Posted on 10/03/2008 7:55:32 PM PDT by Tolerance Sucks Rocks
No one wants to talk about who is most to blame for the financial crisis that now threatens the U.S. economy, though there is plenty of blame to go around. It is far easier to blame other people -- greedy Wall Street executives, predatory lenders, President Bush, federal regulators, members of Congress --than it is to look at ourselves.
For too long, Americans have been living on borrowed money they could never pay back. We've bought houses we couldn't afford and taken out loans on home equity that didn't materialize, assuming housing values would continually move upward. We've paid for every new gadget Madison Avenue hawked with credit cards whose principal we never paid down. We sent our children to college on loans, saddling them with debts that crush their futures. And all the while, we've kidded ourselves into believing the bill wouldn't come due. Now it has -- and all of us, responsible and irresponsible alike, will foot the cost.
But you will never hear this explanation from politicians who are scrambling to resolve the credit crisis. It is far easier to talk about the evil of CEO "golden parachutes" or the dangers of mortgage-backed securities and sub-prime loans. Don't get me wrong. It is obscene that executives who mismanaged their companies leave with millions of dollars in ill-gotten gains while shareholders see their investments plummet and employees lose their jobs. But until we recognize the culpability for the giant Ponzi scheme that was the housing bubble goes beyond Wall Street to Main Street, we won't really fix the problem.
The average American now owes more than $16,635 in consumer debt, excluding mortgages, according to U.S. News. A 2004 Federal Reserve Board survey found that a majority of credit card holders, 58 percent, do not pay their card balances every month. Nearly 10 percent of households owe balances of $9,000 or more on their credit cards. And young Americans are especially dependent on credit cards to finance their lifestyles. Some 76 percent of undergraduate college students have credit cards, and the average undergrad has $2,200 in credit card debt, and overall will amass nearly $20,000 in student debt during their college years, according to a 2004 study by Nellie Mae.
We've simply become accustomed to buying what we want, when we want it, regardless of whether or not we can really afford it. Consumerism has been driving our economy for years. And politicians have encouraged it, including President Bush, who told us all to go shopping to bring us out of recession after the terrorist attacks on Sept. 11, 2001. Again this year, politicians urged us to spend the tax rebates that Congress passed as part of the stimulus package. I can't recall a single political leader that suggested we should pay down our debts with those rebate checks.
As a result, our individual debt continues to grow and our savings to shrink. The Bureau of Economic Analysis reports that for August 2008, the personal savings rate as a percentage of disposable income was 1 percent, but that "saving from current income may be near zero or negative when outlays are financed by borrowing (including borrowing financed through credit cards or home equity loans), by selling investments or other assets, or by using savings from previous periods." Baby boomers have little prospect of retiring on their savings, especially given the current declines in the stock market.
We have become a nation of debtors, and our only solution seems to be to turn to the government to bail us out. And it's not just Wall Street firms looking to be rescued. Politicians are fearful of passing a financial package that does not include some relief for borrowers as well. Certainly it is worth doing something to prevent lenders from making bad loans to individuals without the credit or down payment to ensure likely repayment. But automatically bailing out borrowers who weren't credit worthy in the first place is no solution.
Ultimately, all of us have got to rid ourselves of the addiction to spending money we don't have. Instead of pointing fingers, we'd better start looking in the mirror if we want to understand who's really to blame.
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Linda Chavez is the author of "An Unlikely Conservative: The Transformation of an Ex-Liberal."
COPYRIGHT 2008 CREATORS SYNDICATE, INC.
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Note -- The opinions expressed in this column are those of the author and do not necessarily reflect the opinions, views, and/or philosophy of GOPUSA.
Excellent point by Chavez.
But we just bailed out the banks that loaned the money, signaling that its OK!!!!
Che Obama or Barak Chavez. Take your pick. We will suffer under repression and depression with this Marxist coward.
This Linda Chavez is obviously not the ultra-liberal Linda Chavez who writes for the Arizona Republic newspaper.
Will the government bail out the US Citizen Consumers who piled up the debt? As long as their is music, we don’t need to sit on any chairs... But what if the rest of the world stops the music and comes for the dollars they have put in the US banks>
Speak for yourself, L-Chaz.
