Posted on 01/21/2008 8:34:57 AM PST by shrinkermd
Amid the daily market turmoil, and to help prevent a crash, it helps to step back and remember how we got here. With the benefit of hindsight, everyone can see that the U.S. economy built up an enormous credit bubble that has now popped. Our own view -- which we warned about going back to 2003 -- is that this bubble was created principally by a Federal Reserve that kept real interest rates too low for too long.
In doing so the Fed created a subsidy for debt and a commodity price spike. The price spike contributed to "excess savings" in countries with a low propensity to consume and which channeled that money back to the U.S. That capital flow and debt subsidy, in turn, became fuel for smart people in mortgage companies, investment banks and elsewhere to exploit. In a sense they created a new financial system -- subprime loans, SIVs, CDOs, etc. -- that is enormously efficient and brought capital to new places. But thanks to low interest rates and human enthusiasm, this debt spree also got carried away. This was the mania phase.
Thus we were told that rising housing prices were no problem, even as they climbed by 20% or more a year in some markets. Demographics and immigration could explain the boom. Credit spreads narrowed to unheard-of levels, but neither lenders nor investors seemed to mind.
The political class now attributes this to greed and fraud, and there is some of that in any mania. But most was the product of creative Americans responding to the incentives for debt that the Fed created. The politicians also enjoyed the boom while it lasted, spending the tax revenues, feasting off Fannie Mae campaign dollars, and celebrating the spread of home ownership.
(Excerpt) Read more at online.wsj.com ...
So, OK where did all the ‘warners’ at WSJ put their money end of ‘07?
This recession talk is very over blown. It’s quite possible that we won’t have a recession at all.
Just remember - Wall Street paid itself $66 billion in bonuses in DEC of 2007. They make a financial huge mess, lose $100 billion+ and walk away with huge bonuses. Yes - no one trust them anymore...
Att: Wallmart Shoppers
The only thing that kept the economy going while manufacturing disappeared from our shores was the inordinate rise in housing construction.
Housing was run up by speculators who are now holding the bag.
The problem is, there is no more manufacturing sector.
It can come back, but its not there now.
(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.”
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.
Case in point: The Bush tax cuts which went into effect in 2003 were largely grabbed by state income tax increases in Pennsylvania.
Three short years later, Ed Rendell took credit for a mild improvement in our local economy to coast to re-election while Bob Casey Jr. blamed the Bush tax cuts for Pennsylvania's lagging behind the national recovery to unseat Rick Santorum.
And too many kool-aid drinking voters here bought it!
Recession talk is a self-fulfilling prophecy...
“In cases where there is real systemic risk, the government through the Federal Deposit Insurance Corporation may have to rescue some institutions. In those cases, the equity holders need to be zeroed out and the management replaced. The overriding goal is to keep the banking system functioning.”
I’d add indictments, convictions and liquidations of personal assets of at least a few dozen of the high flying financial geniuses who made themselves millions in those rescued institutions...pour encourager les autres!
Going to be a hell of a day tomorrow. Foreign markets were hammered today. Dow futures are down 500+ as I type this.
The U.S. sneezes, the rest of the global economy catches pneumonia...
Some of the Savings & Loan high-flyers in Texas were jailed after that scandal came to light in the ‘80s. Let’s see some Wall Street scam artists go to jail after this one. That is only fair.
People have to get used to the idea that they will have lower returns on investment for a few years.
We will have moderate inflation because of fuel prices.
Of course the Chicken Littles are trying to create a recession.
Liberals rarely accurately forcast economic development. Buy 'em and hold 'em.
I agree!
Commence the floggings until morale improves.
I hate to be yelled at...
I'm with Rush on this one, I refuse to participate in a recession.
If the economy really turns south, I will buy some real estate {at very low prices and only what I can pay for in cash} and sit on it for several years.
Property ain't like golf balls, they aren't makin' any new stuff every day.
When the market goes up {as it eventually will} I'll sell, and being the greedy capitalist that I am, I'll do the best I can to avoid paying taxes {or least minimize the amount}.
I will not speculate by borrowing money, nor invest more than I can afford, nor put an artificial time line on when I'll sell, because any of those tactics could force me to sell when it is not profitable.
It's called profit for a reason.
ouch
People have to get used to the idea that they will have lower returns on investment for a few years.
We will have moderate inflation because of fuel prices.
Of course the Chicken Littles are trying to create a recession.
Liberals rarely accurately forecast economic development.
Now is the time to invest in banks with a secure asset base.
Barclays for example.
Buy 'em and hold 'em.
No lie, I remember it well. Really becoming fed up with our fellow Americans, even so-called conservatives voting for McCain in SC. Unbelievable.
The originators of this scandal were the mortgage brokers who lent money to people who had no ability to repay the loan. The brokers knew that by the time the chickens came home to roost, they'd have their fees and be gone.
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