The American dream, when the US with 6% of the world's population consumed 50% of the world's commodities is over. The foundations on which the dream was built-- the power of US industry and its banks are no more. The US is a tattered absurd caricature of its former self, as the institutions upon which is rose collapse one after the other like a house of cards
On Oct 17, 3:03 pm, "M.A. Johnson" <[EMAIL PROTECTED]> wrote: > Good and Bad CreditbyFrank Shostak > Posted on 10/16/2008 > On Wednesday October 8 the Federal Reserve, European Central Bank, and four > other central banks lowered interest rates in an emergency coordinated bid to > ease the economic effects of the financial crisis. > The Fed, ECB, Bank of England, Bank of Canada, and Sweden's Riksbank each cut > their benchmark rates by half a percentage point. Furthermore, China's > central bank lowered its key one-year lending rate by 0.27 percentage points. > According to a joint statement by the central banks,The recent > intensification of the financial crisis has augmented the downside risks to > growth and thus has diminished further the upside risks to price stability. > Some easing of global monetary conditions is therefore warranted.The Fed's > decision brought its benchmark rate to 1.5%. The ECB's main rate is now > 3.75%; Canada's fell to 2.5%; the U.K.'s rate dropped to 4.5%; and Sweden's > rate declined to 4.25%. China cut interest rates for the second time in three > weeks, reducing the main rate to 6.93%. One day earlier the Reserve Bank of > Australia had lowered its policy rate the cash rate by 1% to 6%. > Only a day earlier Federal Reserve Chairman Bernanke announced that the US > central bank is ready to intervene in the commercial paper market. The Fed > will now buy commercial paper issued by corporations meaning the US central > bank will make direct loans to corporations. > It seems that Bernanke is ready to push trillions of dollars to keep the > monetary system alive. > Bernanke is of the view that a major reason for the Great Depression of 1930s > was the failure of the US central bank to act swiftly to revive the paralyzed > credit market. By "swift action," Bernanke means massive monetary pumping. > The Fed chairman continuously reminds us that at least he has learned the > lesson of the Great Depression and will make sure that the error that the Fed > made then will not be repeated again. > At theconferenceto honor Milton Friedman's ninetieth birthday, Bernanke > apologized to Friedman on behalf of the Fed for not pumping enough money to > prevent the Great Depression:Let me end my talk by abusing slightly my status > as an official representative of the Federal Reserve. I would like to say to > Milton and Anna: Regarding the Great Depression. You're right, we did it. > We're very sorry. But thanks to you, we won't do it again.(Milton Friedman > and Anna Schwartzwrotethat the key factor behind the Great Depression was the > failure by the Fed to pump large doses of money.) > Central-bank policy makers have said that the key for economic growth is a > smooth flow of credit. For them (in particular, for Bernanke) it is credit > that provides the foundation for economic growth and raises individuals' > living standards. From this perspective, it makes a lot of sense for the > central bank to make sure that credit flows again. > Following the teachings of Friedman and Keynes, it is an almost-unanimous > view among experts that if lenders are unwilling to lend, then it is the duty > of the government and the central bank to keep the flow of lending going. > For instance, if in the commercial-paper market lenders are not there, then > the Fed should step in and replace these lenders. The important thing, it is > held, is that various businesses that rely on the commercial-paper market to > keep their daily operations going should be able to secure the necessary > funding. > Will the increase in money pumping by central banks unfreeze credit markets? > Experts believe that this will do the trick. If the current dosage of pumping > won't work, then the central bank must continue to push more money until > credit markets start moving again, so it is believed. > It is true that credit is the key for economic growth. However, one must make > a distinction between good credit and bad credit. It is good credit that > makes real economic growth possible and thus improves people's lives and > well-being. False credit, however, is an agent of economic destruction and > leads to economic impoverishment.Good Credit versus Bad CreditThere are two > kinds of credit: that which would be offered in a market economy with sound > money and banking (good credit); and that which is made possible only through > a system of central banking, artificially low interest rates, and fractional > reserves (bad credit). > Banks cannot expand good credit as such. All that they can do in reality is > to facilitate the transfer of a given pool of savings from savers (lenders) > to borrowers. To understand why, we must first understand how good credit > comes to be and the function it serves. > Consider the case of a baker who bakes