Phoenix Area Home Market at a Glance - January median $130,000!

Wow! That is hard to believe.

Looks like we are in overshoot (or the economy is going super critical).

Good thing the Obama plan helps people that have a loan to value up to 105%.

I crack myself up

I’m unhappy to say, but I have to disagree with you Peter. This country started out with some strong fundamentals, but that environment has shifted. I’m not exactly sure where you’re coming from with geography, demography, and education. I’m assuming by geography you mean natural resources. And though we consume a lot of natural resources, specifically oil, relative to what we consume, we don’t produce much.

As for demography and education, we all know there is an obesity epidemic in this country and studies have shown the quality of the US education system scores pretty low compared to the rest of the developed nations. I’d question the transparency too. The Federal Reserve, the entity that controls our money supply, has never been audited and has no legal obligation to report anything to Congress or the people of this nation. Remember that $2 trillion that disappeared into the bailout abyss?

I’m not sure what you base your opinion on, but from what I understand the fundamentals to be, they show that we’re in for some trouble. This is just the beginning; the crash has not yet happened. Think about the trade deficit, the national debt, the deficit spending…we’re poor, we just don’t know it yet.

It is time for happy talk

Everything is going to be just fine in five to ten years. Heck, things are not so bad now. In a few years we will look back at this time as being no worse than Y2K.

This is just a mental recession.

If we can only get enough happy talk, then the American consumer will start borrowing beyond his/her means once again. People from all around the world will want to buy securitized debt from our trustworthy and honest bankers. Once the bankers can start unloading triple-plus-good debt to foreigners and hedge-funds then they can pay back the US government with interest. Due to the fantastic bargains the US made with the banks and AIG, the US government will go in surplus.

WooHoo! Happy times are here again

The toxic Alt-A and prime loans haven’t peaked yet. Alt-A looks like it could actually end up being worse than subprime. My expectation is that inventory will go up again this year, as prices continue to fall. If prices bottom out in 2009, I think it will be late in the year; I’m leaning to 2010.

I agree with Peter about Cramer being a fairly reliable contrarian indicator, and on gold in particular. While gold has held up well, I think the deflationary pressures are far beyond what even a $1 trillion stimulus package can reverse any time soon, and gold may go back to the $700/ounce level in the short term. I don’t expect to see high levels of inflation for years, and we are more likely to get a Japanese-style decade of malaise than a 70’s-style stagflation. Unlike the Japanese, we don’t have a high level of savings to fall back on, and everybody’s increasing their savings now, feeding the deflation.

Peter, we are near a hostile neighbor. Not hostile toward us per se. But I’m sure you’ve heard on the news lately that drug violence has been starting to spill over our borders.

http://news.yahoo.com/s/ap/20090227/ap_on_go_ca_st_pe/us_drug_report

With continued economic distress and civil unrest in Mexico, it’s possible we could receive a large amount of Mexican citizens trying to find refuge in America; so not hostile, but still not a good thing.

In regard to population, at what percentage are we behind the other countries you mentioned? Also, what kind of social security type systems do they have? As we all know there is no money in our social security system and we have a very low consumer savings rate. So even if we lead in terms of age by a substantial percentage over the other countries, at this juncture with baby boomers reaching retirement age next year we can’t afford to support those that cannot support themselves.

As for illiteracy rates, this says China is at 9% http://www.chinadaily.com.cn/china/2007-08/01/content_5446874.htm and the US is at 14% http://www.global-report.com/seattle/?l=en&a=343387

But I don’t put a whole lot of stock in statistics. They can’t be skewed every which way. That being said, even if China had a much higher illiteracy rate, they must be doing something right, because they are now one of the largest creditor nations.

The number of college graduates doesn’t prove positive economic impact, if obtaining the education is just for the sake it (e.g. liberal arts degrees). In fact I would say the impact is negative in most cases, as students come out of school immediately in debt. I think there are too many people going to college that should just be studying a trade.

I have previously looked at some of the other countries you mentioned and we’re not better off. Canada has oil, Japan has production; I don’t know about Italy and Ireland, but did they export most of their labor force to other countries and then spend more than they could afford on houses, electronics, and cheap imported goods? Does their currency have world reserve currency status that allowed them to massively inflate to pay for / off foreign debts?