Now the day(s) of reckoning have come.
I am almost sorry we have played by the rules.
What’s so sad about all of this is that the PREVENTATIVE MECHANISM WAS LEFT US IN THE CONSTITUTION. Anyone remember when Bush called it a “Just a Goddamned piece of paper?”
So it appears that we get to slowly and painfully reinvent the wheel.
The one thing I’ve learned is that most people don’t learn from past mistakes and that insanity is doing the same things over and over while expecting an DIFFERENT result.
****************
(I wrote this a number of years ago when things were NOT going well with the economy. Trust me: They WILL get ugly once again as man — or certain men — cannot resist playing God. We continue to violate the universal, immutable laws of economics at our great peril.)
Despite the apparent economic strength of the American economy, history proves that EVERY house of cards eventually comes down. And the higher the card house, the harder the fall when it finally comes. And when it does, the more freedoms we will voluntarily surrender to “restore order.” It was the Founders’ concern about this historically valid problem which prompted their attempt — now ignored — to keep American “money” sound and honest.) Dick Bachert 1998
* * * * * * * *
The Forgotten History of Money
This is the fascinating story of the efforts by certain of the Founding Fathers to prevent the economic distress we find all about us today. It is also a sad story on the basis that modern, “sophisticated” Americans have abandoned the corrective institutional mechanism that remains in place to this day. As you read it, think about a world with many fewer S&L, banking and political scandals and economic problems now considered the norm.
“Blood running in the streets. Mobs of rioters and demonstrators threatening banks and legislatures. Looting of shop and home. Strikes and unemployment. Trade and distribution paralyzed. Shortages of food. Bankruptcies everywhere. Court dockets overloaded. Kidnappings for heavy ransom. Sexual perversion, drunkenness, lawlessness rampant. The wheels of government are clogged, and we are descending into the vale of confusion and darkness. No day was ever more clouded than the present. We are fast verging on anarchy and confusion. (George Washington in a 1786 letter to James Madison, describing the effects of fiat paper money inflation then ravaging America in the pre Constitutional period.)
“The annihilation (of the paper money) was so complete that barber shops were papered in jest with the bills; and sailors, on returning from cruises, being paid off in bundles of this worthless money, had suits made of it, and with characteristic lightheartedness, turned their loss into frolic by parading through the streets in decayed finery which in its better days had passed for thousands of dollars.” (Contemporary writer, Breck, 1786)
“Paper money polluted the equity of our laws, turned them into engines of oppression, corrupted the justice of our public administration, destroyed the fortunes of thousands who had confidence in it, enervated the trade and husbandry, and the manufactures of our country, and went far to destroy the morality of out people.” (Peletiah Webster, 1786)
At the drafting of the U.S.Constitution, there were many “Friends of Paper Money” present. On August 16, 1787, when the discussion arose on Article 1, Section 8, the proposed wording was this: “The Legislature of the United States shall have the power to...coin money...and emit bills of credit of the United States.”
A hot argument ensued on the power to emit bills of credit, which is another way of saying “printing paper money”.
Here are the actual words James Madison wrote describing the debate in his diary: “Mr.G.Morris moved to strike out *and emit bills of credit.* If the United States had credit, such bills would be unnecessary; if they had not, unjust and useless.
MADISON: Will it not be sufficient to prohibit the making them a tender? This will remove the temptation to emit them with unjust views. And promissory notes in that shape may in some emergencies be best.
MORRIS: Striking out the words will leave room still for notes of a responsible minister which will do the good without the mischief. The monied interest will oppose the plan of the Government, if paper emissions be not prohibited.
COL.MASON: Though he had a mortal hatred to paper money, yet as he could not foresee all emergencies, we was unwilling to tie the hands of the Legislature [Legislature = Congress].
MR.MERCER:(A friend to paper money) It was impolitic...to excite the opposition of all those who were friends to paper money.
MR. ELSEWORTH thought this was a favorable moment to shut and bar the door against paper money. The mischiefs of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America. By withholding the power from the new Government, more friends of influence would be gained to it than by almost anything else...Give the Government credit, and other will offer. The power may do harm, never good.
