For all the years I was teaching economics, I always wished I could just tape and show the economic analysis pieces by Paul Salmon. I don't think there is anything close available on TV. This one lasts about 11 minutes, so it may be a bit much for those who want a quick sound-bite and a yes or no answer. But for those who want to try to understand the tradeoffs of government intervention and government regulation, this is worthwhile.

http://www.pbs.org/newshour/bb/busin...ard_07-18.html

To see it, click on streaming video.

And for a followup of his piece, this is good. For you conservatives, I promise it has some criticism of Obama. It just doesn't say he is a Muslim and hates America, so if that is what you are looking for, go elsewhere. And of course it doesn't quote him of context when he said that if Muslim Americans were treated like the Japanese in WWII, he would back them up. But if you want real analysis of meaningful issues rather than "its OK to lie because this is no hold barred" it may be interesting

http://www.pbs.org/newshour/bb/polit...rip_07-18.html

Hey, Bill. Glad to see you back. Your posts don't work by the way. Here's the error message I get...

Sorry!
The file you requested is unavailable.
If you got here by following a link on one of our pages, please send us an e-mail at onlineda@newshour.org.

Weird. They worked when I tested them after posting.

Try this one, and you will see the titles to click on (if it works).

Government Bailout of Mortgage Firms Could Set Risky Precedent

and then


Analysts Tackle U.S. Economy Woes, Obama's Overseas Trip

http://www.pbs.org/newshour/

Hey Bill- glad you're back. We've had some good threads in politics/religion if you want to take a peek.

Moral hazards are an interesting subject- however, I don't think bailing out depositors is a moral hazard in itself. It was done to reduce fear of banks failing. Banks shouldn't fail- except those who engage in risky behavior, and if they do, why should the customers get screwed?

The bailing out of banks themselves is horrible. The most egregious was that of that hedgefund they bailed out a few years ago. Here's an unregulated financial vehicle, who by its very nature was extremely risky- and it failed. Good! Especially since the average investor can't participate- only the 'elite'. The recent buyout of Bear-Stearns continues this- the government sponsoring corporate raiding. Obscene.

What really irks me is that this bail-out is done by just printing more money- hurting all of us. Ron Paul touched on this in his book and showed how the average person gets screwed by this.

I'm very much against the Fed taking on more power (I'm talking central bank- but actually it applies to the federal government too)- because of its propensity to only help the super-rich.

I'm very much against the Fed taking on more power (I'm talking central bank- but actually it applies to the federal government too)- because of its propensity to only help the super-rich.

Yep...now they're talking about growing the system larger so that they can regulate all these financial businesses so that this doesn't happen again. It didn't help Fannie Mae and Freddie Mac did it?? Those were government sponsored/regulated institutions.
....and wouldn't that just put the private entity, The Federal Reserve, in a perfect position to maximize their profits and the expense of the average individual. Those miscreants are sucking the life right out of us.

Bill,

Have you studied any Austrian School of Economics? Read any of Ludwig von Mises's works?

Here's a great site http://mises.org There's a lot of good reading. Check out the literature section.

...on topic.

The Greatness of the Market in a Crisis
Daily Article by Llewellyn H. Rockwell, Jr. | Posted on 7/18/2008

If you are glued to the evening news or the radio, you might believe that the whole nation is waiting in suspense to see how our leaders are going to deal with the economic challenges of our day: recession, inflation, unemployment, bank runs, etc. There are proposed laws, bills flying everywhere, candidates promising this and that, press conferences, debates, op-eds, talking heads, regulations, investigations, proposals, and policies.

Then there is the real world.

The real world is the market economy. It is making a trillion decisions every hour. The decisions are dramatic, decisive, and life changing. They deal with real stuff, not vapid promises. We see this in a crisis more than ever: the takeovers, production shifts, whole industries rising and falling, patterns of imports and exports reversing themselves, jobs changing, with tens of billions of dollars changing hands minute by minute.

Here is the pith of life. The rest of what people think matters is just white noise.

An interesting case is how production in some sectors is increasing in the midst of an economic slowdown. Cars, computers, and steel — important aspects of industrial production — actually experienced a marginal boost in June. Why might this be? The declining value of the dollar on international exchange has made imports more expensive, and made domestic production more appealing. This complex activity — a signal of bad economic times but a praiseworthy response to massive shifts in the investment environment — is driven by nothing less than loss avoidance strategies by entrepreneurs.

No one needed to issue a command to make sure this happened. There were no debates or polls. No regulator had to issue a press release. It happens because considerations of profit and loss provide the right signals to entrepreneurs. The entrepreneurs saw the new conditions and acted on them. And why? To do what they always do: try to stay out of loss-imposing lines of production and find profitable ones.

Another dimension of this is the industrial takeover. InBev SA of Belgium has taken over Anheuser-Busch in the hope that it can make the company profitable. This is partly a response to the falling dollar but also a handoff to a management team that might do a better job at doing what the company is supposed to be doing. Concerning the nativists who say that only Americans should own beer companies in America, consider that the foreigners are doing us a favor: taking over one line of production to free up domestic resources to help dig out of recession. Oh — and beer from Belgium is far superior to any Bud.

Earlier this year, the Royal Bank of Canada, from its US headquarters in North Carolina, swept in and took over First American Bank and nine other banks in Alabama, Florida, and Georgia. In bank after bank, they close on Friday and reopen on Monday with a completely new name and face. Nothing in politics happens this fast. It is all to the good for everyone, since it puts the banks on a more profitable path. Historically, by the way, Canadian banks are far more prudent than their US competition, so as a customer, I can only say: Hooray!

Again, the motivation is the same: loss avoidance and profit seeking, which is just another way of saying that these are efforts to make sure that society's resources are used in the most efficient (least wasteful) way. A recession makes this approach all the more critical. But what is really impressive is the way in which markets respond to dramatic change. Resources move and shift in a manner that makes economizing part of the very structure of life itself.