Forget infrastructure, that’s not what’s important right now. We need to import less and export more. They should be building factories, not bridges. What is going on right now has everything to do with our monetary policy. If we expect this country to get back on track we need to start selling goods and services to the rest of the world. Spending money on infrastructure doesn’t help that cause.

In the end all these items take back seat to monetary policy. So let’s get that in order. No more interest rate manipulation and arbitrary money expansion by the Federal Reserve is the first step.

How does my plan reward banks? With their survival? I think we all need to let the banks survive. This economy isn’t going anywhere without them. Enough of the hatred towards the banks. It is like cutting off your nose to spite your face.

Regarding the overvaluation of homes, and stopping the destruction of home ownership: did you read what I wrote? I did not say the government should “Cram Down” mortgages. That is an idea I find deplorable. What I said was the government should take the difference between the mortgage value and market price on to the Federal balance sheet. The owner could then pay a new mortgage on the reduced market amount and stay in the home. This would stop foreclosures and the damage that does to the economy.

The government holds those no-interest loans on the Fed books until they can be repaid. If it takes 30 years for those houses to regain the value of 2006, so be it. This is not some instant reflation plan. In any case, the Fed is on the hook for the balance of these mortgages one way or the other since the Fed (the taxpayer) is the ultimate guarantor of all GSE lending. Now that Fannie and Freddie are nationalized (yes, they are, if anyone wants to challenge me), as a nation, we own those liabilities anyway. Better to take a position in the underwater homes and offset those liabilities with an equal sized asset.

Regarding the private Refi market, yes, it would not be able to compete wiht 4%, 40. But again, the vast majority of loans getting written today are conforming loans written through GSEs. There is almost no jumbo or non-GSE loans written right now because there is no secondary market to sell the securitized mortgages to. And the mortgage brokers and the rest of the mortgage industry would still be needed to run the transactions, just as they do now. I don’t see much of a difference here.

I have yet to see someone on this blog who criticizes doing something to stop the freefall of home pricing offer any reasonable opinion for what is a “fair” price. Where is this market supposed to fall to? As I said earlier, we are headed to 1992 prices as they trend now. Without economic recovery sometime in the next 2-3 years (and I see nothing on the horizon that will aid recovery) that is where we are going. By the time prices get there, over half the homes in the country will be foreclosed, including mine bought in 1992. Is that a good plan Concerned? You will probably be “Even More Concerned Citizen” at that time.

How does my plan reward banks? With their survival?

Right. They made bad decisions and they should be left to fail. That is the very essence of free market capitalism. So what you’re saying is fascism or socialism is the way to go; that a handful central planners can do a much superior job. That if a business makes a mistake that government should step in and “fix” it. So by your logic I should be able to go out and get 10 credit cards, max them all out, and then if I find out I can’t make a payment expect someone else to take care of it. Where’s the responsibility in that? Where is the lesson learned that maybe over-spending is a bad idea?

It’s also a nonsense statement to make that ALL banks will fail and the ENTIRE system will collapse. That’s what you’re implying, but that just won’t happen. Some banks will fail, some won’t. Banking, in its basic form, is just lending out money and it’s not like everyone’s money is gone. So there isn’t phony growth for a few years, that’s a good thing. It will give people time to save up some money and provide real capital for economic growth as opposed to just money created out of thin air (which clearly ends in disaster).

Regarding the overvaluation of homes, and stopping the destruction of home ownership: did you read what I wrote?

Yes Brian, I read what you wrote. How can a government determine market value? When you figure that out please let me know, because you’ve solved one of the biggest problems with Communism.

Let me point out too that the damage to the economy was already done with the inflation (money expansion) introduced by the Fed during the 90s and earlier this decade. What we’re experiencing is the effect of that. Falling asset values is the solution.

the Fed is on the hook for the balance of these mortgages one way or the other since the Fed (the taxpayer) is the ultimate guarantor of all GSE lending

But they’re not. They put themselves in that position, but in no way do they have the authority to do that. They shouldn’t be guaranteeing loans in the private market.

since the Fed (the taxpayer)

Huh? The Federal Reserve has nothing to do with taxes. The Federal Reserve is a private bank that has monopolistic control over our currency. They were (foolishly) granted power back in the 1913 to manipulate interest rates and expand/contract the monetary base at will. They are our (private) central bank and they have nothing to do with taxes (unless you count the invisible “inflation tax”).

