not qualify. However, the worst offenders in this mess were companies like Countrywide which weren’t even obligated or even encouraged to lend to low income people.
Please give me a cite saying any bank or mortgage lender was required to issue no money down loans of balloon loans. The issue wasn’t that the borrowers had no equity or stake in the property, it was that the lenders had no stake in the loans. If you are getting big fees on very risky loans, and also dumping them on suckers, why not write them?
Most of the news stories I’ve seen about people forced out of their homes show them to be heartbroken, not laughing at the man. And what exactly do you propose that people who cannot afford a mortgage anymore do?
No, the real problem was the belief that if you deregulate a market the people in it are going to look five minutes out if a problem then might hurt the money they are making today. I don’t blame them for this, but the only solution is regulation.
No one went to a Countrywide office with a gun demanding a mortgage that was going to blow up in their faces or else. We have plenty of evidence that loan officers worked really hard so that lenders did not see the credit or income of potential borrowers. Was that Bush’s fault? Was that Frank’s fault? Where was the balance of power in a mortgage session - the working poor guy, who struggled through 9th grade math or the loan officer? Your scenario is illogical and violates what we know of human nature. Mine only involves people doing things to make money, and borrowers desperate to get a leg up and to catch a ride on the seemingly ever increasing housing market believe what they were told. Whic is more likely?
Wrong again. Here is the deficit as a percentage of GDP from 1940 - 2007. You’ll notice it was trending down since WW II, up until 1982. I leave it as an exercise to the reader to figure out what happened in 1982.
I strongly advise you to start looking things up before posting, because your claims have not exactly panned out now, have they? You might want to spend some of the time you are spending posting here to go out and learn something.
I must confess to whooshing you by saying FDR was a hero. FDR did things for the average American, so you and yours hate his guts. The chart, by the way, shows very clearly who is responsible for this debt - it is Republicans and voodoo economics.
So, true capitalism makes monopolies impossible? Does Standard Oil ring a bell? We’ve abandoned your true capitalism because it didn’t work, neither for the people or for the capitalists.
BTW, did you understand what I was referring to by cross of gold, or was I aiming way over your head?
Cite about government okaying shady loans? I can’t even blame the Republicans for that one. Cite for the FDIC being corrupt? Do you understand why we have the FDIC? Ever seen “It’s a Wonderful Life?” If so, you might begin to understand.
Not quite. This made the decline in housing prices catastrophic, but didn’t have much to do with the increase. My house went up in supposed value something like $200K during the bubble - and fell down again. I owe a lot less on it than its price now. If we had taken out equity loans on the increase, then we’d be in trouble. Since we didn’t, the theoretical rise and fall in our home’s price had no impact on us.
The increase in foreclosures due to people using their homes as an ATM did probably push prices down more, but I’m not sure it pushed them up much.
Marketing and financing however did play a role.
Who are “me and mine?” I’m speaking for me and that’s about it. I don’t hate his guts, I just disagree with the idea that social programs is what makes the majority of people successful. Letting people have the freedom to seek their endeavors gives the most success. I am all for social programs that empower individuals to become independent, not ones that enslave people in a vicious cycle you can’t get out of. I’m also for cutting off people at some point who are just lazy (I concede there are people who will need aide and help their whole lives).
For the record, I am an average American, speaking economically. I benefit from government programs like Stafford Loans and some of the tax credits that are school related as I’m returning for a master’s degree. I appreciate that there are social programs designed to help people advance in life. I just don’t think the programs targeting low income peoples really help, just enable helplessness.
I’ll move back on topic (PM me if you want to talk about anything in particular, I like talking with people). I got the cross of gold reference, Bryan’s speech regarding the unlimited coinage of silver right? If I’m not mistaken, it was partially at least in response to the Sherman Silver Purchase (Sherman Silver Act?) which by the government bought up all the silver in exchange for paper money (as we moved closer to a totally fiat currency system). It didn’t work, because people turned it in for gold, not wanting a paper money system. This wasn’t even the first attempt though, there were about 3 or 4 other tax acts, tarrifs, etc in which the government bought up all the silver, trying to fill the US government’s coffers leaving us with paper money that is only as valuable as the people who control it say it is.