ten loaves of bread. Out of his stock > of real wealth (ten loaves of bread), the baker consumes two loaves and saves > eight. He lends his eight remaining loaves to the shoemaker in return for a > pair of shoes in one week's time. Note that credit here is the transfer of > "real stuff," i.e., eight saved loaves of bread from the baker to the > shoemaker in exchange for a future pair of shoes. > Also, observe that the amount of real savings determines the amount of > available credit. If the baker had saved only four loaves of bread, the > amount of credit would have only been four loaves instead of eight. > Note that the saved loaves of bread provide support to the shoemaker, i.e., > they sustain him while he is busy making shoes. This means that credit, by > sustaining the shoemaker, gives rise to the production of shoes and therefore > to the formation of more real wealth. This is a path to real economic > growth.Money and CreditThe introduction of money does not alter the essence > of what credit is. Instead of lending his eight loaves of bread to the > shoemaker, the baker can now exchange his saved eight loaves of bread for > eight dollars and then lend those dollars to the shoemaker. With eight > dollars, the shoemaker can secure either eight loaves of bread (or other > goods) to support him while he is engaged in the making of shoes. The baker > is supplying the shoemaker with the facility to access the pool of real > savings, which among other things includes eight loaves of bread that the > baker has produced. Note that without real savings, the lending of money is > an exercise in futility. > Observe that money fulfills the role of a medium of exchange. Hence, when the > baker exchanges his eight loaves for eight dollars, he retains his real > savings by means of the eight dollars. The money in his possession will > enable him, when he deems it necessary, to reclaim his eight loaves of bread > or to secure any other goods and services. There is one provision here: that > the flow of production of goods continues; without the existence of goods, > the money in the baker's possession will be useless. > The existence of banks does not alter the essence of credit. Instead of the > baker lending his money directly to the shoemaker, the baker lends his money > to the bank, which in turn lends it to the shoemaker. > In the process, the baker earns interest for his loan while the bank earns a > commission for facilitating the transfer of money between the baker and the > shoemaker. The benefit that the shoemaker receives is that he can now secure > real resources in order to be able to engage in his making of shoes. > Despite the apparent complexity that the banking system introduces, the act > of credit remains the transfer of saved real stuff from lender to borrower. > Without the increase in the pool of real savings, banks cannot create more > credit. At the heart of the expansion of good credit by the banking system is > an expansion of real savings. > Now, when the baker lends his eight dollars, we must remember that he has > exchanged for these dollars eight saved loaves of bread. In other words, he > has exchanged something for eight dollars. So when a bank lends those eight > dollars to the shoemaker, the bank lends fully "backed-up" dollars so to > speak.False Credit Is an Agent of Economic DestructionTrouble emerges however > if, instead of lending fully backed-up money, a bank engages in > fractional-reserve banking, the issuing of empty money, backed up by nothing. > When unbacked money is created, it masquerades as genuine money that is > supposedly supported by real stuff. In reality, however, nothing has been > saved. So when such money is issued, it cannot help the shoemaker, since the > pieces of empty paper cannot support him in producing shoes what he needs > instead is bread. But, since the printed money masquerades as proper money, > it can be used to "steal" bread from some other activities and thereby weaken > those activities. > This is what the diversion of real wealth by means of money "out of thin air" > is all about. If the extra eight loaves of bread aren't produced and saved, > it is not possible to have more shoes without hurting some other activities > activities that are much higher on the priority lists of consumers as far as > life and well-being are concerned. This in turn also means that unbacked > credit cannot be an agent of economic growth. > Rather than facilitating the transfer of savings across the economy to > wealth-generating activities, when banks issue unbacked credit they are in > fact setting in motion a weakening of the process of wealth formation. It has > to be realized that banks cannot relentlessly pursue unbacked lending without > the existence of the central bank, which, by means of monetary pumping, makes > sure that the expansion of unbacked credit doesn't cause banks to bankrupt > each other. > We can thus conclude that, as long as the increase in lending is fully backed > up by real savings, it must be regarded as good news, since it promotes the > formation of real wealth. False credit, which is generated "out of thin