Another example is oil. The prices at the pump reflect not only existing supply and demand conditions but also the best possible guesses about future conditions, discounted to the present. The prices reflect what producers believe to be profitable and they also serve to bring about the best possible conditions for economizing. Should prices go up or go down? We are fortunate that this doesn't have to be decided by a government committee. It is a matter worked out by billions of real trades around the world within the global market framework. The response time to new information is mind-boggling. Prices soar for months and then suddenly plummet based on changing conditions. Everything is constantly in flux, with present prices representing the best possible guess concerning the least wasteful use of resources.

Every business in America right now is in the position of having to assess how it does business, what it pays its workers, how much to invest for the future, whether to cut back on some lines of production now, how and whether to advertise, when and how to raise prices in response to increased costs of doing business. Again, no one waits for an order from Washington. The orders are issued by balance sheets at the end of the day. A company must stay in the black or else shut its doors.

Consumers too participate in these large movements of resources. We see prices going up in all goods and services, but some more than others. We shift to substitutes, we consider more carefully what we buy, we think hard about alternative ways of stretching the value of declining dollars. In this way, we reward producers who best adapt to the changing environment, and best serve our needs.

Finally, consider the fate of mortgage lenders and homeowners. The markets became wise to the fact that loose credit led to a fantastic bubble and that trillions in traded mortgages might not be serviceable in an environment of downward price pressure. Companies that were once seen as valuable and liquid are suddenly seen as unstable and wasteful. Their stocks are shorted by sellers. Their price crashes. Reality is revealed.

This is not an attack. It is not a result of malign "rumor mongering." It is not even regrettable from an economic point of view. Truth is a precondition for economic recovery. Bad investments need to be avoided. Good ones need to replace them. That is the very core of what all this economic activity is about. If the informed guesses of traders turn out to be wrong, there is a profitable opportunity for other traders to guess more accurately. To dampen this spirit is to do nothing but prop up illusions and perpetuate error.

What can the state contribute to this cause? It can get out of the way. It is not necessary to somehow demonstrate the superiority of markets over state planning. This is demonstrated every single second of every day. The politicians blather while the markets act with confidence and wisdom to achieve real results. The only positive contribution that politicians can make is to make the market a freer environment for resources to travel to their most profitable production lines.

People say that markets are not democratic. In fact, what we have here is the ultimate economic democracy, one in which all of us as individuals vote in the use of our time and resources, as William H. Peterson argues. We determine, through our buying and selling decisions, which lines of production succeed and which ones fail.

But if the critics mean that markets are not politically democratic, they are precisely right, and it is a good thing too. The price system is a system of action, not words. It is decisive and takes responsibility. Where political democracy ignores those without power, market democracy collects and uses all available information for the benefit of everyone.

Markets are beautiful in good times, but especially impressive in bad. There is no better occasion than a crisis of this size and scale to marvel at how the institutions of private enterprise can cope better than any political leader, or all of them put together.

Moral hazards are an interesting subject- however, I don't think bailing out depositors is a moral hazard in itself. It was done to reduce fear of banks failing. Banks shouldn't fail- except those who engage in risky behavior, and if they do, why should the customers get screwed?

Agreed, but----

Insuring depositors creates moral hazard because we don't have to worry about reading bank balance sheets or investigating the soundness of the loans our banks make. We can just chase the highest rates being paid on CDs for instance, and know that the government will save us if the bank goes under. But then when banks fail in large numbers as they did during the S&L crisis of the early 80s, taxpayers were hit with a bill for billions of dollars to pay off those insured depositors.

Frankly, I don't think its reasonable to expect the general public to understand bank balance sheets. The system needs people having confidence in the banking system so that we don't have runs on banks, with people withdrawing money in a panic over every little rumor. The creation of the FDIC was a god send to the financial system. But if we are going to insure those deposits, then we need to regulate the banks and keep them from taking excess risks that might cause failure.

The bailing out of banks themselves is horrible. The most egregious was that of that hedgefund they bailed out a few years ago. Here's an unregulated financial vehicle, who by its very nature was extremely risky- and it failed. Good! Especially since the average investor can't participate- only the 'elite'. The recent buyout of Bear-Stearns continues this- the government sponsoring corporate raiding. Obscene.

This is a bit beyond my capability to fully understand, but I'm told that the reason we had to bail out that big hedge fund and Bear-Stearns was that their fallure would have caused a domino effect. All these complicated derivatives that are being traded cause financial institutions to be intertwined. If a really big one fails then it can't meet its obligations to other bands, investment banks, pension funds, etc. then the house of cards falls.

What really irks me is that this bail-out is done by just printing more money- hurting all of us. Ron Paul touched on this in his book and showed how the average person gets screwed by this.

Yes, and maybe the answer is more vigorous regulation (although I doubt Paul came to that conclusion). :)

We used to call him less than thorough; yet, intrinsic reading for those that actually digest and process not digress to the platitude of diatribes so frequently observed...


Lester Thurow--a Professor of Management and Economics at MIT's Sloan School--draws uncompromising conclusions: only a bold embrace of globalization will bring prosperity, and nations that fail to engage in global economics will fall behind the world's dominant powers.

He sees three simultaneous revolutions that fuel the rush to global business: the birth of knowledge-based industry, the creation of a global economy built on a worldwide information infrastructure, and the victory of capitalism. But Thurow is not naively optimistic about the prospects for prosperity in this new framework. The U.S. trade deficit, the Chinese export economy and the stagnating Japanese economy all offer real threats to short-term and long-term well-being.

An excellent read for those that still read books...

It's got to hurt before it gets better
There are solutions to high oil prices, the housing crisis and outsourcing, but they require some sacrifice.
By Lester C. Thurow

The financial crisis in the United States is not a crisis if you do not want to sell your home, do not have a house with a sub-prime mortgage and have a good job that you are not about to lose.