I am not a hard and fast capitalist, there are problems to the system just like any other. I’m all for banning monopolies, but how is the government eating up everything (banks, auto-manufacturer’s, etc) any less of a monopoly? The government should be regulating businesses to act ethically and try to keep the market open and fair. They also should allow business to fail when they obviously are not working. People need banks. People need cars. Something will rise to fill the void. At some point, some things need to fail to move forward, be it businesses, investments, or governments/economic systems themselves. I do not relish in things failing, I’m just acknowledging that it has to happen at some point or another. When a government interferes to the point of propping up failing business models, that is over-regulation in my mind. It’s no longer protecting the people, but protecting corporations. When the government buys out corporations and absorbs them, well that is soviet style communism, which didn’t work out much better than “pure capitalism” (though I’d argue it wasn’t pure, but nothing usually is.)
Republicans and their “voodoo economics” are definitely culprits in this, just not the only ones.
I understand the proposed purpose of the FDIC, but watching how they forced banks to take bailout money, even ones who didn’t want it, I have to wonder what the motivations are for an agency to spend money that doesn’t need to be spent? Especially when it’s their effing job to help prevent economic crises! So I can’t cite “proof” of specific corruption, just the trend of history, human beings, and that money and power make people do corrupt things for more money and power. You only need a handful of corrupt people making the decisions to corrupt a whole organization. I’m not saying every FDIC employee is an evil power monger.
Under Clinton (though he was not the first to do this, so again, not putting all the blame on one person) his administartion pushed for all people to have access to housing leading to approval to issue these sub-prime rate loans that have recently come back to bite people in the ass. So they didn’t hold a gun to people’s heads and force it, but they relaxed the wrong kinds of regulations (on ethical business practice) opening the door for people to be taken advantage of (though many people likely didn’t even bother investigating the risks for themselves, so that’s their fault).
Why are we giving billions to banks that failed/are failing when with the money spent on the Bush/Obama coporate handouts could have given every homeowner in America about $100,000 (last figures I read)? Want to reinvigorate the economy? Help people pay off their debt to get more liquidity in the market place. I’m not a big proponent of handing out money everywhere, but if we’re going to give them, let’s start at the foundation of the country (the people) and work our way up. Government and business should not be our top priorities.
I’m sorry if I’m a bit rambly. It’s late and I should go to bed. Look forward to your response tomorrow.
The book I’m currently reading, “Why Your World Is About To Get A Whole Lot Smaller” by Jeff Rubin says that triple-digit oil prices caused this recession - the subprime crisis was a symptom, not a cause. It’s a fascinating theory; once we come out of this recession, we’ll see oil prices go up again, which will trigger yet another recession, and cycling on like that until the global economy un-hooks from oil.
While I agree that the housing collapse is a symptom of greater problems, please help me understand what the cost of oil has to do with a housing collapse? I admit, gas was high for awhile, but I was still able to afford my montly rent of $550. Granted some mortgages were higher than that, but again, were people biting off more than they could chew? Rising oil prices may have contributed, but it is just one factor in a perfect storm of events.
This is a silly distortion of the actual process.
People turned in their notes for gold because it was the speculatively smart thing to do. The price of commodities, even precious metals which people ordinarily like to think of as having stable value, are constantly in flux. A two-metal standard is impossible not because it’s “paper money”, but because the two metals will never be able to maintain a steady value with respect to each other, despite the paper representation to the contrary. If the quantity of gold had suddenly expanded through, say, the discovery of a cheap alchemical process, the very same speculators would have followed the very same reasoning to start hoarding silver and other non-gold-denominated assets.
None of these silver purchases were attempts to create a paper currency. They were, instead, attempts to inflate the currency and thus reduce the real value of current existing debts, while also preserving some semblance of a metal standard. They were silly, economically ignorant motions.