I have yet to see someone on this blog who criticizes doing something to stop the freefall of home pricing offer any reasonable opinion for what is a “fair” price.

That’s because no one can. No individual or small group of planners knows what a “fair” price is. I again want to point out this is a main difference between free market Capitalism and a planned Socialist/Fascist market. Once the bust occurs it has to be left alone. Any meddling in it will elongate the recovery. You told me to read about the Great Depression. I have to great lengths. And I’ll ask you to do the same. Our government’s involvement in it (price fixing, monetary policy, subsidies, make work programs, new agencies, and all the deficit spending) is what made that depression “great”.

So what’s the solution? Make sure the artificial boom doesn’t happen in the first place. Unfortunately, until we get rid of our central bank (Federal Reserve) we will have to continue to endure these outrageous “business” cycles.

I recommend everyone read: http://mises.org/story/3128

And Brian, you should read “The Mystery of Banking” by Murray Rothbard http://mises.org/Books/mysteryofbanking.pdf

I don’t think you quite have a handle on the purpose of money, how healthy expansion occurs, and where it gets its value.

I want to put this out here for everyone. Let’s get some definitions out of the way first:

Inflation – Creating more money than what previously existed in the economy. NOT rising prices.

Money – It is a medium of exchange and in itself has no value. The value is obtained by the goods, services, and scarce resources it represents.

Federal Reserve – A private bank that has the ability to create (print) money and influence other commercial bank (BoA, WaMu, etc.) interest rates at will. It is the central bank of the US.

For there to be sustainable healthy growth in an economy there first has to be savings. Because how can there be investment without savings? Where does a bank get the money to loan out? Whether it’s for someone to buy a house or expand their business, banks first must have money from people saving (savings accounts or CDs).

Now, the last 15 some years of growth hasn’t been based on savings; it’s been based on “printed” money. Technically most of the money added to our system is done without paper currency (dollars), but the concept remains the same. Our economic growth has been funded by the Federal Reserve creating money and distributing it to banks.

The problem with this is that new money isn’t rooted in anything. It wasn’t generated by someone working and then putting what wasn’t spent on food, bills, or entertainment into a bank. Because the new money isn’t based on any real resource, good, or service, the new money winds up taking some value from the money already in existence. Another way to say this is things wind up costing more. Inflation isn’t raising prices, rather rising prices is the result of inflation.

If you look back through our history you will see constant inflation; constant devaluation of our money. When done slowly the destruction isn’t as noticeable. But sometimes, as in the case of the housing boom, the Federal Reserve inflates (creates new money) at a tremendous rate. In that instance, there is lots more money chasing the same amount of goods (like houses). This drives the price up. Another thing that occurs is that businesses (like home builders) don’t know the difference between the recently devalued money and the money they were using prior to the aggressive inflation. They begin to expand their business, because to them it seems like everyone has an unlimited amount of money.

And in a way everyone does. Houses that miraculous appreciate by double digits every year, an endless stream of credit card offers, stocks that just keep going up, loans being offered at near historical low, cheap goods imported from other countries…everyone feels richer. But again, this expansion isn’t based on savings. It’s based on money created out of thin air. Eventually the Federal Reserve has to stop inflating or it will get out of control. Imagine a house that was worth $130k in 2003 and by 2010 being valued at $1 million. People begin to get wise to the devaluation and the currency itself becomes completely worthless.

When the money “spigot” is turned off, we begin to slide into a recession. Credit contracts, projects can’t be completed, bad investments become blatantly obvious, and over-priced asset begin to fall in price. And the greater the inflation, the greater the recession.