Very few Americans have to sell their homes right now. Those who bought a house on speculation get what they get. After all, they "speculated" and lost. Very few Americans have a sub-prime mortgage. Those with bad credit have bad credit. Most have a job they are not about to lose.

So what is all the fuss about? The meltdown of the financial markets.

Shouldn't we just let the big guys lose? After all, they are big guys. The answer is no. The credit markets, like those before the 1929 crash and during the Depression, affect us all.

What should be done?

The answer starts with the heart of the problem: the sub-prime mortgages. These mortgages have to be written down to less than the current value of the house so that if the borrower walks away, he or she has something to lose. The government (taxpayer) is going to have to pay to write down these mortgages. This is the subsidy -- and the only subsidy -- that should be given to the lenders.

If the borrowers don't walk away from their sub-prime mortgages, there is no crisis in the financial markets.

In the future, we can regulate the markets to prevent sub-prime mortgages. But that is the future. Let's get to the real crisis: the rising cost of oil and the outsourcing of American jobs.

There is a solution to the rising cost of oil, but it is a painful one. Let's say there is a lot of $20-a-barrel oil in the world -- deep-sea oil, Canadian tar sands. But who would look for $20-a-barrel oil if someone else (Saudi Arabia) has lots of $5-a-barrel oil? The answer is: no one.

Basically, American taxpayers have to guarantee potential producers that the price in the future will not fall below $20 a barrel and that they will not lose their investments.

This is easy to do. The U.S. needs to guarantee that it will buy all of its oil at $20 a barrel before buying anything from OPEC. This forces the price of oil down to $20 a barrel, but it eliminates the possibility that it will ever go back to $5 a barrel.

Painful!

Outsourcing has an equally simple solution. Let us encourage the dollar to fall. At some value of the dollar, it will pay producers to bring jobs back to the United States.

Suppose the dollar has to fall a lot -- let us assume 50%. Who cares? Only those Americans who plan to take foreign trips or buy something abroad. It costs them more. For those who want to go to the tropics, there are the U.S. Virgin Islands. If the solutions are so simple, why don't we do them? Because all of them are painful.

Write-downs for sub-prime mortgages cost money. Oil at $20 a barrel guarantees there will be no $5-a-barrel oil. A lower dollar guarantees foreign trips and purchases will cost more.

We have Herbert Hoover when we need Franklin Roosevelt. Luckily, we will have a new president and a new Congress come January, but January is a long time away.

Basically, we require changes from President Bush now. He needs to propose a write-down in the sub-prime mortgages, propose a guarantee in the price of oil and let the dollar fall. Unfortunately, the first two are not likely. Only the third will happen with or without his approval. As long as we have a large current account deficit, the dollar will fall. It has to for some very simple reasons.

To get foreign currencies to pay for the deficit, we must borrow from abroad. Eventually, foreigners get tired of lending because they will lose money on their holdings of dollars if the dollar falls further.

At the same time, the big American guys move money into foreign currencies to take advantage of the falling dollar. When they move money back into dollars, they have more dollars. Essentially, they have an infinite amount of money to move.

As they move money, the current account deficit gets bigger and bigger, and the pressure on the dollar to fall only grows.

We need to do something! Take painful actions! Gridlock is the worst of all worlds.

Lester C. Thurow is a professor of management and economics and dean emeritus at the MIT Sloan School of Management. His latest book is "Fortune Favors the Bold: What We Must Do to Build a New and Lasting Global Prosperity."

Yep...now they're talking about growing the system larger so that they can regulate all these financial businesses so that this doesn't happen again. It didn't help Fannie Mae and Freddie Mac did it?? Those were government sponsored/regulated institutions.

It didn't help Fannie and Freddie because the Fed didn't choose to use regulatory powers that Congress gave it a few years ago. I forget the name of the act, but I'll try to find it. Greenspan was a classic libertarian who thought that the market knows best. When he was young, he attended a weekly bull session at the apartment of Ayn Rand.

The status of Fannie and Freddie has always been a bit fuzzy. They are private institutions owned by stockholders, but there was always an expectation that they were so important that government would not let them fail. If they are that important, then they need to be regulated. And if the mortgage market is so important to the economy, then it needs to be regulated. Brokers should be prohibited from earning higher fees by putting borrowers into higher risk loans when they qualified for conventional mortgages. Brokers should be required to fully disclose what mortgages a borrower is eligible for and disclose the fees that he will earn. Brokers should be required to verify income of borrowers. I'm afraid I'm hazy on the details, but I've read that most of these requirements were already part of the law, but were just willfully ignored by Treasury and the Fed.

....and wouldn't that just put the private entity, The Federal Reserve, in a perfect position to maximize their profits and the expense of the average individual. Those miscreants are sucking the life right out of us.

The Fed is not a private entity. No one but the American people gains from its profits. The Fed's main source of revenue is interest on US Treasury securities that it owns as part of its Open Market Operations function to manage the money supply and interest rates.

Very briefly- if the Fed thinks the economy is weakening, it buys Treasuries from banks and dealers, injecting more reserves into the financial system and lowering interest rates. If the Fed thinks inflation is a problem, it sells Treasuries to banks and dealers, sucking reserves out of the system and raising interest rate. Of course with stagflation, which we may be facing now, the Fed is in a bind, but that is a separate argument for another thread.

My point is that while it owns those Treasuries, it receives the interest on them. As I recall, in the average year about 10% of that annual interest income is enough to pay for the operation of the entire Federal Reserve system, and the remaining 90% is just returned to the Treasury. That means that we didn't have to pay interest on a large chunk of our national debt.

It didn't help Fannie and Freddie because the Fed didn't choose to use regulatory powers that Congress gave it a few years ago. I forget the name of the act, but I'll try to find it. Greenspan was a classic libertarian who thought that the market knows best. When he was young, he attended a weekly bull session at the apartment of Ayn Rand.