MR.WILSON: It will have a most salutary influence on the credit of the United States to remove the possibility of paper money. This expedient can never succeed whilst its mischiefs are remembered, and as long as it can be resorted to, it will be a bar to other resources.
MR.READ thought the words, if not struck out, would be as alarming as the mark of the Beast in Revelation.
MR.LANGDON had rather reject the whole plan than retain the three words *and emit bills*”.
The motion for striking out carried.
Historian George Bancroft later wrote: “James Madison left his testimony that *the pretext for a paper currency, and particularly for making the bills a tender, either for public or private debts, was cut off.* This is the interpretation of the clause, made at the time of its adoption by all the statesmen of that age, not open to dispute because too clear for argument, and never disputed so long as any one man who took part in framing the constitution remained alive.”
(Bancroft – founder of the U.S.Naval Academy at Annapolis among other accomplishments – wrote a book on this very subject entitled “A Plea for the Constitution of the United States: Wounded in the House of Its Guardians.” During WWII, FDR – a serious friend of paper money – ostensibly to supply the war effort, ordered the printing plates for many historical books smelted. Bancroft’s book was among them. A photocopy of one of the remaining originals can be found here
ROGER SHERMAN(1721 1793)should be a name familiar to every American. As familiar as Washington, Madison, Jefferson and Adams. He is the only man to have signed all 4 documents surrounding the formation of the United States of America: The Continental Association of 1774, The Declaration of Independence, The Articles of Confederation and The United States Constitution. He was a Judge of the Superior Court in New Haven, Connecticut, serving that office with distinction from 1766 until 1788. He served as Treasurer of Yale University from 1765 to 1776. He was renouned for his high intelligence and unswerving honesty and was described by John Adams “as honest as an angel and as
firm in the cause of American independence as Mount Atlas.” He served in the U.S.Senate from 1791 until his death in 1793.
Why is Roger Sherman*s name unfamiliar? HE WAS AN ENEMY OF PAPER MONEY!! In 1751, Roger Sherman and his brother William sued James Battle for paying a debt to their shop in New Milford, Connecticut, in depreciating paper currency. Over a period of 15 months, Battle had charged “divers wares and merchandizes” amounting to 129 pounds of what
Sherman assumed were pounds of Connecticut “Old Tenor”, a stable currency whose value were well preserved by taxation taking it out of circulation. But Battle assumed the debt was denominated in pounds of ever depreciating Rhode Island currency, tendered in same, and the Shermans took a beating in the payment and sued for recovery of loss by depreciation. The Shermans lost when Battle argued that he was merely following the accepted custom of the day. In 1752, Sherman wrote his book “A Caveat Against Injustice or An Inquiry into the Evils of a Fluctuating Medium of Exchange” indicting UNBACKED PAPER MONEY.
It was this experience that Sherman brought to the Constitutional Convention and prompted him to rise on August 28,1787 and propose new, more restrictive wording to Article 1,Section 10. The standing version under consideration was worded this way: “No state shall coin money; nor grant letters of marque and reprisal; nor enter into any Treaty, alliance, or confederation; nor grant any title of Nobility.” (From Madison’s Notes of the Convention) “Judge Sherman and Mr. Wilson moved to insert the words *coin money* the words *nor emit bills of credit, nor make any thing but gold and silver coin a tender in payment of debts* making these prohibitions absolute, instead of making the measures allowable with the consent of the Legislature of the U.S. Mr. Sherman thought this a FAVORABLE CRISIS FOR CRUSHING PAPER MONEY. If the consent of the Legislature could authorize emissions of it, the friends of paper money would make every exertion to get into the Legislature in order to license it.” Mr. Sherman*s and Mr. Wilson*s motion was quickly agreed to and became the supreme law of the land.
