Doug Casey on Government and the Financial Crisis

Not

Did I miss the punchline of the Einstein joke?

Cdzccdlo

The financial crisis had little to nothing to do with the Federal Reserve. The financial crisis was a run on the banking system, which had been funding itself by moving its credit risk off of balance sheets in what was called the “shadow banking system”. NONE OF THE SHADOW BANKS WERE DEPOSITORY AND NONE HAD BAILOUT GUARANTEES FROM THE FED! They allowed Wall Street to build up excessive leverage so that in August of 2008, the entire banking system held
about $50 billion in actual cash reserves while clearing trades of
$2,996 trillion per day.Shadow banking is unregulated by definition. It caused our meltdown, not all of these ridiculous bourgeois distractions like Fannie and Freddie and the FHA. It’s insane to think that we need to leave it unregulated.

http://www.TomWoods.com Tom Woods

Strictly speaking, no one has a “bailout guarantee” from the Fed.

There would have been nothing to crash from had the housing market not been artificially inflated. The Fed (and to a lesser extent) government agencies boasted about this, so it’s a little tricky to exonerate them from something they bragged about.

Why do you suppose the financial sector is so highly leveraged, as opposed to, say, the auto industry?

http://www.TomWoods.com Tom Woods

Strictly speaking, no one has a “bailout guarantee” from the Fed.

There would have been nothing to crash from had the housing market not been artificially inflated. The Fed (and to a lesser extent) government agencies boasted about this, so it’s a little tricky to exonerate them from something they bragged about.

Why do you suppose the financial sector is so highly leveraged, as opposed to, say, the auto industry?

http://pulse.yahoo.com/_BR53HBDRYJBFAON72CFPFGFD5Q Parker

“… ridiculous bourgeois distractions…” Bourgeois? Been reading much Marx lately? The Fed blew up the housing bubble with cheap credit (still doing that) and the government guaranteed all bank losses (still doing that also)… Don’t these policies strike you as just a teeny bit of a problem? BTW Madoff was regulated but his regulators were too busy watching porn in his office to do any actual “regulating”…

http://pulse.yahoo.com/_BR53HBDRYJBFAON72CFPFGFD5Q Parker

I guess he’s saying that Bernanke has an IQ of 70. And that might be being generous.

Our contemptible public school system tragically rewards people with impressive short term memories who have not one whit of common sense and punishes people with common sense who lack the knack for cramming. Not to say though that some rare phd’s possess *both* a good memory and common sense… like Tom. Whew.

Tunk999

We should also point out that, although “shadow banking” was technically unregulated, many chief regulators at least as late as 2006 were perfectly aware that banks were buying off-balance short-term liabilies and even went so far as to praise it as bold and innovative.

http://www.federalreserve.gov/newsevents/speech/Bernanke20060612a.htm
Ben Bernanke:
“The banking industry has also made strides in managing credit risk. [...] [T]he development of new technologies for buying and selling risks has allowed many banks to move away from the traditional book-and-hold lending practice in favor of a more active strategy that seeks the best mix of assets in light of the prevailing credit environment, market conditions, and business opportunities.”

http://www.imf.org/External/Pubs/FT/GFSR/2006/01/pdf/chp2.pdf
The IMF:
“There is growing recognition that the dispersion of credit risk by banks to a broader and more diverse group of investors, rather than warehousing such risk on their balance sheets, has helped to make the banking and overall financial system more resilient.”

http://www.ny.frb.org/newsevents/speeches/2006/gei060228.html
Tim Geithner:
“[Although] adverse developments outside the banking system, such as the failure of a major nonbank financial intermediary, can potentially cause greater damage to the core of the financial system than might have been the case in the past [...] [t]he evidence to date suggests that dramatic growth in new instruments for risk transfer and the greater role of nonbank financial institutions have contributed to a more stable and more efficient financial system.”

Go over the regulatory literature from this period. What do you find more of, concern about shady lending practises, or references (in retrospect hilarious) to “better dispersal of risk” or “innovative risk management tools” in the financial sector? The fact is that regulators didn’t lack a mandate to address shadow banking, all they lacked was judgment and insight. As Arnold Kling says, Wall Street might have started a fire, but the government was certainly there handing out matches and gasoline.

In order for the “lack of regulation” story to work, it has to be demonstrated that if Washington had only had 1 or 2 or 5 or 50 or whatever more regulatory bodies than the 115 it already had, it would have been able to nip this bubble in the bud. Given the available evidence, and what we know about the cronyism rampant in the regulatory apparatus, such a hypothesis would require more faith than I am capable of.

http://twitter.com/AnonymousHench Bruno Tata

What do you think of Casey’s ideas on charitable giving?

http://www.TomWoods.com Tom Woods

I’ve only heard him say that giving your money to charity is usually a waste. My wife and I anonymously help people we know personally. The government system makes families dysfunctional. I have seen it too many times. Private charity is probably better, but it could be that directly helping people you know yourself is the best route of all.

http://www.facebook.com/people/Chuck-Ross/46105083 Chuck Ross

All very interesting.

I wonder about something on CPI though. On the one hand Austrians argue that CPI is undermeasured which would imply that real income is much lower than reported. On the other hand my knee-jerk reaction, as an anti-leftist, is to oppose Owsers who decry increased economic inequality and who say that wages are stagnating and/or falling. In that way I’m torn in thinking that leftists are just whining.

What is it? That the Federal Reserve has caused more inflation than reported and that this has created income inequality and wage stagnation/declines? Or am I just conflating two issues. Do we instead have mismeasured CPI and the Fed distortion *plus* regulatory issues, uncompetitve corporate and capital tax rates, and structural changes due to the globalized economy?

Sorry, lot of moving parts here that I’m trying to sort though.

Dither

I have a question about Doug’s advice to take out a mortgage. Even if the mortgage is “inflated out of existence,” as Doug says, won’t a person’s wages be similarly debased, making it impossible for a working person to pay the mortgage after meeting other expenses as food and energy prices rise?

Maybe Doug meant the advice for non-wage earners.