The status of Fannie and Freddie has always been a bit fuzzy. They are private institutions owned by stockholders, but there was always an expectation that they were so important that government would not let them fail. If they are that important, then they need to be regulated. And if the mortgage market is so important to the economy, then it needs to be regulated. Brokers should be prohibited from earning higher fees by putting borrowers into higher risk loans when they qualified for conventional mortgages. Brokers should be required to fully disclose what mortgages a borrower is eligible for and disclose the fees that he will earn. Brokers should be required to verify income of borrowers. I'm afraid I'm hazy on the details, but I've read that most of these requirements were already part of the law, but were just willfully ignored by Treasury and the Fed.


So the regulations were in place but were ignored. How will putting more regulations in place help?


The Fed is not a private entity. No one but the American people gains from its profits. The Fed's main source of revenue is interest on US Treasury securities that it owns as part of its Open Market Operations function to manage the money supply and interest rates.

Very briefly- if the Fed thinks the economy is weakening, it buys Treasuries from banks and dealers, injecting more reserves into the financial system and lowering interest rates. If the Fed thinks inflation is a problem, it sells Treasuries to banks and dealers, sucking reserves out of the system and raising interest rate. Of course with stagflation, which we may be facing now, the Fed is in a bind, but that is a separate argument for another thread.

My point is that while it owns those Treasuries, it receives the interest on them. As I recall, in the average year about 10% of that annual interest income is enough to pay for the operation of the entire Federal Reserve system, and the remaining 90% is just returned to the Treasury. That means that we didn't have to pay interest on a large chunk of our national debt.

From Wikipedia...
The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. Created in 1913 by the enactment of the Federal Reserve Act, it is a quasi-public (government entity with private components) banking system[1] composed of (1) the presidentially appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (3) 12 regional Federal Reserve Banks located in major cities throughout the nation acting as fiscal agents for the U.S. Treasury, each with its own nine-member board of directors; (4) numerous private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks; and (5) various advisory councils.
As an independent institution, the Federal Reserve has the authority to act on its own without prior approval from Congress or the President.

They suck the life out of us by printing money trying to keep this fiat money system going.
Looking at history. Can you name a fiat based money system that hasn't failed?

Here's some good presentations for your economics class.

http://www.chrismartenson.com/the_fed

http://www.chrismartenson.com/brief_history_of_US_money

So the regulations were in place but were ignored. How will putting more regulations in place help?



From Wikipedia...
The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. Created in 1913 by the enactment of the Federal Reserve Act, it is a quasi-public (government entity with private components) banking system[1] composed of (1) the presidentially appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (3) 12 regional Federal Reserve Banks located in major cities throughout the nation acting as fiscal agents for the U.S. Treasury, each with its own nine-member board of directors; (4) numerous private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks; and (5) various advisory councils.
As an independent institution, the Federal Reserve has the authority to act on its own without prior approval from Congress or the President.

OK, private banks choose to belong to the Federal Reserve System and subject themselves to its regulation in return for having access to the discount window, but I think its a stretch to conclude that the Fed is therefore a private entity. The members of the Board of Governors are appointed by the President, confirmed by the Congress, and are salaried government employees. That doesn't sound to me like a private entity.

They suck the life out of us by printing money trying to keep this fiat money system going.

I really don't understand that statement. Unless we revert to a barter system, we require money as a medium of exchange. Its the Fed's job to create it in the proper amounts. I don't see how that sucks the life out of us.

Looking at history. Can you name a fiat based money system that hasn't failed?

This one hasn't, and I'm pretty sure that all the developed nations of the world are on a fiat money system. Does it make sense to have our money supply dependent on how fast we can discover deposits of some metal and dig it out of the ground? During our great westward expansion we were on a gold standard, and there wasn't enough money to support all the new business being done.

There is a lot of argument over how much fiat money should be created. For instance, Milton Friedman thought that the Fed should keep the money supply growing at roughly the long range growth rate of the economy, 3%. Keynesians think that the Fed should slow or speed up the growth of the money supply to smooth out the business cycle. But both sides are talking about the Fed controlling it.

I really don't understand that statement. Unless we revert to a barter system, we require money as a medium of exchange. Its the Fed's job to create it in the proper amounts. I don't see how that sucks the life out of us.

Adding money supply devalues the dollar which eliminates wealth from anyone holding it. Furthermore, the rate of dollar devaluation is much faster than the rate of wage increases thereby decreasing everyone's standard of living.



This one hasn't.

It's only been 37 years since the dollar was removed from the gold standard and we are well on our way as seen in the above posted presentation link.

http://www.gold-eagle.com/editorials_04/greene032104.html
"Examples of Prior Attempts at Fiat Money Systems 20 BC - Roman Empire - After a highly successful period of empire building, Augustus, ordered mines in Spain and France to be mined 24 hours a day to support his tremendous infrastructure costs. Money was increased faster than production, however, creating inflation. He cut back on coinage, but later his stepson put coinage into government coffers, which was eventually abused by emperors that followed him including: Caligula, Claudius, and Nero. Their lavish spending on consumption, (sound familiar?) wiped out most of Rome's riches when Nero got the idea to debase the currency in 64 AD by putting less silver into coins. This allowed the emperor to continue his lavish spending, building increasingly large trade deficits with Rome's colonies, and causing the wealthy to either hide their wealth or flee from the confiscating government. This did not have a happy ending as we now know.

910 AD - China experiments with paper money - It takes several hundred years but the system is abandoned due to unacceptable levels of inflation as money printing exceeded production.


1500'S - Spain gathered gold from Mexico and the new world, becoming the richest nation in the world. Instead of developing their own economy they sent gold to trade partners in a consumption orgy not dissimilar to the US today. Then they went on a military rampage to extinguish pirates, (terrorists?) in an imperialistic march into other lands, dropping any distinction between terrorists, (I mean pirates) and the countries that harbor them. Their excessive consumption ran through their gold hoard, so they turned to financing the war with debt, bankrupting them.