They should’ve just dropped the standard entirely and shifted to fiat currency. But they couldn’t have known that at the time because they hadn’t yet experienced the Great Depression, which finally taught us the incredibly harsh lesson of trying to maintain the value of the currency even given a self-reinforcing deflationary trap.
The reasoning with the auto bailout was that a failure of a big company like GM could case a cascade effect that would threaten their entire supply chain. I don’t know how true that is, but I do know that even their chief competitor Toyota supported the government’s decision to bailout the company.
As for banks, you’re just plain wrong. Nothing’s going to fill the void in time to avoid a depression if half the US money supply disappears overnight. Even with the bailouts and a trillion dollar expansion of the monetary base, we still suffered a drop in nominal GDP because the velocity of money dropped so steeply. And let me clear about this, because “average American” thinking isn’t sufficient to understand this point on its own: There is no significant dispute about this among economists, as there is about so many other issues. Even a hardcore libertarian like Milton Friedman advocated that the money supply should never decrease. And despite that warning, we still experienced a nominal GDP drop with the onset of the recent crisis.
It isn’t even remotely similar to Soviet style communism. The US government is not setting quotas, is not setting prices, is not allocating goods and services to people based on their “need”. In some ways, what we have now is much worse than Soviet style communism. We’ve privatized profits and socialized losses. The bailouts were, yes, completely mismanaged on almost every level.
But the finance bailouts were also necessary to avoid a depression. They just should’ve been structured much, much differently.
This is beyond clueless.
The FDIC regulates regular depository institutions, traditional banks, not the big investment firms that were failing. That was the whole fucking problem. The FDIC doesn’t have to bailout a failed bank under its jurisdiction–it simply takes it into receivership, guts the owners, repackages the assets, and sells it to another bank. It’s like a superquick bankruptcy procedure. But the investment banks, the ones that were failing, weren’t under the FDIC’s jurisdiction. They were part of the “shadow banking” system, and there was no FDIC for them, ready to gut the owners and put the healthy pieces back into the market quickly. And that’s why we had to resort to the ad hoc bailout system.
It was Treasury that forced the investment banks to swallow the TARP pill, whether they liked it not. The FDIC, in its current form, simply doesn’t have the manpower to regulate the big multinationals. That’s not what the agency was created for.
Because that would cause hyperinflation. The money that was loaned out in the financial bailouts will be almost entirely paid back. The government is making money on most of these loans, not losing it.
And I say this as a person who believes that the Fed clearly has not done enough to fight this downturn. The dollar is rising again internationally, long-term bond yields are creeping back down. The Fed should absolutely be pumping more cash into the system. No longer paying a quarter percent interest on excess bank reserves might be a good start on that. That would get the cash flowing again, which would in turn help people pay off their debts, just like you want.
**See, I would like to see that, and if the Fed ever did something like that, I might not think they’re quite so ominous as I currently do. Help me understand how the Fed nearly continuously pumping money into the system doesn’t result in hyperinflation? I’m not getting how that’s better than giving money to individuals.
@ Voyager - about your GDP-National Debt graph…It shows the ratio in recent years between 60-70%. Unless my figures are wrong, our GDP is about 14.2 Trillion, and our national debt is about 12.4 trillion. That puts the percentage around 88%. Am I doing bad math? Do I have the wrong numbers? I’m not understanding why your chart isn’t matching the figures I have.
**
My chart only went to 2007, and so doesn’t include the higher level of deficits in the past two years. The point is not to deny that today we have a large deficit (and Obama’s addition to it was necessary) but that the level of debt actually had been falling for years before Reagan, contrary to your claim.
Hellestal, thanks for your informative comments as usual. IIRC, there were periods of deflation in the late 19th century, which I believe were due in part to an economic expansion without enough currency in circulation. I’ve read that the common “widow losing the farm to the evil banker” plot line was inspired by the difficulty of holding a mortgage or owing money in a deflationary period. Am I more or less correct?