air," > is bad news: credit which is unbacked by real savings is an agent of economic > destruction.Fed and Treasury Actions Only Make Things WorseNeither the Fed > nor the Treasury is a wealth generator: they cannot generate real savings. > This in turn means that all the pumping that the Fed has been doing recently > cannot increase lending unless the pool of real savings is expanding. On the > contrary, the more money the Fed and other central banks are pushing, the > more they are diluting the pool of real savings. > Yet most commentators are of the view that, given the present fragile state > of the financial system, the central bank and the government must intervene > to prevent the collapse. But how can the government and the central bank help > in this regard? How can the central bank or the government generate more real > savings? > The only thing that the government and the central bank can do is to > redistribute the real savings from other people and give it to banks. Now, if > the pool of real savings is still expanding this can "work" and lending might > flow again but the overall pool of real savings will weaken as a result of > the transfer of real savings from the nonbanking sector to the banking > sector. If, however, the pool of real savings is falling, then it will not be > possible to increase the flow of lending.Why Doing Nothing Is the Best Policy > to Revive the EconomyGiven the growing likelihood that the pool of real > savings is in serious trouble, does this mean that the flow of credit will > remain frozen? What can be done to unfreeze the flow is to allow the interest > rate to find its own level. > With a weakening real economy, lenders will be willing to lend only at the > interest rate that allows for higher risk and for the fact that less real > savings is available, all other things being equal. At a much higher interest > rate, the so-called financial crisis and the shortage of credit will vanish. > The problem then is not with the credit market as such but with the fact that > the central banks are pushing massive amounts of money and trying to force > interest rates artificially lower. This of course makes it even less > attractive for lenders to enter the credit market. Hence the shortage (i.e., > the credit crunch) is the result of the central bank not allowing interest > rates to reflect the levels that are in line with the facts of reality. > Why then are authorities resisting market forces and allowing the crunch to > persist? > Because if interest rates were allowed to be higher, many bubble activities > would become unprofitable, and would cease. > Most of those in a position to influence policy are of the view that this > would lead to a serious economic slump and therefore should not be allowed. > Supporting bubble activities with easy money further impoverishes wealth > generators and delays the prospects of a meaningful economic recovery. The > pumping by the Fed will distort the interest-rate structure further and > worsen the credit crunch. The best policy is for the Fed to do nothing as > soon as possible. By doing nothing, the Fed will enable wealth generators to > accumulate real savings. The policy of doing nothing will force various > activities that add too little or nothing to the pool of real savings to > disappear. This will make make the generation of wealth much more rewarding. > As time goes by, the expanding pool of real savings will work towards the > lowering of interest rates. This in turn will provide a base for the further > expansion of various wealth-generating activities. Therefore, the sooner the > Fed stops tampering, the sooner an economic recovery will emerge. > If the pool of real savings is still growing, then doing nothing (and > allowing the interest rate to reflect reality) will allow the recession to be > short lived and economic recovery to emerge as fast as possible. (At a higher > interest rate, various bubble activities will go belly up. As a result, more > real savings will become available to wealth generators. This in turn will > work towards the lowering of interest rates.) > We suggest that decades of reckless monetary policies by the Fed have > severely depleted the pool of real savings. More of these same loose policies > cannot make the current situation better. On the contrary, such policies only > further delay the economic recovery. > By impoverishing wealth generators, the current policies of the government > and the Fed run the risk of converting a short recession into a prolonged and > severe slump.[VIEW THIS ARTICLE ONLINE]________________________Frank Shostak > is an adjunct scholar of the Mises Institute and a frequent contributor to > Mises.org. He is chief economist ofM.F. Global. --~--~---------~--~----~------------~-------~--~----~ Thanks for being part of "PoliticalForum" at Google Groups. For options & help see http://groups.google.com/group/PoliticalForum * Visit our other community at http://www.PoliticalForum.com/ * It's active and moderated. Register and vote in our polls. * Read the latest breaking news, and more. -~----------~----~----~----~------~----~------~--~---