Some additional quotations to ponder:
“All the perplexities, confusion and distress in America arise not from defects in the constitution or confederation, nor from a want of honor or virtue so much as from downright ignorance of the nature of coin, credit and circulation” (John Adams in a letter to Thomas Jefferson, 1787)
“I deny the power of the general government to making paper money, or anything else, a legal tender.” (Thomas Jefferson)
“You have been doubtless been informed, from time to time, of the happy progress of our affairs. The principal difficulties seem in great measure to have been surmounted. Our revenues have been considerably
more productive than it was imagined they would be. I mention this to show the spirit of enterprise that prevails.” (George Washington in a letter to the Marquis de LaFayette, June 3, 1790 AFTER the United States Constitution prohibited unbacked paper money at Article 1, Section 10)
“Since the federal constitution has removed all danger of our having a paper tender, our trade is advanced fifty percent. Our monied people can trust their cash abroad, and have brought their coin into circulation.” (December 16, 1789 edition of The Pennsylvania
Gazette)
“Our country, my dear sir, is fast progressing in its political importance and social happiness.” (George Washington in a letter to the Marquis de LaFayette, March 19, 1791)
“The United States enjoys a sense of prosperity and tranquility under the new government that could hardly have been hoped for.” (George Washington in a letter to Catherine Macaulay Graham, July 19,1791)
“Tranquility reigns among the people with that disposition towards the general government which is likely to preserve it. Our public credit stands on that high ground which three years ago would have been
considered as a species of madness to have foretold.” (George Washington in a letter to David Humphreys, July 20, 1791)
“It is apparent from the whole context of the Constitution as well as the times which gave birth to it, that it was the purpose of the Convention to establish a currency consisting of the precious metals.
These were adopted by a permanent rule excluding the use of a perishable medium of exchange, such as certain agricultural commodities recognized by the statutes of some States as tender for debts, or the still more pernicious expedient of PAPER CURRENCY.” (Andrew Jackson, 8th Annual Message to Congress, December 5, 1836)
DESPITE WHAT YOU WERE TAUGHT IN SCHOOL, THE HISTORICAL RECORD IS CRYSTAL CLEAR: AMERICA WAS TO HAVE BEEN SPARED THE DESTRUCTIVE EFFECTS OF AN UNBACKED PAPER MONEY SYSTEM. MOST OF THE PROBLEMS WE FACE TODAY CAN BE TRACED TO WHAT ANDREW JACKSON CALLED “THE PERNICIOUS EXPEDIENT OF PAPER MONEY”.
HISTORY TEACHES THAT AN “ARTIFICIAL” MONEY CREATES AN “ARTIFICIAL” WORLD WHERE THE PRICE FOR SOME ITEM...EVEN OUR MOST POPULAR WELFARE “PROGRAM”...CAN BE DEFERRED TO FUTURE GENERATIONS (OUR $11 TRILLION
NATIONAL DEBT) OR PAID WITH A “MONEY” CREATED OUT OF THIN AIR WHICH ROBS THE VALUE FROM THE MONEY WE MIGHT BE UNFORTUNATE ENOUGH TO HAVE IN OUR POCKETS AT THAT MOMENT (INFLATION). AND ONE THING YOU MUST REMEMBER ABOUT INFLATION IS THAT IT IS NOT AN “EQUAL OPPORTUNITY” DESTROYER: THOSE FIRST IN LINE TO GET THEIR HANDS ON THE NEW MONEY ROLLING OFF THE PRESSES (THE MODERN FRIENDS OF PAPER MONEY) HAVE A CHANCE TO SPEND IT BEFORE IT LOSES ITS VALUE. THE LITTLE PEOPLE (THAT’S US, FOLKS!) FARTHEST DOWN THE LINE ARE THE ONES WHO FEEL THE FULLEST EFFECTS OF THIS DESTRUCTIVE PROCESS.
Yeah, sure, we’re all to blame...a plane crashes, a levee breaks, a tanker runs aground, there’s an investigation...why are we satisfied with accepting “this is not the time to fix blame”? $700 freakin’ billion dollars and we shouldn’t know what caused it? Lucy, you got some ‘splain’ to do! Late trailer payments? No prob, the Bama’s gonna fix the principal, nasty old man that he is...a new concept on Home Depot...Bama’s got it covered.
YOU SOBS!!!!!