OK…I saw it said to 2007 at the top, but I was counting hashmarks at the bottom of the graph so I got confused. Anyway, yeah I was wrong on that one. Thanks for the correction.
I want to be clear, I am not posting this video to defend Bush Reagan, or anyone else - just to make a point why Obama’s proposed spending plan is even more dangerous and detrimental to our economy.
http://www.youtube.com/watch?v=P5yxFtTwDcc
We are seeing the greatest expansion and increase in government over the last 30 years since the 30’s and 40’s. I guess if you think that’s a good thing, then that’s not a problem, but for me personally, I don’t feel that way. I appreciate that you are repulsed by the Republicans double speak (as am I), but I fear you ignore when the Democrats are equally guilty of propaganda and rhetoric. There were Republicans in power during those down turns as well (I’m sure you are aware). If your major beef is with neo-conservatism (which is probably better termed machiavellianism) then I’m right next to you in the shouting mob.
Again though, while you’re quite obviously opposed to Reagan’s economic policies (carried on by Bush v1.0 and v2.0), as the video said, Obama’s proposed budget is blowing them out of the water. Also it’s worth pointing out that Reagan and Bush 1.0 both had Democratic congresses, so they share some of the blame I should say.
Help me understand why Obama’s debt he added was good but the neo-cons of the last 30 years were bad.
I don’t know about the plot line stuff, but yes, holding debt is especially burdensome during periods of unexpected deflation.
Say the nominal rate of interest is 5 percent. With slight inflation of 2%, the real interest you pay on the loan is a mere 3 percent. In real terms, the debtor pays less and the creditor receives less. And just as inflation decreases the real interest rate, deflation increases the real rate. A nominal value of 5%, with a deflation rate of 2%, suddenly causes the real interest of the loan to be 7%. And then the debtor has serious problems, especially given the economic conditions that are likely causing the deflation.
Prices generally decreased over the course of the 19th century (I got this point wrong in a previous thread). A dollar was worth more in 1900 than it was in 1800. And that was precisely because the economy grew faster than the money supply. There were relatively few dollars chasing more and more goods and services, thus making those dollars more valuable. Even so, it was not a smooth transition across the time period. The gold standard is most emphatically not going to keep prices stable during bubble periods, nor during the subsequent panics. And this compounded the problem for that poor old widow of the stories. She borrowed money during the expansion, when prices were naturally inflating because of a higher velocity of money. But prices couldn’t inflate forever, not with a relatively fixed currency. Eventually the crash came, and with it the deflation and the “hard times”. And so not only did the widow have to pay back her mortgage with dollars that were worth significantly more than the dollars she borrowed, she had to attempt to do this during a recession when there were fewer opportunities to earn those dollars. Deflation isn’t just a problem for debtors on its own–the deflation is accompanied by, and reinforces the severity of, other economic problems.
Because according to mainstream macroeconomic theory, you’re supposed to add to the debt during a recession, and you’re not supposed to do so during economic expansion.
The Bush debt was bad because there was no point to it. The economy was expanding. There was no useful purpose is the government not paying for what it purchased. Unfortunately, we can’t take back the radical irresponsibility of the Bush era. It’s done and gone and we have to live with the consequences. But now that we’re experiencing a large output gap, it will do more harm than good to rein in spending now. The economy right now needs the stimulus to stay afloat.
If the economy were to swiftly recover, it would be swiftly necessary to halt the expansion of government spending. But such is not the case at the moment.
Yes, it has. And as your example of silver purchases showed, it has often backfired in spectacular fashion.
What you don’t seem to realize, though, is that our past attempts to be “responsible” with our money supply have also backfired in spectacular fashion, when we were being responsible at the wrong time. What works during economic expansion does not necessarily work during a recession. Different illnesses call for different treatments. If there are two patients, one suffering hypothermia and the other suffering second-degree burns, then there are different methods to deal with these problems. The same is true for the economy as a whole. Yes, we have numerous examples of countries believing they can create prosperity out of thin air by increasing the supply of money. You’re missing, though, that we also have examples, in certain rare circumstances, of countries that have created real wealth by inflating their money supply. This is not artificial prosperity. It has caused a genuine improvement in the real ecomomy, and thus in real peoples’ lives.
