A Short Note on the Banking and the Banking Crisis in the US

When Milton Friedman and Anna Schwarz wrote about the Great Depression, their major point was the total absence of growth of the so-called monetary aggregates (money supply, monetary base, etc.) between 1929 and 1933. Well, the economist John Rutledge – in his very interesting blog – is raising the same point again:

“The Fed’s job is to provide liquidity. Instead, they diverted their energies to propping up troubled banks and investment banks by extending massive loans to institutions that were never eligible before. At the same time, they adopted procedures to sterilize the resulting reserve increases by selling T-bills in the open market to suck the additional reserves back out of the market. The net result was simply to shift bank reserves from healthy banks that were making loans to their customers to the sick ones. Total reserves did not go up at all. The monetary base has not grown in the past year. The Fed’s balance sheet has imploded. The upshot of all this is the Fed has provided no liquidity whatsoever and we have had one crisis after another. The FOMC statement, in writing about the balanced risks of growth and inflation shows they do not have a clue what is wrong with the system. The Fed does not print oil and should not chase growth-induced commodity price swings up and down with monetary policy. We don’t have an inflation–housing prices–the largest asset class for every American family–are still falling. It is time for the Fed to wake up and stabilize the capital markets.”

It seems that – just like in the 1930’s – the Federal Reserve is too worried about inflation and does not understand that one thing is to raise the money supply and the monetary base in order to generate life in the economy, and another thing totally different is to inject liquidity and then sterilize this new liquidity by selling Treasury bills and Treasury bonds.

Perhaps Ben Bernanke – who is considered an expert on the Great Depression – does not believe in the major argument of the Friedman and Schwarz book on the Great Depression.

Over and above that, one should also call attention to the writings of Hyman Minsky. His financial instability hypothesis raises a very interesting question: Why is it that it took almost 75 years for the bank financing methods to become again equal to a Ponzi scheme? Why is it that between 1945 and 2005 (60 years) we had a golden age without systemic crises?

Hyman Minsky and John Rutledge have written very important articles and studies about money and credit which confirm many of the preoccupations manifested in this blog in the past few months by Nouriel Roubini.

8 Responses to "A Short Note on the Banking and the Banking Crisis in the US"

  1. Guest   September 20, 2008 at 11:24 am

    The problem is that even Rutledge and Minsky do not understand what, in FACT, liquidity is. They can’t come to an agreement on it.So what should happen does not happen: ban housing evictions. Until housing evictions are banned–until that ban is absolute, permanent, individually enforceable and complete–economic activity will continue to decline.It’s what I said in my book long before Roubini began making his predictions (John Ryskamp, The Eminent Domain Revolt).The fact is that neither Rutledge, Minsky, nor Roubini, have any notion of the legal context in which the economy exists. Above all, they have only a primitive understanding of individually enforceable rights and the role individually enforceable rights plays in the economy.The reason they are no different from the Administration–and why they are part of the regime–is that THEY want to tell YOU what is good for you. Housing does not know better than they do: they know better than housing.They need more humility and less ignorance.

    • Anonymous   September 24, 2008 at 8:56 pm

      whatever is said here, one can not say that Roubini wasn’t right with his predictions and warning….Where are the 5 investment banks now? GONE…just like Roubini said months ago, and so on…Commander in chief and his advisors, those need more humility and be less ignorant…

  2. Sean   September 20, 2008 at 11:46 am

    Ban evictions? Let’s ban having to pay all debt too and we can all live for free. We are willing to forgive foolish bank debt, but not individual debt.

  3. Anonymous   September 20, 2008 at 12:08 pm

    We can’t tell the difference between foolish bank debt and good bank debt.

  4. Jerry   September 20, 2008 at 1:46 pm

    I think most taxpayers would be less resentful of this bank bailout if it included laws to forbid the usurious 20%-plus interest rates on credit cards, the outrageous late fees and other fees, the “blended” payment regimens where payment goes automatically to pay off the lower interest borrowings, the $10 charge plus fingerprint required to cash a $10 check at the branch where it was drawn, etc. etc. It sickens me to think my taxes will go to perpetuate the petty, nasty money-making rules of the Charlotte banks and others.

  5. Chris   September 21, 2008 at 5:57 pm

    I have been watching with dismay, over the last several years, the developments in USA economy and her financial system. The financial and banking elite led by the Wall Street created an enormous credit bubble which eventually encompassed the whole world. These people were selling worthless paper all over the world extracting huge, hundreds of billions of dollars worth of fees in the process. Now when the whole Ponzi scheme was exposed and the paper that the Wall Street sold turned out to be nothing but the worthless toxic waste, the resulting trillion dollar loses are being dumped onto the innocent US taxpayer.This is socialization of loses and privatization of profits at its worst. When will the looting of the taxpayer end? This is the greatest transfer of wealth from the Main Street to the Walls Street in US history and it MUST be stopped. Giving absolute power and mandate to deal with the crisis to Mr. Paulson, unelected official, the man who while working at Goldman Sachs, was the chief architect of the Wall Street generated Ponzi scheme that is underming the world financial system is beyond comprehension. To add salt to injury, the people who looted the entire world are not only allowed to keep the spoils of their crime, but are also rewarded with the job of running the new program. How many more trillions of dollars are they going to steal from the taxpayer? By voting for this heinous bill you give Wall Street green light to embark on the next round of looting, and another one, ad infinitum. This is an ultimate moral hazard. Where will it stop? When US Treasury is completely bankrupt? NO BAIL OUT FOR GAMBLERS AND FRAUDSTERS. By voting for this legislation you will mortgage not only future of your children, but the children of their children. Although I can?t participate in November 4th elections I can vote with my valet. I will, if this bill is adopted, lose confidence in your legislative, governmental and financial systems, and I will liquidate all my holdings of US treasuries and convert the proceeds into Canadian dollars. I AM AFRAID TO HOLD YOUR CURRENCY AND I REFUSE TO FINANCE THE MOTHER OF ALL FRAUDS.I pray to God that you will fulfill your duty to the American people and vote against this bill. GOD BLESS AMERICA.

  6. Mark in SF   October 8, 2008 at 10:50 pm

    “The monetary base has not grown in the past year. “As you were writing this piece, the fed was busy increasing the monetary base by 75 BILLION in 2 weeks. (latest # for 9/24)

  7. Ralph   October 18, 2008 at 11:59 am

    I agree that the monetary base is crucial in this mess. A web site URL http://solari.com/blog/?p=1630 says the MB has shot up. The above article by A.Lemgruber says it hasnt. And “Mark in SF” (above comment) says it has shot up. I’d be interested and grateful if the above individuals could please check their sources, and let us all have the details.On the subject of the monetary base, a quote from Larry Kudlow : “Not one in a thousand economic talking heads understands that the true role of the Federal Reserve is to control..the monetary base.” See http://article.nationalreview.com/?q=MDZiOWJhMzkxNDA4ZTBiZGQ3Y2UxYjNhMzUyMmI3MmQ=