You write all kinds of laws abusing the system and then call us greedy?
THEY WOULDN’T HAVE BORROWED THE MONEY IF THERE WASN’T A LAW REQUIRING THEM TOO.
The only thing we bare the blame for is ELECTING YOU A$$HOLE$. And you’re thanking us by having us pay to keep your rich friends at the top.
Now that every fault line clearly goes right back to you, you want to defend yourself by saying “it’s everyone’s fault.”
This bail out is stuff with pork, it gives the government all kinds of new powers and rewards people who did a crummy job. And we’re doing the right thing by giving them the money?
F**K OFF!
Let’s face it. This was a bailout for the dems. They think are going to get away with it, but not this time.
If we’re all to blame, why are we only soaking the most responsible amongst us to fix it?
BITE ME BAYOTCH!!
My wife and I have lived below our means for 20 PLUS years! We’re part of the group of people that have saved money so it could be lent out to others!
We put 20% on our house when we bought it, refinanced 3 times to lower interest rates and less years. Never took out ANY equity in the house, and it’s paid for!
We rarely eat out, buy used cars, use coupons, shop for the best prices, pay off our credit card balances in full every month, save as much as possible for retirement, and don’t keep up with the newest trends!
I’m not part of the problem, if it wasn’t for people like me, the financial institutions would have NOTHING to lend!
People that have run themselves into this kind of debt PISS ME OFF!! You can take your mirror and CRAM IT where the sun don’t shine! (Rant over!)
Who is BAYOTCH?
“Never took out ANY equity in the house, and it’s paid for!”
You’re a fool. I just went out and took out a sixth mortgage on my house to buy another big fancy T.V. and some other stuff. Sort of a “bail out” celebration.
Now I just need to figure out which line to stand in to fill out my Mortgage Principle Reduction paperwork.
(I’d put a smiley face with a wink - but for some reason that doesn’t seem quite right.)
We will suffer under repression and depression with either Obama or McCain.
GOP needs to decide if it believes in conservatism or not. Because right now, it absolutely does not. The GOP needs to make up its mind and make an announcement so conservatives can move on. This Rockefeller BS is not small government conservatism.
“During WWII, FDR – a serious friend of paper money – ostensibly to supply the war effort, ordered the printing plates for many historical books smelted. Bancroft’s book was among them. A photocopy of one of the remaining originals can be found here”
WOW! And I thought putting price and wage fixes was bad enough - but burning books too. (I wish I had been old enough to understand my Dad’s rants about FDR).
I believe he is referring to the beautiful and talented (/s)Linda “Hugo” Chavez.
A lot of people feel exactly the same way you do. But you did the right thing. I told my daughter last night I think it was that the only thing I remember my father ever borrowing for was a $10,000 mortgage on our house back in the 1950's, $8,000 down. He paid cash for everything even new cars.
Try not to be too discouraged. I know things look pretty dismal right now, but I don't think you'd feel good about yourself if you'd have run everything up to the max then defaulted and skated. People like us don't get bailed out like those rich bankers. So remember that.
I did take out small loans for things in the past. For several years I haven't had to, through good fortune I might add and no great earning capacity or particular virtue on my own, so that doesn't make me better than someone else who borrows responsibly.
Yeah, that's it! I love how some people like to throw everyone in the same boat. It must make them feel better to know that it's EVERYONE'S fault, not theirs.
Just a month or so ago when the Edwards flap hit the airways. I was discussing the issue with this girl in my office and told her that I was glad the slimeball finally got busted.
All of the sudden she starts blaming his shortcomings on society! SOCIETY?! Yeah, it's society's fault Edwards was screwing around! I said he's the one screwing around, not society, he has a mind of his own!
Then she started mumbling incoherently and I walked off. WHOA!!
I played by the rules and paid all my obligations as agreed.
No it is the above dirt bag I think.