You have many conflicting statements here.
First, you don’t seem to understand what inflation is. We are most emphatically not trying to maintain the value of the currency. Inflation is a reduction in the value of the currency. And a reduction in the value of our currency is precisely the goal. We want people to realize that their dollars will be worth less in the future, so they start doing something with those dollars now. This worked during the Depression, and it will work again today.
Next, you don’t seem to understand the distinction between monetary policy (i.e. printing more money) and fiscal policy (i.e. the government borrowing money to spend it or cut taxes). Fiscal policy increases the deficit. Monetary policy does not. Aggressive monetary policy reduces the debt by seigniorage. In normal times, this would be a problem, because the government printing more money is effectively a tax on those who are currently holding US dollars. It leads to inflation. However, stuck as we have been in a deflationary situation recently, a little bit more inflation is exactly what we need right now.
In other words, with an appropriately balanced stimulus from monetary policy, we can both reduce our debt and increase our prosperity.
You also don’t seem to understand the debt burden of the bailouts. The bailouts were a mix of both monetary policy and fiscal policy (both printing and borrowing money). However, the bailouts are a tiny drop in the deficit bucket because most of that money will be paid back. If you’re genuinely worried about deficits (as I will also be once the economy starts a genuine recovery), then you should focus your ire primarily on the Bush administration, which is responsible for more than 85% of the deficits we’re currently facing. Obama’s spending, even if you don’t follow the mainstream Keynesian view (and plenty of economists don’t, although they are a minority) is a small fraction of the problems we’re facing right now. Even if you disagree with the man about his 15%, you can’t possibly accuse him of radical irresponsibility. He is following the textbook. Many economists believe that, if anything, he hasn’t gone far enough given the magnitude of this downturn.
This is a vicious contradiction.
You spent a full paragraph waxing wrathfully about the corruption of Nancy Pelosi and the rest of the Washington power structure. In the next paragraph, you then advocate giving them even more power. What in the name of Jesus’s abnormally swollen Adam’s apple are you thinking?
The Fed has made some mistakes. Absolutely. And there is still no god damn way I’m going to trust Congress more than the Fed. Look, if we don’t get our health care costs under control, if we don’t institute some genuine health care reform, we’re screwed. All of the rest of this is meaningless because our medical costs are going to swallow us in a couple decades. And how does Congress respond to that? By sitting with their thumbs up their asses. And these are the people you want to give control of our printing presses? The very same people who have to stand for election every two or six years? That’s just crazy talk. We do that, and we’d be looking like Weimar Germany within two election cycles.
The reason we have an independent central bank is to prevent the people who would destroy our currency from destroying it. The Fed is, if anything, too conservative. Giving Congress a whip would certainly fix that problem. But at what cost? Who’s to tell Congress to shove it when all the incumbents want to over-heat the economy in the summer before a November election?
Does the Fed have monstrous powers? Yes. Yes, they do. But the whole reason they have the powers they do now is because those powers were deliberately taken away from Congress. And even then, the Fed used to be constrained by its gold reserves. They no longer have to live with that constraint. And why? The Congress and the presidency couldn’t control themselves. They’re politicians. They have no restraint. The Fed with a free hand, even without a gold constraint, has been consistently more responsible with our money supply than any group of politicians. They have done absolutely nothing to justify the contempt they receive.
So they haven’t told us where all the new money has gone? Well, that’s right. They haven’t. And why is that? They don’t want a bunch of short-selling sharks to undercut markets that they are trying to prop up. Maybe they’re over-zealous on this point. I suppose that’s possible. I don’t know these markets near enough to say for sure. But even if the Fed is wrong on this point, I guarantee you that the number of congress-critters who understand why the Fed is wrong on this point could be counted on a single hand. This means that if you give Congress power over the Fed, you are not creating any new checks and balances. Instead, you are collapsing the monetary and fiscal policy of the United States into a single institution, the Congress, which has already proven itself mostly inept with what it already has.