1716 - John Law convinced France to use paper money and declared all taxes must be paid with it to gain acceptance. The idea snowballed and paper money became more desired than coin. It led to excessive printing, additional moneymaking schemes and fraud. Exaggerated values coinciding with money printing eventually blew up the system.


1791 - The French Government again tries its hand with a paper currency. The Government confiscated land from aristocrats and issued "assignats" which paid interest against the properties. Land was auctioned off in exchange for these notes, inflation rose to 13,000% by 1795. Napoleon ended the revolution and replaced the "assignats" with the gold franc, which set off over a century of prosperity for France. In the 1930's Socialists came to power and brought the Bank of France fully into the Government. They quickly removed gold backing of the currency and made the franc a managed fiat currency. In only 12 years the currency lost 99% of its value.


1853 - Argentina went on a gold standard and thrived for close to 100 years. A central bank was created in 1932, beginning a long downfall. Juan Peron took charge in a 1943 coup and depleted reserves causing trade to fall. Argentina continued on this path of paper money, falling from the eighth largest economy to a mere shadow of its former self, which it has not recovered from as of today.


1862 - Abraham Lincoln passed the Legal Tender Act allowing the Government to issue paper money, backed by nothing but government promises. A huge inflation transpired that caused the practice to fall out of favor until the Federal Reserve System was put in place in 1913.


1923 - Weimar Republic - After World War I, Germany, crippled from its loss in the war, was held accountable for its war reparations. The country was destitute so found no other choice but to simply print the money in massive quantities to pay the reparations. The result was the plundering of the entire middle class, wiping out all value of savings, and paving the way for Hitler in front of an angry public.

The US dollar went off the gold standard in stages:

1934 - President Roosevelt revalued gold from its official price of $20.67 to $35 an ounce in an attempt to print more money, with the hope that this would lift us out of the depression.


1944 - The Bretton Woods Agreement was made to treat the dollar as a substitute for gold, since a dollar was defined as 1/35th of an ounce of gold, which was pegged at $35 per ounce. The door was opened worldwide to print money; foreign nations could print if they had gold or US dollars.


1971 - President Nixon closed the gold window, ending convertibility of dollars to gold. This came about because the US was printing too many dollars and living beyond its means. Foreign nations led by France, recognized this and began demanding payment in gold, breaking the system as the US experienced a major gold drain.

Look how long a fiat currency can thrive. Between 1948-1969 world money reserves increased only 55%, since that time they have shot up more than 2000%. See any connection? Also note that after Nixon's move, gold went up over 25 times in less than ten years. Was it discounting the unprecedented money printing that was about to unfold? A brief perusal of history will show that when a nation went on a gold standard it was the beginning of a very long period of that nation thriving. When a country went to a fiat currency there was a period, as long or longer than 30 years, in which it thrived even more. However, during that period of prosperity on a fiat currency, excesses began to build. Once they have built up to extreme levels, it is a very dangerous time. When levels of debt become too excessive, an increasing amount of the rewards of production; profits, must go to servicing debt. When the servicing of debt consumes all of the profits of production, it finally consumes production itself. This is the real culprit for the loss of jobs domestically. As more of the economy shifts from real production of goods, to the pushing of various forms of paper, citizens lose jobs and live in more dangerous times.




We have reached that time. The above chart shows that even after a 20 year bear market gold is the only form of money that has retained its value. The dollar, one of the historically strongest of currencies lost over 90% of its purchasing power as of 2000."

Bill,

You mentioned Ayn Rand...have you read Atlas Shrugged?

Bill,

You mentioned Ayn Rand...have you read Atlas Shrugged?

Yes, and The Fountainhead, both when I was in college.

Adding money supply devalues the dollar which eliminates wealth from anyone holding it.

That is true only if money is added at too great a rate.

Do you really think that the money supply that was sufficient when we had a $5 trillion economy would be enough to conduct business in our $13 trillion economy?

The dollar crisis
http://mises.org/story/1386

That is true only if money is added at too great a rate.


You don't think it's being added at too great of a rate? http://www.infoplease.com/ipa/A0001519.html


Do you really think that the money supply that was sufficient when we had a $5 trillion economy would be enough to conduct business in our $13 trillion economy?

No, but it is still just paper unless backed by something tangible.

You don't think it's being added at too great of a rate? http://www.infoplease.com/ipa/A0001519.html

That chart is meaningless by itself. It shows a general rise in prices. Wages are prices, and they tend to rise as fast as other prices. Wages for some jobs rise faster, and wages for some jobs rise slower, but in general, wages rise as fast as prices.

When I was teaching econ, I used to use 2dLt wages as an example. In 1960, my base pay was $222.30 per month. I don't have the current figure in front of me now since I quit teaching, but when adjusted for changes in the CPI, it turns out that current 2dLts make about 1.5 times what I did in real wages, purchasing power.

No, but it is still just paper unless backed by something tangible.

Its valuable because the Treasure says that its legal tender, and its value is backed by the expectation that the Fed will restrict the availabilty of it so that it retains value. What is magic about gold or some other commodity? I only want enough for my wedding ring. Any value must be because the supply is limited. If we find vast new deposits of gold, then presumably it would lose its value. If we can't find any more at all, then the money supply could never grow with the economy and we would be in permanent recession or depression.

This doesn't prove much beyond the fact that wages can go up as least as fast as prices, but I looked up current 2dLt base pay- $2543.40.

CPI in 1960 was 2.99 according to your chart.

CPI today is 21.57

21.57/2.99 X $222.30 = $1608.68, the amount that is needed in today's dollars to have the same purchasing power that $222.30 had in 1960.

2543.40/1603.68= 1.58, so a 2dLt today has over half again as much purchasing power as I did in 1960.

Not everyone is a 2dLt- some are doing worse and some are doing better. But the main point is that its meaningless to look at CPI increases alone.

Yes, and The Fountainhead, both when I was in college.