Dear GOP,
Don’t blame me or millions of other debt free Americans that have purchased homes responsibly. In fact, I hold you directly responsible for allowing criminals and traitors to wreak havoc on America through Trojan Horses like usury interest rates, loose credit, CRA, SS and Meidcaid Ponzi schemes and your general lip service to basic American principles. I also disdain your gutless posturing as ‘compassionate’ and ‘bipartisan uniters’ and whatever other concealment you use to hide your own fundamental failure to do your Constitutional duty and stop the foundational corruption in Washington, DC and the cavorting with the lobbying harlots from business that help to line your Seville Row pockets. RATs are criminals by nature and are born to thieve, lie and murder. You have become the same through being consorts and silence when you should have spoken and acted.
You have no shame and you have lost my vote.
I hope not. I have less than a hundred on credit cards, a car loan which I will pay off soon with some inheritance money, and a reasonable mortgage. I don't want to subsidize the idiots and deadbeats, or even the well-meaning but gullible.
Either it's Linda Chavez for writing the column, or me for posting it (ouch).
We can't solve the problem if we leave them in.
Insanity has been described as doing something that is wrong over and over, but expecting a different result every time it is done.
Congress critters may be acting insane, but we are insane for reelecting them over and over.
Arizona Republic’s Linda Chavez may be syndicated. To be honest, I’ve never checked to see. Her photo is as repulsive to look at as her writing is to read.
Either it's Linda Chavez for writing the column, or me for posting it (ouch).
It's Chavez, not you! Don't sweat it. Everything's kewl!
I know that many Democrats committed acts that many would believe are criminal. Sadly, I expect that from them. What really disappointed me in this is how fast those who claimed to be conservative caved. I really don't think I will be able to hold my nose and pull the lever for McCain after he caved on this bill when I needed him most. I so desperately want to vote for one of the third party candidates who actually espouse conservative values. At the same time I do not want to contribute to an Obama presidency. That said, Sen. McCain needs to earn my vote. Sen McCain has until the election to earn it.
The simple fact is 51T in debt (does not include any financial debt whatsoever) is too much to sustain on a 14T economy, especially a low margin service economy. We have borrowed beyond our means. Some of the ranters here say they have not, and perhaps that is so. But a closer look at their risk factors and inflation would probably show that their debt is too cheap.
That's the essential flaw in Fed policy, when debt is too cheap it distorts the free market. We built millions of extra houses. Otherwise crappy houses were tricked out with granite countertops. Properties were bought as "investments" with negative cash flow using HELOCs.
All of those stupid economic decisions would not be possible without stupid Fed policy. The other thing Greenspan approved of and cheered was the creation of the securities house of cards which was in fact the only way all his short term cheap credit could be turned into long term loans. The debt problem is painful, but we are pain averse. The securities problem is fatal.
Leadership is not blaming others for your stupidity. Leadership is making the tough calls and punishing the guilty.
Enron, Worldcom etc. were small change compared to this debacle. Yet those company's officers were convicted.
Why should the politicians receive a "get out of jail free" card from their friends in high places, just because they are connected? Will the perps skate?
Everyone thought they were real estate geniuses who used no interest loans to get them through what they thought was going to be a quick turnaround. Now they have no choice but to walk away. So, I ask you, WHOSE FAULT IS THAT? Preditary lenders..I don't think so. Just everyday people who thought they understood how markets work..and they didn't. And now we all pay.
Linda's cast too wide a net here. I am not in such debt as she describes. I do have a mortgage, but it's not outside my means. The fact that there are many who do abuse credit does not mean everyone abuses credit.
Those who don't aren't pointing fingers of blame. She's wrong on that.
We're pointing fingers of accountability. I want to fire the people who were corrupt or asleep at the wheel.
Great post, cuts right to the heart of the issue.
When the powers that be are determined to create phony prosperity by way of a debt bubble, it's sadly not enough to be prudent in one's personal life.
I wonder how many Freepers spoke out when President Bush told Americans to "go shopping" after 9/11.
Or how many cheered "consumer spending up" when they should have been rooting for "consumer savings up".
Or how many defended the Bush administration's record on "economic growth" when so much of that alleged growth was based on borrowing money from foreign countries and using that money to flip assets back and forth to one another at ever-ratcheting prices.