So people are wondering how to fix the problem. Really there is not a whole lot that can be done at this point. The Federal Reserve could increase interest rates and contract the money supply. The recession would become rapidly more severe, but it would also be over sooner. What really needs to happen is the arbitrary money expansion and interest rate manipulation not occur in the first place. Printing more money will not fix this problem. Trying to buy up “toxic” assets just keeps the bad investments in the system longer. Spending money on make work programs, stimulus packages, giving money to ailing companies will all go to making a really bad recession into a new great depression.

People losing their homes, their retirement funds, and their jobs are all terrible things. Of course they are terrible things. But they are unavoidable. The first few rounds of stimulus and bailouts haven’t done anything to stabilize the economy. And now they say more, spend MORE. But it was spending without SAVING first that caused this problem.

I like too how you conclude an argument by saying that the government doesn’t “have the authority to do that (they don’t? Are you the chief justice of our Supreme Court?) . They shouldn’t be guaranteeing loans in the private market.” as a way of refuting my point that we own the liabilities of the banks, one way or the other.

That is a good one: so now you are dictating national policy and what we should and shouldn’t be doing with our banking system. You need more than this blog to make any difference there. Concerned, you should have run for President and then maybe that opinion of yours would matter.

Thanks for making me laugh. I need a good one in this economy

Sorry, I can’t contain myself. There are so many good lessons (for everyone) in your writings above.

“When done slowly the destruction isn’t as noticeable. But sometimes, as in the case of the housing boom, the Federal Reserve inflates (creates new money) at a tremendous rate. In that instance, there is lots more money chasing the same amount of goods (like houses).”

That was what I thought, too, until about a year ago, that it was the Fed that had expanded money supply driving down interest rates and making cheap loans easily available. Then I read one of the McCulley columns that talked about the “shadow banking system”. What a revelation. (HE SHOULD win the Nobel prize for that idea). Shadow banking in the past 10 years completely swamped the amount of money created by the Federal Reserve. The Fed even tried raising rates in the 2004-07 period to slow money supply growth, with no effect. It was not the Federal Reserve that caused the housing bubble (even Greenspan got caught by surprise on this one), it was “Shadow Banking”.

What is the Shadow Banking System? It is an unregulated “Free Market” banking system that came about because of an over-abundance of savings (sorry to burst all your bubbles at once). During the 1990s and early 2000s, the Western world, especially America, bought more and more goods from Asia. We know about this from the problems with outsourcing and balance of trade issues, of course. But most people don’t know about the reciprocal problem it created.

The economies selling the West their goods (manufactured goods in Asia and increasingly petroleum products in the Mideast) could not hold the dollars they received without experiencing an appreciating currency that would make them less competitive and also might precipitate deflation (as savings exceeded consumption). So, what did they do, they sent all their dollars back to us by buying securities. At first, they just bought Treasuries, but soon that was not enough and they needed more places to send their dollars. So, they started by securitizing packages of mortgages and other American credits (broadly known as “derivatives” today), were reassured by the triple AAA ratings given those derivatives by rating agencies (that the buyers may have misunderstood to be government entities), and the dynamism and safety of the American economy that attracted investment.

This money flowing back into America from other countries was completely unregulated (a Free Market; which puts a bomb under the thesis of free market banking, sorry), and it was plentiful. So plentiful that soon credit standards started to drop and anyone who could “fog a mirror” as the RE profession likes to say, could get a loan.

Another source for “Shadow Banking” was private banks and hedge funds playing the “Carry Trade”. The economies that had strong economic exports in the same period, but with low interest rates (Japan, New Zealand, Australia, even Iceland) became hotspots for borrowing by these private, unregulated, non-bank “free market” entities. But with Glass-Steagall a thing of history, they could make themselves in effect, a bank, and fabricate money. The private “banks” did so by borrowing cheap, and then lending (or buying commodities, businesses, real estate) at a higher rate / price. This was all well and good for a while, but the incredible amount of money created, multiples of the American M2 or M3 money supply, swamped markets and caused the pricing bubbles we all observed. It is this “carry trade” unwind that has crushed the commodities and energy market the past year and it is the “derivatives” unwind that is crushing the financial, housing and busines loan markets.

