United Liberty
The Origin of This Financial Crisis: 1913
Wed, 03/25/2009 - 6:42am | posted by Katy Delay
Part I
Economists disagree on the identity of the true culprit behind our current crisis. Some blame Wall Street; some blame the progressive politics that pushed Freddie Mac and Fannie Mae beyond their capacity; some blame the profiteering loan brokers, the foxy house flippers, and the naive subprime home buyers in their rush for quick profits. Some blame the Federal Reserve, including me from time to time.
In reality, all of the above had their role, but they are just players in a game, the rules of which are defined by politicians. The origin of the problem lies in the rule changes that caused the demise of sound commercial banking back in 1913.
Before then, good commercial banking had been functioning well, both in England and and the US, for about a century. Business cycle fluctuations, although sometimes painful, managed to keep the profession on the right track. The invention of the Fed in 1913 was supposed to allow banks to weather business cycle downturns without going completely bust because of irrational panic withdrawals that had no justification in the real data.
Morphing onto a national stage out of private banking functions already in development, the Fed’s check clearing services and temporary commercial loan facilities were indeed a clever and useful idea. But the politicians discovered that, once the Fed found it could take over the centralized monopoly of legal tender issuance and then credit creation, it could be used for other things than just stabilizing the banking system. And everyone believed the Fed could control this new-found usage and that it would not do any harm.
In preparation for WWI, the government turned to the Fed credit-creation facilities to finance the war. It was a great success. The Fed managed to wrest most of the genie back into the bottle after the war by early 1920; but the temptation was too great and the discipline and privations too onerous, so they allowed over-issuance of credit to continue, ostensibly to help the country out of the recession the war disruption had caused.
The downturn ended in 1921; but the credit issuance continued. The result was 1929. As Doug Noland says in this week’s article at Prudent Bear:
It was understood at the time [during the Great Depression] that our fledgling central bank had played an activist role in fueling and prolonging the twenties boom - that presaged The Great Unwind. Along the way, this critical analysis was killed and buried without a headstone.
How true. Very few economists today remember the Fed’s role in inflating credit previous to the Depression. On the contrary, everyone, from Keynes to Friedman to Bernanke, believed and continue to believe to this day that the problem lay in too little credit.
Many base their hypothesis that the Fed did not over-expand credit in the 1920s on the fact that the price level was relatively stable. Economist Edward C. Harwood pointed out in published articles that an economy can present over-expansion of the money supply even in a climate of stable prices; and furthermore, that this held true in the 1920s. Outside factors can cause real prices to fall, while an excess of money supply would camouflage these factors by keeping prices at the higher level, with no one the wiser.
Furthermore, what these theorists ignore entirely is that the Fed’s newly assumed power to unleash the credit genie destroyed sound commercial banking in pretty short order. (“Power tends to corrupt; absolute power corrupts absolutely.” Lord Acton)
In an unpublished article written around May of 1928, Harwood described the process by which the art of commercial banking became tainted and was eventually lost. He compared it to a play in three acts. After describing the players and the events of the first two acts, he wrote:
To date [May 1928], recent business history has paralleled acts one and two of this drama of commerce. Act III remains to be played. Just when it will begin is a problem, but it is certain that the actors will not fail to appear. It must be confessed that this drama is a tragedy. The third act may be readily imagined by those who have seen depression before. It is unfortunate that this is what we must expect, but such will always be the price of inflation.
He correctly predicted the depression that came one year later. He is one of the few, unfortunately forgotten today.
In the next parts of this blog post, I will go into the details of sound commercial banking, how it was allowed to self-destruct by the creation of the Federal Reserve, and how its destruction led to today’s crisis.
Everyone tries to make money and its use complex.
It is not.
It has and it is and it will always be about math.
Money is just representation in numbers of the value of physical theoretical objects.
So the first lie that nobody in America including this author seems to get is the math about mortgages.
It is a complete and utter lie that any bank, and I mean any bank is losing money because of mortgages. I could do the math but it is simple, banks do not use there own money they also borrow the money and loan it to the homeowner for over 5 times what they pay for the money. So as long as 1 out of every 2 pay there mortgage then the banks make money. Right now over 9 out of 10 pay there mortgages so the banks are and have been making a killing. Sit down use a caluculator and do it yourself, the banks loan at about 5% and the bank borrows at close to 1%.
So the media, the government and this author is perputuating the lie that banks are losing money on mortgages!
Lie #2 is that the houses were overpriced and everything was overpriced and people in America were living beyond there means. The simplist way to prove this lie is go to any nieghborhood get the price on an existing home for sale call a builder and see what it would cost to build the same home brand new. It will shock you! To build new in over 50% of America is now 4 times the cost of buying a used in home!!!!! In Urban areas it is approaching 25 times the cost!!!!
Americans were not living beyond there means, Americans were living good because of the productivity gains of the last 20 years of a technology created boom unparralled in the history of mankind. Again more math to prove it was the 25 years ago it took almost 10,000 workers in an American automobile plant to produce about 50 automobiles per hour. Currenty it takes about 1,000 workers in an American automobile plant to produce about 60-90 automobiles per hour or about a 10 times increase in productivity. So you would assume the American worker would be living at least twice as good as before if they were producing 10 times as much!
The truth about all of this is simple and it has nothing to do with the lie of mortgage defaults or the lie of Americans living too good on credit or the lie of this is like the great depression.
Are you ready America, or should I say you can not handle the truth including this author!
Our government has allowed all of America’s wealth to be shipped overseas by our banking and stock market system by manupilating currency and banking regulation to move every piece of material, technology, corporation, infastructure, and whole factories to India and China along with other third world countries to utilize slave and child labor and to bypass all legal, tax, environment laws and to fire every American worker humanly possible!
China, India, Russia and third world countries have laughed while Americans have lost there homes, and jobs and cars and retirement savings and can not get a loan all because the money was given to them and they stole everything not nailed down. And now China and India and Russia and every third world country is not paying back the loans which is a slap in the face!
Our great government is giving these same financial institutions more money to keep doing the same thing and not loan out a nickle to Americans!!!
It is all a bunch of lies that everyone needs to wake up and stop talking all the bullshit about what happened in the 30’s it is no comparison to what is happening today and any monkey can do the math.
What is next,
huge inflation,
if jobs do not come it will be starvation in America we are only months from it.
What is the answer? Everyone needs to tell there government we are not fooled anymore and there better be jobs or we will remove those in office immediately to make sure there are jobs. Also that banks need to loan money immediately or the banks will be taken back over by the fdic which is completely in the realm of the fdic.
It is a surprise to read your version of the economic demise of America. Futher I must agree with one point that you have made. The fact that starvation is soon to sweep our nation. What we are all witnessing is in fact a consperisy. No matter how Hollywood that sounds, the truth about our country is soon to be recognized. It is not however just America, there will be billions of humans dying from disease, starvation, and murder, and war soon. This will be the act 3 mentioned above (Harwood) Nuclear detonations will destroy billions and few will be left alive. This kinda sounds like the bible doesnt it. Anyway there is nothing that can stop this, jobs will not fix it, the government will not be able to solve any of the problems. Our only hope is to find the creator, and ask him to foregive us. The saddest part of this whole thing is that this is our fault. Our SINS have even reached into heaven. We have been warned, we were told. We have no excuses. Now we will receive the rewards of practicing sin.
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