Thursday, September 18, 2008

Stories from the street

Graffiti sometimes offers more profundity than professional so called punditry.  Below is a picture of the head of Lehman Brothers Dick Fuld, nickname "the Gorilla - the brawler known as the scariest man on Wall Street," posted outside Lehman offices for staff to post their comments on.  Two that caught my eye catch the truth of the Keynesian crisis perfectly:

Greenspan Dot Com Bailout Led to Real Estate Bubble

and

Austrian Economics Was Right!

                                

So true, so sadly true.  The New York Times traces the timeline of the Fed-created boom for which we're now experiencing the bust, and of which we've only just seen the beginning.  How do we know it's not over?  Just look at the numbers.  An $85 billion bailout for AIG.  As Jeffrey Tucker notes, $85 billion was the size of the entire federal outlay 50 years ago, as measured in current dollars.  Meanwhile, as the confidence virus spreads, the UK government was contemplating nationalising the Halifax Bank, just like they previously seized Northern Rock and the US Government seized Fannie and Freddie, a bank with a £660bn balance sheet, a number representing about 40 per cent of UK's GDP!

These are big numbers being used to mop up the bubble created by Greenspan's counterfeit capital.  But the bailouts themselves are using the same counterfeit capital -- truckloads of the stuff -- they're only extending the bust and rewarding the failures of the fractional-reserve pyramid, and with credit created from where? 

From thin air. 

Says Austrian economist Frank Shostak, the "rescue" is illusory:

    The seizure of Fannie Mae and Freddie Mac by the government cannot help the housing market or the economy. Most people hold the mistaken view that the government has extra real resources that can be used in emergencies. This is erroneous. The government is not a wealth generator; it can only consume and redistribute real wealth. All that they can do is redistribute the existent wealth by means of taxes or by means of printing money. (Remember that it is real savings that makes real economic growth possible and not money.)
    The act of real wealth redistribution can only weaken wealth generators and make things much worse. Pushing more money into [Fannie and Freddie and the like] cannot set in motion an increase in lending if the pool of real savings is under pressure. After all, the essence of credit is not lending money as such but lending real stuff. Lending amounts to a transfer of real savings from a lender to a borrower by means of the medium of exchange, i.e., money.
   
The existence of banks enhances the use of real savings. By fulfilling the role of middleman, banks make it easier for a lender to find a borrower. When a bank lends money, it in fact provides the borrower with the medium of exchange that can be employed to secure real stuff that is required to maintain people's lives and well-being. It is therefore futile to urge banks to lend more if real savings are not there. Likewise, it doesn't make much sense to suggest that the Treasury or the Fed could somehow replace nonexistent real savings. Again all that such actions will produce is the depletion of the existent pool of real savings.

What is needed to revive the economy is a growing pool of real savings, not the denuding of real savings by the printing of more dollar bills backed only by the ability to tax.

The bust is not over.

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