So, don’t put this economic disaster at the feet of the Fed. They were helpless to stop it with current laws and regulations (though Greenspan’s cheerleading in 2004 did not help). Rather, it was the unregulated Shadow Banking System, administered by the investment banking industry, and run through mortgage brokers with Fannie and Freddie approval, that caused the disaster.

As for Freddie / Fannie complicity in this deal, that was enabled by the Dems in Congress (led by Frank and Dodd) who wanted to make home ownership a national Right rather than a privilege. And it was also given an assist by the Repubs who wanted to extend Free Markets to the banking system by deregulating them through the abolition of Glass-Steagall and the declawing of the SEC.

The bottom line: we had no national banking problems until Free Markets got involved. Banking is one industry that cannot be Free. Other crises in banking happened because of insufficient regulation and oversight (including the S&L crisis due to a lack of Federal regulation during the 1980s). Sorry, Central Planning wins this one.

I don’t appreciate your patronizing tone. Let’s keep this mature, yes? Listen Brian, if you think there has been free market banking in the last 90 years, you are sorely mistaken. We haven’t had free market banking since the early 1900s. So all of your “gotchas” are way off base. I adhere to exact opposite of your “bottom line”. We had no substantial banking problems in the free market until central planning got involved.

You should be weary of listening to a bond fund’s “solution”, of which I’m sure has a vested financial interest. Telling me you follow a bond company’s economic theories undermines the points you make. It’s like telling me milkshakes and french fries are healthy and later I find out you studied at the school of McDonald’s. PIMCO is a bond fund, no? So don’t you think their economics are going to be skewed toward favoring them?

You mention Austrian economics, but the points you make don’t follow Austrian theory. Keynes never did a sufficient enough job at explaining the reason for the boom in the first place. Then his solution to the bust re-enacts the problem. Also, Keynes himself said that his theories (I’m paraphrasing) are much more easily executed in a socialist type system, as price controls are difficult in capitalism.

You’re going to blame the Asian countries? I’ve seen this theory floating around. This scenario would have never been able to play out if not Federal Reserve intervention replacing the outflow money with new dollars. Interest rates in America would have gone through the roof and we would have gone through a recession as money became scarce (all going to Asian countries). But that didn’t occur, interest rates were held down and we had a stock bubble in the late 90s.

As the inflated dollars were coming back here (generated initially by the Federal Reserve), then it would have been the job of the Fed to raise interest rates and sell bond to “cool” the market. But they didn’t. They kept rates low and continue to expand the money supply on top of it.

Our problems didn’t start with the housing market and they won’t end there either. The government will loan the difference between the appraisal and balance? Ask John Wake how accurate an appraisal is in a market like this. Yes, I understand your housing “solution” and it’s terrible. At best it will keep houses officially overpriced and at worst it will pave the way to a new housing bubble (or some other asset bubble).

Most of the “toxic securities” are only toxic because of uncertainty. Eliminate uncertainty and the banking system is repaired.

The toxic securities are toxic because they are worthless. If you want to believe that China caused the housing bubble (it didn’t), you can. But it was a bubble none the less. The only course for repair then is to allow the worthlessness of the securities to be realized.

“You’re going to blame the Asian countries? ”

This is another example of your complete misinterpretation of what I say, to fit your own thesis. What I actually said was that the dollars held outside the central banking system and their subsequent re-entry into our economy through “Free Market” banking, was the source of the problem. Besides Chindia, I also cited the Carry Trade from Japan, New Zealand, Australia and such.

“I’ve seen this theory floating around. ” Again, you take actual documented fact and try to call it theory because it does not fit your “free market” paradigm. The Carry Trade and the buying of securitized collaterlized debt by Asian and Middle East interests is no theory.

Worse, because there was no regulation around those money flows, and no “capital reserve requirements” on the lenders, those flows were levered up to the hilt by private (free market) banks that were not regulated and outside central bank control. This was the source of the reported “hundreds of trillions” (as some others on this site have correctly reported) of derivatives overhanging the market. It is this free market banking derivative overhang that is now being unwound with all its negative economic effects. This number completely swamps the financial power of the Federal Reserve, which controls only $10-20T (and can’t create enough money to offset the derivatives unwind, try as it might).

