The Current State of the Economy Explained

I ask my fellow ATSer to read this. I may be a little long, but it will hopefully make sense of one of the biggest issues in today’s world.
There are many individual issues inside the main issue: money supply (M1), regulation, deregulation, the Fed, Community Reinvestment Act (among other Acts), poor investment, laissez-faire, bailouts, the TARP, subprime mortgage crisis, mortgage backed securities, ACORN, CMBS, and Tea Parties just to name a few.

Let’s talk about a few of the key issues and direct causes of the situation, but first let me explain important terms and ideas.

WIKI Moral Hazard-From Wiki “Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk.” Wikipedia put it so eloquently I figured to just quote it.

Incentives matter- rewarding behaviors to encourage the same behavior in the future. Inversely, punish undesirable behavior to discourage that behavior in the future.

The media distorts reality. Writing to ATSers about this is like preaching to the choir, but it is important because not even alternative media sources have run with any real, logical explanation of how this all happened. These explanations are generally found in obscure articles written by college professors or economists, and never covered at length in the MSM or Alt Media.


1. With those out of the way, let’s talk money supply.

In 2001 our economy faced a recession (you can probably remember this). The Fed started increasing the money supply by roughly 6% a year from previously having several years of stable money supply. As any economist, student of economics or well informed person will tell you, a major increase in money supply will cause inflation. This extra money directly caused the housing boom because banks now had the capital to lend significantly more money. This is an incentive to lend more money to more people while being insulated from risk. Moral Hazard

2. So the banks had the means to lend more money. Why did they lend money to people that could not afford the house?

The banks have been making poor investment into sub-prime housing for years because of the Community Reinvestment Act of 1977 (CRA). This act has been forcing banks to lend to low income neighborhoods as a way to end discrimination in lending. It sounds very noble, but the effect of it is poor investment and bad mortgages, the subprime mortgage. Not a fan of ACORN now? Look up their involvement in the CRA.
The Financial Services Modernization Act of 1999 sealed our fate. It allowed banks and insurance companies to merge, while at the same time they could only merge if they met CRA requirements. All these mergers, injection of capital by Fed, creative investments, Citicorp/Travellers Group and an increased fear of the CRA coming down on them set us up for a classic boom-bust cycle we have seen before, called a bubble. These only can occur if the government artificially intervenes with the money supply.
Robert B. Ekelund and Mark Thornton said in their article on this matter LINK TO ARTICLE
“The Financial Services Modernization Act of 1999 would make perfect sense in a world regulated by a gold standard, 100% reserve banking, and no FDIC deposit insurance; but in the world as it is, this "deregulation" amounts to corporate welfare for financial institutions and a moral hazard that will make taxpayers pay dearly.”


So why, after all of this, the media is blind to it. Or, rather, been silent in reporting this. In fact, they have been harping a different tune. They have been blaming the laissez-faire practices of the Bush administration. Though a measure of deregulation can be blamed, it only in conjunction with an increase in regulation in other areas of the market yields this resulting poor economy. If we are going to blame presidents for bad economic policy, we could blame all of them back to Woodrow Wilson and the Federal Reserve Act.

We need to learn from history. The Great Depression went from bad to worse during the Hoover and Roosevelt Administrations when the government got involved with monetary policy and stimulus. We have successfully used government involvement and stimulus in recent years (2001-2005) to get out of recession (which is just a strictly defined depression), only to find out our medicine caused an even more dangerous disease.

So why, after all of this, the media is blind to it. Or, rather, been silent in reporting this. In fact, they have been harping a different tune.

I do not know the precise answer, but I can assure you it is closely related to, or a subset of, the same reason why our government-run basic education system fails to teach.

It is part and parcel of the fact that there s an information embargo regarding who owns what and where the profits go.

It must be a development of the rationale that justified the creation of an institution run by a secret cabal of central bankers to govern over the nation by virtue of debt. That for every dollar we 'borrow' they create new money, which they loan again at interest... fractional reserve lending, I can lend you money I don't have... and then I own you.

They created the financial vehicles which few recognized as the poison they were, and those who did for the most part, cashed in on it, basely.

I remember some minor George W. Bush appearance where he mentioned the precarious nature of the vehicles being unleashed in the world.... but nothing became of the comment....,

The entire facade of government is concealed by the expansive web of deceit and hubris the empowers the travesty they want us to believe is a 'free market'. They make it less free everyday.

The economy has slipped into deep recession (aka depression) due to the poor control of the money supply. The Fed Res is doing what it can, but it may be too little too late.

The first signs of the economic problem were noted by the Bush administration in 2001, but were blocked by the Democrats who wanted to provide low interest loans to those who could not afford them. Hence, the American home dream gone bust.

If you recall, the first signs of trouble to you and I were when the Fed kept lowering interest rates and could not create the usual backlash inflation. As they kept going down - down - down and no inflation was occurring, they were at a loss. This was shortly after Greenspan left. The obvious answer was to print massive amounts of money. Anyone knowing basics of depression and recession economics would realize that you hit a dead end with the lending rate, now you need to go to the M1 money supply and use that tool to create inflation.

However, they did not. They waited. And waited. Unfortunately, they did not likely expect the next occurrence: the failure of the sub-prime loans market. Now it was too late.

Hence, the Fed Res was slow to react to the lack of money supply. The next failure, sub-prime loans, set them behind schedule so far that no matter how much they printed money, there still would not be inflation.

Well, they typically wait 9 months to see the aftereffects of lowered rates, etc. Now, as you can see, interest rates are doing their usual sinking as they move away from the summertime when most people move and buy a home. The rates will typically bottom out around April or May. There seems to be no effect on the inflation rate or the funds rate. Looks like business as usual, in spite of the massive amounts of money supply created.

Bottom line: we needed the additional money supply to function.

Imagine a town where everyone wants to work, but there is only a total money supply of $100 to go around.

Welcome to your town.