Here's a great article (and who said Playboy doesn't have great articles?) interviewing her. It helps if you have the background to her philosophy (and books):

http://www.ellensplace.net/ar_pboy.html

I am proud to say that this conversation is so cerebral that I am actually learning something from it.

From both sides.:smthumbup:

Not everyone is a 2dLt- some are doing worse and some are doing better. But the main point is that its meaningless to look at CPI increases alone.

It's not irrelevant- the reason being that the CPI/inflation hits the lowest-income people first. We're experiencing it right now. Al Gore really isn't suffering from soap doubling in price in the last three years- but lots of poor families are. Sure, their minimum-wage job might get a $0.25 increase to help, but it lags the price increase by months/years. Meanwhile, those elite who make money out of thin air increase their investments by leaps and bounds (or move money out of the country).

Why am I arguing the side of the poor and downtrodden? Bill- just because inflation 'evens out', it doesn't need to- which gives everyone opportunity to succeed.

I am proud to say that this conversation is so cerebral that I am actually learning something from it.

From both sides.:smthumbup:

And all these years all you looked at in Playboy was the pictures. :)

Here's a great article (and who said Playboy doesn't have great articles?) interviewing her. It helps if you have the background to her philosophy (and books):

http://www.ellensplace.net/ar_pboy.html


Great article, thanks Toecheese.

On topic....

Historic Financial Collapse Underway?
by: Porter Stansberry posted on: July 20, 2008 | about stocks: FNM / FRE / GLD / SLV / SPY / UDN / UUP / XLF
I tend to be in hotel rooms when bubbles burst.

On January 6, 2000, I was on the 30th-something floor of the Marriott hotel across the street from the convention center in San Francisco. I was jet lagged and up working even though it was still dark outside, around 5:30 a.m. local time. Just then, Lucent Technologies announced earnings before the market opened. After beating expectations for 15 quarters in a row, Lucent missed its earnings forecast by 18¢. Much worse, it reported a $1 billion drop in revenue. You can't miss on revenues by $1 billion unless something is horribly wrong.

And something was horribly wrong. It wasn't clear until months later, but that was the morning the bull market in tech, telecom, and the Internet died. I vividly remember that morning. Believe it or not, I didn't have to look up the date or the details on the earnings miss. That morning is seared on my brain. It was the end.

I don't believe it was a coincidence I was in San Francisco that day. We financial scribblers follow the market. We cover what's hot. I visited tech capitals San Francisco, Boston, or Seattle nearly every month during the big bubble of 1998-2001. It was an incredible, exciting time. I'm glad I got to see it up close and personal.

This month, I got the same feeling I did back on January 6, 2000. It's over. And I was watching it all collapse, at the epicenter.

Recently, I was at the Four Seasons Hotel, looking down over the Las Vegas strip. Fannie Mae (FNM) and Freddie Mac (FRE) have finally cracked. While the stocks haven't gone to zero yet, it's clear the market woke up to the obvious fact equity holders of these companies are holding worthless pieces of paper. From my hotel room, I could see many of the reasons why...

Las Vegas may end up being the single-largest source of mortgage defaults. Upscale home prices here have fallen nearly 40%. The $2 billion Cosmopolitan hotel development is in default. The $6 billion Las Vegas Plaza is being delayed. Even Donald Trump has put his second tower on hold. It's a bloody mess.

Meanwhile, City Center, a $9.2 billion condominium/hotel development on the strip, is still going up.

Pre-construction sales began in February of last year – just before the financial markets shut out condo developers completely. I can see six huge cranes and the enormous steel infrastructure, half wrapped in glass. I cannot embellish on how big City Center is.

Each of its six main buildings seems bigger than any existing building in Las Vegas. This is the largest privately financed development in the history of the United States. It sits in the middle of a desert, in a city whose economy is dominated by gambling. Those two facts alone would give most reasonable investors pause.

The entire complex is five-star. One-bedroom condos here sold for $700,000. And the complex includes literally thousands of them. What will they be worth in foreclosure? I'd bet less than $200,000. And who will absorb those losses? I can't help but think in another two years we will look at those buildings and wonder, "What were they thinking?"

On a smaller scale, the same problems and the same questions are being asked of real estate buyers all over the United States. And the answers are not pleasant. By a huge margin, the largest owners of residential mortgages in the world are Fannie Mae and Freddie Mac.

Whether we like to admit it or not, the entire market for housing in the United States has been corrupted by government involvement. By subsidizing the availability of credit and by granting huge tax incentives to home speculators, the government helped finance the biggest bubble of all – the biggest bubble in history. It won't be unwound without serious disruptions to our economy and, unfortunately, a tremendous amount of pain.

I was listening carefully this week to the congressional testimony of Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson. Both insisted Fannie and Freddie have enough capital to continue their operations. Paulson sounded just like a Latin American finance minister on the eve of devaluation.

Incredibly, they both insisted all that was needed was more regulation! I felt like I was watching a kind of financial Nuremberg trial, where the main perpetrators of the crime were utterly oblivious to the evil they'd created. I was aghast.

Consider: Only 20 years ago, the U.S.'s total outstanding mortgage debt made up roughly 30% of our GDP. Homeowners held large stakes in their houses – close to 70% of the equity on average. Today, mortgage debt equals nearly 80% of GDP. The average homeowner owns less than half the equity in his home. This seismic change in the nature of home ownership and debt financing occurred nearly overnight – in less than one generation.

Fannie Mae and Freddie Mac made it all possible. Released from capital-ratio requirements and backed with a line of credit at the Treasury, they were able to buy a nearly unlimited amount of mortgages. Today, Freddie or Fannie finance more than 80% of all new mortgages in the United States. Over the last several decades, their presence in the market greatly lowered interest rates, created an endless supply of credit, and pushed housing prices higher. Meanwhile, the cost of the government guarantee, which lay behind Fannie and Freddie's power, was invisible.

Now what?