Free market banking has proven to be an absolute failure and is what brought down our economy, not our toothless banking regulators and the Federal Reserve.

Here is a nice quote from Austrian economist, Friedrich Hayek regarding hard core “free market” observance (or laissez-faire) from his book the “Road to Serfdom”:

“probably nothing has done so much harm to the liberal cause as the wooden insistence of some liberals on certain rules of thumb, above all of the principle of laissez-faire capitalism”

Well said, Mr. Hayek

It is interesting that in his day, it was “liberals” that were the free-marketers. How times have changed.

Again, I never said banks were “free market”.

Then you made my point for me. If the banks aren’t free market, why are you blaming the free market?

you will continue to misinterpret everything I say.

I’m not misinterpreting anything. I know what you’re saying. I’ve heard it a hundred times before and I hear it every time I listen to the news.

Here’s what it comes down to, you can’t have investment without savings. When you try to, it creates a bubble. When the bubble bursts you can’t spend your way out if it, because just like before, there wasn’t any “real” money in the first place.

If you think you are smarter than the guys who run all the world’s money, and smarter than the guys who have created and managed our banking system since 1913, or even before that the creation of the US Treasury by Alexander Hamilton, then I feel sorry for you and we really can’t have an intelligent debate.

We can have an intelligent debate, but you need to take a breath first. I don’t think I’m smarter than the guys that run the world’s money, but I also think they know better. I think they know exactly what they are doing, but choose to make the wrong choices for financial gain. Greenspan wrote an incredible article in the 60s about the importance of a gold standard and sound currency. Then after joining the Federal Reserve employed policies that were the exact opposite of what he wrote. When asked if he still believes in what he wrote all those years ago, he said he did. Even Volker has just recently commented on the dangers of a fully fiat system. But will push for more inflation and centralized planning on a global scale regardless. So no, not smarter, but they have an agenda and I do not.

I think it is much better to understand how the world’s economic system actually works

All the understanding in the world isn’t going to help. Unless you’re an “insider” you’re always get the short end of the stick.

“then to wish for something that doesn’t and never will exist.”

It’s a good thing our founding fathers didn’t feel that way when they made the push for freedom and independence from the British Empire. We can introduce sound money and policy back into this system, but people need to wake up to the truths of central banking. Did you read those books I recommended yet, Brian?

I will be happy to debate you in the future if you will actually try to understand what I am saying without filtering it through your biases, and will try to see some middle position and not the “Free Market or Die” position you are now apparently taking.

Why am I wrong? What if you are the one that is wrong? See, I think you should try to understand what I’m saying without filtering it through your biases, try to see central planning doesn’t work, and that more government isn’t the only answer. Central government control over money is the ultimate destroyer of individual freedoms.

“Give me control of a nation’s money and I care not who makes her laws.” - Mayer Amschel Rothschild

Concerned…once again, you have read into what I say what you want and ignore the point.

What I said was: “I make the point (the banks) never have been (free market) in the modern era, except for 2003 till now (after repeal of Glass-Steagall) which was an absolute disaster as we are now seeing. Banks must be regulated and are not free market and should never be. Too much mischief can be done with the power to create money.”

I am done with this discussion. You are on the fringe with this debate and now have revealed yourself to be a goldbug. There is no reasoning with a goldbug as I have learned.

I don’t retreat, but I don’t find it much fun talking to a wall, either.

“I don’t find the explanation for the cause of shadow banking to be sufficient”

You quickly denounce Shadow Banking as the source of the problem even though the best financial minds in the world have declared this IS the source of the problem. I showed you that the reason Shadow Banking came into existence was the complete lack of regulation caused by the repeal of Glass-Steagall and no additional regulations put in place on hedge funds and private banks, amounting to a federal capitulation to the Free Market that you so fervently embrace.

The problem with our world’s financial system is not Central Banking, just the opposite, it is abdication of responsibility to manage banking and money growth to the Free Market. You are totally, 100% wrong on this point, but I will never be able to persuade you, no matter how many facts and figures I bring to the argument. You are locked in on your position, like every goldbug, anarchist, anti-government type I have ever met.