I’ll take the Fed we have now. It makes mistakes, but thankfully, it is also quite often capable of making sensible decisions.
Because the Fed does not give money away. It lends it. It buys assets. It does not write blank checks.
Eventually, the time will come when the Fed will need to suck up all those new dollars that they’ve printed. In other words, they need to have an escape plan. Giving money away for free is not an escape plan. It’s a recipe for hyperinflation. What they’re doing now is vastly differently. Yes, they’re propping up markets. Yes, they’ve created a lot of new money. That money is intended to circulate through the economy… but not too fast! As soon as things start warming up too much, the Fed will wind down. It will take its dollars back and destroy them.
There’s a balance here. They’re trying to find it. I suggest that you read this explanation of the Fed’s functions, which I will immodestly call the best short summary that I know. You need to understand it before you criticize it. And if you do understand it, you might be willing to consider the possibility that the current problem with the Fed is not its secrecy, nor its bailouts, but that it has not yet printed enough money to fight this downturn.
I’ll try to paraphrase from the book -
Global economic growth depends on cheap oil for cheap transport costs; globalization decreases inflation; lower inflation decreases interest rates. Cheap oil facilitated globalization and created a lot of easy (cheap) money to spread around. Cheap money manifested in easy credit and mortgages with low interest rates - too easy. People who could barely afford it got credit cards and mortgages. Subprime mortgages are created, they are leveraged into derivative investments by Wall Street, investors around the world with money to invest (and looking for a higher-return investment than low-risk treasury bills, which are returning those previously mentioned low interest rates) believe the AAA risk rating and buy them.
Inflation triggered by high oil prices started to increase the cost of servicing the easy debt that people couldn’t afford unless interest rates stayed low. Oil prices rise, inflation rises, interest rates rise, subprime mortgages come due for re-financing, and all the people who shouldn’t have been allowed to buy get washed out of their mortgages. The over-leveraged credit bubble bursts.
Bush the elder actually increased taxes when necessary - remember the outrage? Reagan did too at the end of his term, not enough, though.
Let’s talk about Bush the younger. In 2001, with a recession (which was not his fault, to be clear) he wanted a tax cut, which was appropriate. What he did wrong was to propose the wrong type of tax cut. In 2001 the problem was not lack of investment, but lack of consumption. Silicon Valley companies were writing off inventory in the billions of dollars ranges, and contract manufacturers went from full production to almost nothing. Bush’s tax cut, targeted to the rich, would have been great if more investment was required, which it wasn’t. Since most Americans got very little, consumption rose only slightly, which was the cause for the slow recovery in terms of jobs, and the even slower recovery in terms of income.
The problem was that the tax cuts did not go away when the economy recovered and they were no longer needed for stimulus. Instead, they remained as the cost of the wars and Medicare exploded. So we had a big deficit when it was not required to stimulate the economy. Notice how the Clinton-era tax increases and a booming economy went hand in hand. Somehow, even at the old higher tax rates for the rich, there was plenty of money for investment - too much, actually, since I think a bit less money in venture capital would have made them examine start-up business plans a bit more closely.
If we had an essentially balanced budget the necessary Obama deficit wouldn’t be a big issue. Piled on top of the unnecessary Bush deficits, it becomes more painful. The right is hypocritical, to say the least, to cheerlead the unnecessary deficits and oppose the necessary ones. Read Hellestal’s post to correct your misunderstanding of the impact of these on inflation.
Say your car dies, and you need to borrow $15 K to buy a new one. Isn’t it better to have no debt at this time as opposed to massive credit card debt from partying and buying junk? And what would you say to a so-called friend who encouraged you to run up credit card bills for partying, and then criticized you for borrowing to pay for the car?