The size of the bailout of Fannie Mae and Freddie Mac could easily surpass $1 trillion. But Congress has no understanding, at all, of what's about to happen.

In 2003, chairman of the Senate Banking Committee Chris Dodd refinanced his home mortgages with Countrywide Financial (CFC), receiving a below-market interest rate that allegedly saved him $75,000 a year. He never disclosed the benefit to the Senate and claimed he was in Countrywide's VIP program because he was "a good customer of Countrywide's" – which is as bald-faced a lie as has ever been told in Washington, D.C.

In any case, the bill Dodd is getting through Congress (which was written by Bank of America (BAC), by the way) will create a new tax on Freddie and Fannie – 4.2 basis points on all mortgages they buy. That would generate about $600 million annually.

And, the money won't go into the general fund. Most of the money (65%) will go directly to the secretary of Housing and Urban Development, who will pass out the loot in the form of block grants to states. The Treasury secretary will get the rest of the money. He's allowed to give it to any nonprofit entity he chooses. And that means, whoever wins the presidency will get another $600 million (or more) each year to kick back to political backers. All for "affordable" housing, of course...

If Congress had any idea how serious the problems with Freddie and Fannie were going to become, they wouldn't mess around with a new tax or allowing a rival to Fannie and Freddie (Bank of America) to draft the bailout. Clearly, Congress has no idea how much trouble Fannie and Freddie face. Here's my estimate:

...continued.

Freddie and Fannie own or guarantee $5 trillion (yes, trillion) in U.S. residential mortgages. I'm convinced mortgage losses after recoveries will exceed 10% of the total outstanding and could exceed 20%. Thus, over the next 12 to 24 months, Fannie and Freddie will likely face losses of between $500 billion and $1 trillion. That's a huge amount of money, even for Congress.

There's simply no doubt Fannie Mae's and Freddie Mac's shareholders will be wiped out. Last month, I wrote the market value of the mortgages on their balance sheets has fallen by at least 5%, wiping out all of their equity. And when you factor in the off-balance-sheet guarantees these firms have sold, it was impossible to imagine they remained economically viable...

I'm embarrassed to admit my estimate of Fannie and Freddie's viability was hugely optimistic. Both firms seem unlikely to last through the end of July. Readers who followed my advice in June are up over 70% on their short positions in Fannie and Freddie.

I'm certain the government will do whatever it takes to ensure Fannie and Freddie continue to operate – but that doesn't mean bailing out the shareholders. All the government will do is guarantee Fannie and Freddie's debts. That means a huge amount of taxpayer money is about to go into troubled mortgages. A huge amount of money the government doesn't have and won't be able to increase taxes enough to afford. And that means inflation is going to get a lot worse. The government is going to pay for guns, butter, and housing. Look out.

The value of the dollar is going to go down, and the price of everything else is going to go up. I think this sets the stage for a true inflationary crisis – as the economy can't adjust to soaring commodity prices. I also find it hard to believe our foreign creditors will continue to hold U.S. Treasury bonds if the U.S. Treasury takes on all of the mortgage losses of Fannie Mae and Freddie Mac. I think they'll dump our bonds and that will literally be the end. No more world reserve currency. No more pegs to the dollar around the world. We'll be on our way to banana republic status, in terms of credit quality.

What's the best way to protect yourself and to make money on this looming crisis?

You must buy gold and silver as a hedge against a further collapse in the value of the U.S. dollar.

Most people don't spend any amount of time thinking about the value of the dollar. It has never occurred to nine out of 10 Americans that the last 35 years mark the first time in recorded history that every major financial power in the world operated with fiat (paper) money in the absence of a World War. No monetary backstop exists anywhere – no limit in any country to the amount of paper the government can create on a whim. Meanwhile, the track record of every experiment with fiat money is 100% perfect: In every case, the currency regime was eventually destroyed by an inflationary crisis.

I believe we have begun the monetary crisis that will end the dollar standard that has governed world trade since World War II.

I can promise you, the same way I promised readers that GM (GM), Freddie Mac, and Fannie Mae were "zeros" – the U.S. dollar's strength will continue to fade.

Slowly, bit by bit, Americans will realize this. Our foreign creditors will realize it, too. The result will be a flight from the U.S. dollar into other assets – at any price. Please set up your affairs now, so you can profit from the coming panic, not be a victim of it.

Writing the most recent issue of my investment advisory – my third strong endorsement of precious metals in as many years – I can't help but feel like Chicken Little. Are things really this bad? Well, let me ask you which do you think is more likely?

Scenario one: The U.S. government recognizes its severe financial mismanagement. It allows Fannie and Freddie to collapse completely and does not assume their liabilities. Mortgage investors take huge losses. Mortgage rates soar to more than 10%. Housing prices fall 75% – which makes housing affordable for millions of Americans previously priced out of the market.

In the meantime, the government cuts spending by 30% and reduces taxes radically to encourage economic growth (which, ironically, increases tax receipts, leading to a balanced budget). It restructures Social Security, moving the age of retirement to 75. And most importantly, the government gets out of health care completely, renouncing all of its Medicare obligations. Hospitals and doctors immediately drop their fees to meet the affordability requirements of a free market.

Scenario two: The U.S. government refuses to take responsibility for causing a bubble in mortgage finance. Rather than allow the bubble to deflate quickly, it bails out Fannie and Freddie. Mortgage losses build for five years, reaching more than $1 trillion. Housing prices stabilize in good neighborhoods, but risk-averse lending practices result in widespread vacancy across broad swaths of America.

Refusing to substantially raise taxes, annual deficits surpass $1 trillion in 2010. Total government debt begins to spiral out of control as our interest costs mount. Our foreign creditors lose confidence in the dollar and begin dumping it on the world market. Inflation surpasses 20% annually and prices for energy soar. Oil reaches $250 per barrel. The president alleges an international conspiracy to destroy America and threatens to attack China if it continues to sell the dollar. Price controls are instituted.