There is a very good reason why free markets do not work for the governance of money supply, and that is that there are no free market limits to how much money can be created. Money supply MUST be regulated. Money is a monopoly, and when you let people in on any monopoly they distort it to their own greedy ends, especially if they have nothing at stake.

“Banks cannot inflate in solitude. If they did, they would become almost immediately insolvent.”

You wonder where the private banks that created the Shadow Banks got their money? That is the whole point, they didn’t. There was no capital reserve required to play this game. A private bank could just use its reputation (AIG, Goldman Sachs, Blackstone, Texas Pacific Group, etc) and could borrow money unsecured from global sources like banks in Japan, and then lever that borrowed money up in the American capital markets by lending to buy businesses that they then buried with debt to take out a profit. Or, they could “underwrite” (again, using their company’s name as collateral) collateralized debt, creating securities in the process that could be resold at a profit and/or commission. Then, if they were feeling extra greedy, they could write insurance policies (default swaps) against that same securitized debt and make even more money on commissions and profits.

“They would need to be constantly infused with new money to replace the money that they created as it was lent out. ”

No, they don’t need to be constantly infused with money. You are wrong. Where do you get your support for this statement. It is another off-the-cuff remark with no evidence offered. I just pointed out that in a Free Market for banking, with no capital requirements enforced, these banks just fabricate money at will by creating debt and profiting from the sale of that debt. This is really the same concept as a Ponzi scheme, which is exactly what Minsky calls it.

All along the way, this debt that was created from nothing (other than the goodwill of a business’s name) or by borrowing from hungry and reckless foreign banks like in Iceland or New Zealand. It was being magnified by 30 or 40 times or more creating a mountain of debt out of nothing. And none of this has a thing to do with the Federal Reserve or the Treasury for that matter. Too bad it didn’t. At least then, the Fed could have managed the growth, or tried to stop it. But Congress is the body that passes laws to regulate banks, not the Fed. It was Congress (both Dems and Republicans for different reasons) who let the genie out of the bottle.

I can go on for pages and days. I read this stuff and study it almost 24 hours a day. But no matter how logical and well reasoned / researched my arguments, you ignore my points and just fall back on “Central Banking is Bad” by narrowly interpreting people like Hayek who had a much broader view of the market than you.

Listen, Concerned (again, the fact you don’t give us a real name says quite a bit about your agenda), I am as much a free marketer as the next guy for products that trade openly and fairly. But I also am honest about what the government can and shouldn’t do. We need a Central Bank (again, from the first our country has had one, from the time of Alexander Hamilton). The Dollar belongs to the people of a nation. It is backed by the “Good Faith” (and physical assets) of the American people; it needs a protector and that is the Federal Reserve.

The Dollar needs to be protected from the people who have caused our economic collapse, the private bankers and hedge funds that you support with your insistence on Free Markets in banking. People around the world do business with these private bankers who are offering up investments in America (the securitized debt) because of the world’s faith in America and the dollar.

What has happened is that our Dollar has been subjected to the forces of the Free Market without anyone protecting it since 2003 (which coincides very nicely with the housing bubble). Private bankers and hedge funds have defrauded foreigners by using our national currency as bait. This is what the Free Market in dollars has done for us, and I don’t like it one bit; and I don’t like it when people make specious arguments for a Free Market in currency, when it has NEVER proven to be successful in the history of the planet.

You are big on evidence. Show me one economy that worked for even five years without regulating its currency through a central bank and a Treasury. Even currencies backed by gold need a Treasury to protect the currency, not the least to stop counterfeiting. When banking is deregulated and made “free”, that is what creating debt without capital requirements amounts to: counterfeiting.

I doubt you will get my point; but maybe others reading this site will understand.

Concerned, regarding gold (since you are now bringing that into your arguments): I am much friendlier to a discussion just focused on the subject of a gold-backed currency (there is no connection between gold and free market banking). That at least has some historical precedents that worked, at least for a time.

The main problems with a specific physical asset like gold backing a currency are inefficiency and mechanical regulation. The physical movement of gold to settle international transactions is very problematic. The storage of gold to back a currency is also problematic and expensive (Fort Knox syndrome). To provide a “guarantee” for a currency, gold production must also be regulated and private ownership forbidden (as it was before 1971). To me, that is a major issue in a free market economy.