There were some who saw this coming several years ago, they were derided as "permabears" and "contrarians" who just wanted to throw a big, smelly wet blanket on the great party that all the sharp guys were throwing for America. I wasn't on FR back then, but I'll bet those voices of sanity didn't get a very significant hearing.
Those voices were here and yes you are right, we were told that we were talking down the economy. But we also made some significant errors, in particular talking about delinking the dollar from gold and silver. That may be the root of the problem, but most goldbugs could not explain how that would destroy the economy. The few that explained it well were drowned out by dozens who had major flaws in their arguments.
I participated mostly on the goldbug side getting corrected, but sometimes even on the fiat side and getting spanked. I just pointed out last week that America grew great without credit (of the type we see today) and was given a lame argument in return (we borrowed money for railroads). It's a complex subject and there's truth on both sides. I think it can be boiled down to a distinction between capital and credit. Capital is the money you have earned, whether backed by gold or not, put to work as equity in the economy. Credit is an accounting tool used to transfer capital efficiently.
For those who think all credit is good (except CRA, F&F and and their other favorite red herrings), consider what happens when I put my hard earned capital in the stock market but someone else borrows to buy stock. The result is my capital is simultaneously diluted and expanded on paper, and I am forced to withdraw that capital to preserve it (and I have the added incentive of capturing the gains). Once that happens the bubble bursts (1929, 2000) and there is underinvestment.
Another example is housing. Overextension and mispricing of credit will obviously result in the type of asset bubble we've just seen. In a bursting bubble credit deleverages the same way it was used for leverage during the runup. If I used 5k in capital and borrowed 95k but the house drops to 80, I lost the capital and I'm on the hook for 15 in credit which I will likely just walk away. The capital of the people who paid off their houses was diluted. The guy who took my 5k + 95k probably leveraged it into more houses as the boom went on.
These types of booms and busts may indeed be inevitable in fiat money systems, but in general booms and busts are human psychology. The tool of credit just makes it far far worse when the psychology kicks in, because it flows too easily (too tightly) and makes the capital look larger (smaller) in positive feedback loops on the way up (and on the way down).
Who is going to bail out the government!?
Taxpayers? Fed (inflation)? T-bill bond holders (default)?
I live in a luxury resort condo complex on the Colorado River. It was built in the middle of the boom, 2004. We moved in the middle of 2005. Here's what is not being talked about. So many MIDDLE CLASS people thought they'd get rich quick by buying these speculative condos and flipping them. The couple that lives below me owns 3. He's a fireman, she's owns a small window covering busienss. The total investment they can't get rid of now is over 1.2 million. The guy above me is walking away from 4 of them, even the one he lives in. FOUR. out of 78 units, three have gone into foreclosure, six are about to and there are 15 for sale.
Everyone thought they were real estate geniuses who used no interest loans to get them through what they thought was going to be a quick turnaround. Now they have no choice but to walk away. So, I ask you, WHOSE FAULT IS THAT? Preditary lenders? I don't think so. Just everyday people who thought they understood how markets work..and they didn't. And now we all pay for THEIR greed.
The Creature from Jekyll Island: A Second Look at the Federal Reserve (Paperback)
Product Description
Where does money come from? Where does it go? Who makes it? The money magicians’ secrets are unveiled. We get a close look at their mirrors and smoke machines, their pulleys, cogs, and wheels that create the grand illusion called money. A dry and boring subject? Just wait! You’ll be hooked in five minutes. Reads like a detective story — which it really is. But it’s all true. This book is about the most blatant scam of all history. It’s all here: the cause of wars, boom-bust cycles, inflation, depression, prosperity. Creature from Jekyll Island will change the way you view the world, politics, and money. Your world view will definitely change. You’ll never trust a politician again — or a banker.
Personally, I would love to see money backed by gold and silver again. In the history of the United States, prior to the worst year in History (1913), the inflation rate was 8 percent, IIRC, not per year, but over that entire period. After 1913, the cumulative inflation rate was something like 2400 percent! So much for the wonders of central banks and fiat money!
To be fair, IIRC, we actually had a central bank twice in this country prior to the Federal Reserve. Maybe that was responsible for the 8 percent. :-)
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