Let me start out by asking a few questions. How many of you were pro-bailout? How many pro-healthcare? How many think borrowing trillions of dollars to “stimulate” will really have any long term effect what-so-ever on the economy? How many realize that borrowing and spending really isn’t the cure for a problem caused by too much debt and too much consumption?
Now let me ask another question. Aren’t our politicians supposed to represent the will of the people?
I’m going to assume that the vast majority answered no to the above questions and yes to the last one. If that is the case then why in the hell did we hand over billions and billions of dollars to the banking industry? Was that in our best interests? How on earth did the health care bill get passed? And why, why, why are we throwing trillions of dollars down the drain in stimulus that has no earthly chance of having any long term positive effects?
Of course we all know the answer to the question. All these things came to pass because politicians don’t actually represent the will of the people. Politicians represent our desire to avoid short term pain and their own personal desire to get re-elected.
So how did we get in the mess we are in?
Let’s start off with a little history. Let me say that nothing is happening today that hasn’t happened many times in the past. I’m fairly certain human nature hasn’t changed in the last 5000 years or so, and I really doubt it’s going to materially change in the next 5000 either, so I can virtually guarantee we will go through this again…and again, and again.
Historically about every 70-80 years humanity suffers through an economic depression. It takes about that long for society to forget the ravages of the last depression. And what causes it is a credit bubble.
I know we would like to blame our troubles on the greedy bankers and leave it at that. But that is way too simple. Bankers are just human, no different than anyone else. Trust me, no one is immune to the pull of greed. Sure the financial system should have foreseen that no good could possibly come from loaning half a million dollars to someone with a $30,000 a year job. And what about the speculator that bought that half million dollar house. He knew darn well when he took out the loan he couldn’t afford to make any payments once the teaser rates expired. Isn’t it also his fault when he lied about his income? Or how about the loan originator? Was it really in everyone’s best interest to underwrite a loan for several hundred thousand dollars to a guy sitting on the other side of the table wearing a McDonald’s work uniform? Or was it just the quickest way to make a commission? And what the heck, everyone else was doing it. If they didn’t make the loans they were just going to put themselves out of business while all their competitors were getting rich.
The same could be said for the appraisers. They certainly knew the prices they were quoting had no basis in reality, but then if they tried to act responsibly they would quickly find themselves out of a job.
How about the home owner who annually or biannually refinanced their house so they could take equity out and buy a new Hummer, home theater system, or a swell vacation, etc. Aren’t they also just as much to blame as the bankers?
We’ve coined the term Banksters as a sign of the contempt we feel towards the perceived instigators and originators of our current malaise, but perhaps we need another term, one that is a bit harder to stomach but just as appropriate. Sure, the Banksters were a big part of what went wrong but no more so than the average Americanster. All those folks living on home equity, all those buying houses, sometimes several at a time to flip, all those people lying about their income, were they not also driven by greed? Weren’t they just as much at fault for the mess we are in as any banker?
Next I want to point out that none of this would have been possible without the co-operation of our elected officials and especially the Federal Reserve. After all it was Alan Greenspan and now Ben Bernanke who cut rates to near zero and supplied the free money that was required to get the ball rolling down the hill. No bubble was possible without the consent of the Fed, the very people who are supposed to be looking out for this very thing.
Of course Greenspan has insisted it isn’t possible to spot a bubble before it pops. What a load of baloney. Anyone with half a brain could spot not only the tech bubble but also the housing bubble a mile away.
Amazingly we are now going to give the Fed even more power to regulate and oversee markets. The very people whose monetary policies enabled the credit bubble in the first place. The very same people who couldn’t see it as it formed. The very same people who repeatedly denied it as it imploded.
Do we really want to trust these folks with regulating the system? Let’s face it, their track record leaves a lot to be desired. Why should we think they will get it right this time when so far they are batting zero?
There are right and wrong ways to deal with this kind of problem though. History has shown over and over that the quickest and cleanest solution is to let the market work. Let the system collapse and cleanse. Sure it means hard times. There really is no avoiding that. The countries that have allowed the market to function have suffered 2 or 3 years of extreme pain. Regretable, but unavoidable.
However, every country that buckled down and accepted the cleansing process emerged from the other side much stronger. Brazil in the early 80’s, Vietnam in the mid 80’s and Russia in the late 90’s are just a few examples. And without exception these countries all saw explosive growth after allowing the cleansing process to run its course.
On the other hand the countries that fought the market without exception entered long periods of hard times. In the 1930’s Roosevelt took this path and turned what should have been just a bad recession into the Great Depression. Ultimately all the efforts to halt the depression only made it worse, culminating in World War II.
Japan chose this path and was rewarded with 20 years of on again, off again recessions, culminating in finally bankrupting their country.
Now we are faced with the same problems as Japan in the 1990’s and Roosevelt in the 1930’s and what path have we chosen? The path of least resistance, of course. We’ve decided to kick the can down the road.
We are certainly in good company as almost every major empire in the history of the world has chosen this path to oblivion. And it always starts with currency debasement.
Take a good look at the following chart.