But the biggest problem, and the reason we left the gold standard as a nation, is that gold is a mechanical index and cannot respond adequately to changes in the national or global economy.

Ideally, money supply should grow exactly as much as the economy as measured by real GNP. The formula for this is very simple: “population + productivity” = real GNP (nominal GNP includes inflation and is more normally reported in the media). But who is to say that gold supplies can be increased exactly as much as population and improvements in productivity? In fact, history has shown that it doesn’t / can’t. It then becomes the so-called “cross of gold” that constricts an economy and causes human suffering in the process.

If population and productive capacity grow faster than the supply of gold, the result is deflation. A gold backed currency does not guarantee a stable currency.

But in fact, fiat currencies in a country with property laws like ours, are in fact backed by physical assets. Anyone in the world who wants to turn their dollars in for a physical asset can do so by buying property in America that is valued in dollars. And that is exactly what people do, which is how our country grows and melds people from all over the world. I think this is a much more flexible and humanistic system than using an arbitrary commodity such as gold to back the dollar. Most people agree with me.

You have strange ideas, Concerned.

1. Fear as the mechanism to contain Free Market Greed? I don’t think so. That has never been the case in the past. Greedy people act on their impulses without any fear. That is what makes them greedy.

2. We did not have these kind of problems prior to the repeal of Glass-Steagall. That is a fact and really can’t be challenged. Whenever we have had problems in the banking industry or others that operate in a monopoly industry, it has been due to a lack of regulation. Free markets require regulation.

3. Money lending is money fabrication. Again, this is pretty basic. I don’t know why you even bring this up. This is the entire problem with free market banking. What limits are there on money fabrication? It is your worst nightmare, unless gold is backing money, and then there can be NO lending (in a true gold backed money economy). In a gold backed money system, if lending occurs with any kind of leverage at all(that is, if the bank lends more than it has on hand in reserve), then the gold backed buck is broken. The last time lending used no leverage was the Middle Ages.

4. I don’t acknowledge that the Fed is irresponsible because I don’t think it is. That should be obvious. I do and have taken exception to some of the stuff coming out of Alan Greenspan. He got a little to caught up in trying to save every little blip in the economy, so I will give you that. But Volker was very responsible and corrected previous Fed excesses (that I am more inclined to blame on Nixon, anyway). Greenspan without the lack of bank regulation, would not be able to do too much damange. The things Greenspan was doing to try and soften the business cycle would lead to Inflation, not Deflation. We don’t have inflation right now, do you agree? The only way to get to Deflation is by a complete collapse of the credit system. And the only way to get that, is through free market fraudsters destroying the public’s confidence in a transparent and safe (well regulated) banking system. The fraudsters had no regulations to worry about and nothing to hold them back.

FEAR? No way, these guys had no fear regardless of the consequences. Your thesis regarding fear and banking doesn’t hold water because as shown by the collapse of Lehman, Washington Mutual, IndyMac, Bear Stearns, and countless other public and private banks. Greedy people with no limits and limitless opportunity will always take a chance to crash their business if they think they can become RICH before doing so (and so would I if I could do so with other people’s money).

Free markets have their place, but not in banking. You can have your free market every Saturday at the flea market. There is nothing but raw competition there. But our banking system trades in the monopoly of the world’s reserve currency. We can’t let these guys running the banks abuse the world’s trust in America just so we can say the banks are free.

5. I will read “Road to Serfdom” again. It has been years. But I am much more interested in the disciple, Minsky, of Hayek’s disciple Schumpeter. Minsky has a much more modern view of the world than Hayek and Minsky’s perceptions have been validated now, twice. First in the mid 70s, and now once again. So, I will ask you to read Minsky as you ask me to read Hayek. The Austrians operated in and around the two World Wars, right next to the tragedy of those wars. They witnessed facism first hand. So, I am sure they had very little trust in government and that colored their thinking (and maybe yours). I am much more inclined to trust my government, even when I disagree with it, like right now. I know that every two years, we can throw the bums out if they screw it up, which it looks like they might.