Two centuries of monetary and fiscal policy and banking

I own a book of old car ads. One from 1963 for GMAC says " THRIFTY CAR BUYERS KNOW THE BEST WAY TO BUY ON TIME IS TO PAY DOWN AS MUCH AS YOU COMFORTABLY CAN- THEN PAY THE BALANCE AS SOON AS YOU CAN ". I believe if one examines American history each time the nation has deviated away from The Judo Christian work ethic of thrift and modesty the result has been financial crisis. I first saw Beverly Hills Ca in 1991 the homes built by the movie stars of the 1930s and 40s were grand but modest compared to the castles built in the last ten years. I believe at the root of the problem as been the widening gap between the rich and poor. I recommend Dr. Robert Reich's book " Aftershock to Economist readers around the world who wish to learn about the U.S. economy.

Whoever is interested in reading this book will find "This Time is Different" From Rogoff and Reinhart an amazing read.

Just a highlight, the title is an irony. He discribes the "This time is different" syndrom, a feeling people have whenever they are faced with a buble, or an unplasent economic reality. They think this time we are more modern, have better tools, and problems won't pop-up.

Are we in a "This time is Different" symdrom right now ? OH Yeah !!!!!!!!! Just look at Europeans "State of denial" of the fact that they need to spend less then they earn. Only a syndrom like this can make something so obvios seem out of picture, like it is right now.

So basically what Christopher Whalen is saying is that anybody who invests in Government Bonds is a sucker who will be taken to the cleaners when the Govt monetises their debts. Historically, this is always how it has been, and will be in the future.

Chris is the brother of Mike Whalen, the immensely talented musician.

TOO MANY PEOPLE, TOO MUCH COMPETITION - NOT ENOUGH DEMAND

No question that Mr. Whalen's ideas are correct. Too much deficit spending, too much FED policy to suit big business and the political fortunes of our President(s), and I will add that the U.S. has already digested its own resources.

Now, in every field, the boom/bust economic model always leads to a rush of people into a particular high demand field, until too many suppliers have too little customer demand.

As Americans, when there's a market void, too many jump in endlessly to fill the demand. The initial demand is devoured and then what's left - too many suppliers and too few customers.

The only survivors in this American system will be "too big to fail" businesses because they will have little competition.

Warmest,
Richard Michael Abraham, Founder
The REDI Foundation
http://www.redii.org

America, as the world's reserve currency, is deemed by the markets as being too big to fail. Here's a look at the American deficit so far this year. It has surpassed the level of the GDP of all but 30 nations in the world in the first 2 months of fiscal 2011 alone:

http://viableopposition.blogspot.com/2010/12/united-states-deficit-is-us...

If this were the debt of a European nation, America would be under a credit watch.

I'll be the devil's advocate and (partially) take up the side of the banks and federal government. The view of the Gold Rush of shifting the Puritan attitude towards earning money is an interesting and new one to me, but the rate Congress attempted to move the country back to the bimetallic standard following the Civil War (the Funding Act of 1866 being the first try) shows that people's attitudes didn't exactly do an about-face overnight.

Undoubtably Mr. Whalen covers much more material than this review could, but I find the absence of the "Free Silver" movement telling. The Populist Party in the late 1800s called for an expanded monetary supply to alleviate the burden of private (not public) debt held by farmers, whose real debt increased with deflation.

Large banks and the Federal Reserve have been popular targets since the financial collapse. It's very easy to say banks took undo risks on MBS because they were TBTF, but I feel it would be more honest to say investors in these securities had an unrealistic view of the riskiness of these assets (most were ranked AAA), not a malicious business plan to get-rich-quick-and-pin-the-Fed-with-the-bill-because-they-can't-afford-your-collapse. When underlying incentives are incorrectly calculated, 20 banks with capitalization of $100 billion each will make the same mistakes as 2 "TBTF" banks with capitalization of $1 trillion each. Once the bubble bursts, you still have financial institutions with $2 trillion of capitalization ready to go sink, the size of individual banks playing no role (obviously this is a coarse model, and I do agree that TBTF played a role in the crash, esp. with Lehman Brothers' resistance to finding a private buyer, but I'm less sold on its oft-alleged part in helping create the bubble. Let's make sure banks are behaving properly, and then we can worry about their size). As for the Fed's rescue plan, it's easy to hint that the "financial markets" the Fed protects are separate from the "real economy," but allow the former to dry up and see how long the latter lasts.

There's a lot to be learned from economic history on how to confront our current economic and fiscal crises, but let's be sure to give it a thorough examination if we're going to use the resource.