printWrites economist Peter Schiff:
“After more than a decade of unsustainable borrowing and spending, the private sector is currently attempting to restore balance through reduced consumer and mortgage credit, greater savings, and lower asset prices. With its trillions of dollars of credit injections and stimulus programs, the government hopes to allay this process by force-feeding Americans a diet of more borrowing. They feel that a restored securitization market will help. It won’t. It will just grease the skids for a quicker collapse.
Credit, whether securitized or not, cannot be created out of thin air. It only comes into existence though savings, which must be preceded by under-consumption. Since savings are scarce, any government guarantees toward consumer credit merely crowd out credit that might otherwise have been available to business. During the previous decade too much credit was extended to consumers and not enough to producers (securitization focused almost exclusively on consumer debt).
The market is trying to correct this misallocation, but government policy is standing in the way. When consumers borrow and spend, society gains nothing. When producers borrow and invest, our capital stock is improved, and we all benefit from the increased productivity.”
Updated (Feb 19): “All credit is debt,” explained the brilliant Henry Hazlitt. “All loans, in the eyes of honest borrowers, must eventually be repaid. Proposals for an increased volume of credit, therefore, are merely another name for proposals for an increased burden of debt. They would seem considerably less inviting if they were habitually referred to by the second name instead of by the first.”
He’s right but very few are paying attention. Housing prices are being propped up, failing automobile companies are being kept alive with autoworkers for good companies being laid off …. Indebtedness should be undertaken for sound reasons (such as establishing a needed business) but not only is the indebtedness excessive to an extreme – it is for unsound purposes (such as making new “green” governmental buildings etc. to replace perfectly sound structures). I cannot see how this doesn’t end in a real catastrophe (such as hyperinflation).
One doesn’t have to have a PhD in economics to figure this out. It’s common sense, which is why it won’t be tried. Instead, we’ll borrow and inflate our way into a depression, and the blockheads who created the boom and refuse to permit the bust to happen will blame the “free market” for the calamity.
About “blame” — I highly recommend that everyone two revealing articles: (1) “Would you pay $103,000 for this Arizona fixer-upper”
by Michael Phillips in the online Wall Street Journal Jan 3 2009
online.wsj.com/article/SB123093614987850083.html and
(2) “The end” by Michael Lewis Portfolio.com Dec. 2008 edition at http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom?print=true. If the links don’t work, Google will still get you there. Sadly, there is enough blame to go around to greedy/dishonest consumers, stupid and greedy financial institutions, and the government. It is not ONLY “the government” that brought about the mess. But, sadly, the government will force the innocent pay for the sins of the guilty and the stupid – and that completely outrages me. The government should let the free market correct the mistakes and recover. Meanwhile, we are accelerating from bad to worse to financial Armageddon led by foolish amoral statist politicians – the Demosocialists and the Republikeynsians.
The Big Lie has been repeated for almost 100 years, ever since we enacted the fifth plank of the Communist Manifesto into law and transformed our currency into debt.
So it bears repeating, almost every time the subject comes up, because someone inevitably comes along to blame businessmen and consumers:
The boom and its consequent bust could not have happened without the creation of money and debt by the Federal Reserve Bank and the government that formed it to finance deficit spending. The reason the latest boom got out of hand was because the banks figured out a way to get around the limitations of fractional reserve requirements. They set up a positive feedback loop – as their loans bid prices up, the derivatives were used as basis money to loan multiples of the value right back into the market, creating money out of thin air.
It’s a new twist on a very ancient game. Even the Roman Empire blamed inflation on greed as they debased their coins and destroyed their economy.
We don’t have a free market. We have central economic planning. Central planning fails. The central planners are not in the government. They are in the Federal Reserve, and they are not under the control of government. In fact, they pretty much own the government.
The innocent are going to pay, but not through taxes. They are going to pay with the loss of their jobs, their homes, their savings, and the value of their labor.
The strategy of the administration and the Fed is to pour rocket fuel on the fire to put it out.
Anyone not familiar with this line of reasoning and not inclined to read arcane books on economics can view “Money As Debt” for free on Google. It poses solutions I disagree with, but it is an excellent exposition of how money is created. Knowing how the money is created, I hesitate to blame the victims.