No paper currency regime has ever lasted. No government in history has ever repaid debts as large as those already assumed by our government (in terms of GDP). A default is not likely – it is inevitable.

The answer seems obvious and urgent. Make sure you own a substantial amount of gold and silver. I prefer to own plain bullion. Buy gold and silver bullion and bury it somewhere safe. The gold won't rust. Silver is more difficult to manage, but the best way to own it is to take physical possession.

That's what I strongly recommend you do. Right now. Seriously. I wouldn't be surprised to see prices of these metals soar if Fannie and Freddie are taken over by the Feds, which is what I expect will happen.

Is there a chance I'm wrong about all of this? Is there a chance the death of Fannie and Freddie will mark the end of the crisis? That financial stocks will rise from here and gold and silver will fall?

Yes, absolutely. At some point all of the bad news will be in the market, and prices will turn before the fundamentals improve. So, yes, I might be Chicken Little. I might be dead wrong. But I don't think we are anywhere near the end of the real estate bubble collapse, and I know we haven't even begun to deal with the fiscal imbalances of our profligate politicians.

One more thing... I wish I were wrong about all of this. But I don't believe the debts of our government and many of our neighbors will ever be repaid. As a nation, we've essentially bankrupted ourselves over the last 20 years. And the consequences of those actions will be felt by several generations of Americans, at least.

I worry about the middle class, people who generally lack the financial knowledge and resources to protect their savings. They will probably believe the lies they're told by the mainstream press about "greedy" speculators and evil oil companies. They will almost surely support the policies and the politicians who are actually responsible for their increasing poverty.

I also worry about people who are retired and depending on the government to support them. They will surely see their standard of living decline substantially.

And finally, I worry most of all about my infant son. Will he grow up in a vastly different kind of America than I did? He could. And that makes me saddest of all.

Fannie Mae/Mac are a crock of socialist sh...poop. They want congress (taxpayers) to bail out semi-government-run companies so that foreign investors don't get burnt. Talk about a 'new world order.' You invest in a crackpot scheme- you deserve to get burnt.

http://www.nytimes.com/2008/07/21/business/21bank.html?ref=worldbusiness

Asian institutions and investors hold some $800 billion in securities issued by Fannie and Freddie, the bulk of that in China and Japan. China held $376 billion and Japan $228 billion as of June 2007, the most recent country-specific Treasury figures.

In Europe, roughly $39 billion in Fannie and Freddie debt is held in Luxembourg and $33 billion more in Belgium, countries that are home to large investment management firms. Investors in Britain hold $28 billion, and Russian buyers hold $75 billion. Sovereign wealth funds in the Middle East are also believed to be big investors in Fannie and Freddie debt.

The trillions in securities issued by Fannie and Freddie and backed by American mortgages were never explicitly guaranteed by the United States government, but foreign and domestic investors alike have always believed, because of the companies’ integral role in the housing market and their marketing pitch, that the guarantee would be backed up if it were tested.

Fannie Mae/Mac are a crock of socialist sh...poop. They want congress (taxpayers) to bail out semi-government-run companies so that foreign investors don't get burnt. Talk about a 'new world order.' You invest in a crackpot scheme- you deserve to get burnt.

http://www.nytimes.com/2008/07/21/business/21bank.html?ref=worldbusiness

There are a lot of domestic investors who will be burnt too. Among them maybe your pension plan or stocks held in your 401k. Where we are is where we are. Its like Iraq- even those who say that we have no choice but to stay admit that we shouldn't have gone there in the first place. Are you really willing to have the financial system come apart to prove your ideological point?

This expression may be a relic from the past, but my generation called it "cutting off your nose to spite your face."

Now the finger-pointing has climaxed with Fannie Mae and Freddie Mac. The shares of those housing-finance companies plummeted two weeks ago for a very good reason: If you valued their books in a way that reflected the decline in house prices, they were worth about zero. Ah, but never mind such details. Blame the short sellers.

Why should they be propped up again? http://www.washingtonpost.com/wp-dyn/content/article/2008/07/20/AR2008072001665.html

Why should they be propped up again? http://www.washingtonpost.com/wp-dyn/content/article/2008/07/20/AR2008072001665.html

Wow...this is just manipulation of the market by the government. Their only purpose is to induce a rally in the financial sector.

Since this thread is about Fannie...

Freddie, Fannie Should Split, Not Get Aid, Faber Says (Update2)

By Carol Massar and Alexis Xydias

July 23 (Bloomberg) -- Freddie Mac and Fannie Mae should close down their business or split into private companies and not get government aid, investor Marc Faber said.

``They should close down Fannie Mae and Freddie Mac or what they should do is split them into 10 different companies and let them run as private companies,'' said Faber, who forecast the so-called Black Monday crash in 1987, in an interview with Bloomberg Television from Chicago. ``What Freddie Mac and Fannie Mae should right away do is not obtain any federal aid, but issue additional shares'' to avoid using taxpayers' money in a rescue plan, he said.

http://www.bloomberg.com/apps/news?pid=20601087&sid=afW0hUrRUP54&refer=home

http://www.foxnews.com/story/0,2933,389244,00.html

I'm no expert on pecuniary matters, but this proposal by Congress makes me very nervous. It seems that it will only reward reckless behavior and delay long-needed correction and change in the mortgage business.

http://www.foxnews.com/story/0,2933,389244,00.html

I'm no expert on pecuniary matters, but this proposal by Congress makes me very nervous. It seems that it will only reward reckless behavior and delay long-needed correction and change in the mortgage business.

"The measure hands the Treasury Department the power to extend the government-sponsored mortgage companies an unlimited line of credit and buy an unspecified amount of their stock, if necessary, to prop up Fannie Mae and Freddie Mac, two companies chartered by Congress. The two companies back or own $5 trillion in U.S. mortgages — nearly half the nation's total."

Nice...:rolleyes: A government that has proven itself incapable of managing it's own debt are making quick reactionary decisions with our money...we're F'd.