Have no fear: The economy can rebound without any bailouts!

I am really getting bored of all the socialist nonsense that is coming from both the right and the left. Robert J. Samuelson spews some misleading pessimistic absurdity in his latest Newsweek article:

The Bailout Isn’t a Morality Play
Inept bankers may not deserve help, but that’s not the point. If the financial sector isn’t revived, then the economy will stay depressed.

There really is no point reading any of his article unless you are bored or you want to prove me wrong. The headline is an adequate summary of his opinion and there is nothing in the article that substantiates it.

Money is simply a medium of exchange that also has its own flexible price. Thus, inflating the money supply can only aggravate any economic recovery by creating misleading signals of valuation in the interim of any market adjustment. If there is any hope of the economy rebounding, it will ultimately be due to a market force in spite of monetary inflation. Buyers will have found value in what sellers have to offer. No more and no less. Inflating the money supply will never create value out of thin air.

I can not understand how people can simultaneously believe that the American economy requires money inflation to survive a recession while recognizing flexible prices for money. If we were talking about any other market adjustment, we would simply say: “Prices will adjust to reflect bidding.”

The sad reality is that the money market is not like any other market due to the coercive monopolization of its supply. The money lenders get new money first before it cycles through the economy, increases demand and leads to price inflation. The timing of when you get the money puts you at a bidding advantage.

One more thing: the bailouts are most certainly a morality play. What other justification is there to support them??

A “Bad Bank” is still a bad idea

There is now talk about creating a “Bad Bank” that would clear toxic assets. Finally we get the main stream media talking some level of economic sense:

The liquidity injections, the bailout programs, and the fiscal-stimulus packages try to sustain asset prices, when these prices need to fall to market levels so they can be cleared. The policy makers have just prolonged the crisis.

—SNIP—

What policy makers on both sides of the Atlantic desire is to sustain household leverage and consumption at any price, when the only exit from the credit crisis involves a return to thrift by the overleveraged. That cannot be achieved painlessly.

However, unlike David Roche, I believe that a “Bad Bank” is a bad idea because at its core, it hinges on a tax-payer subsidization of the banks. I will quote that author’s description of how it may operate:

The bad bank clears the toxic assets off the books of banking systems by buying them at market prices and forcing write downs by the banks. A good bad bank forces banks to write down their bad assets and cleanse their balance sheets with those made insolvent being recapitalized, nationalized or liquidated by the state. But it is equally possible to use a bad bank to buy the banks’ toxic waste at inflated prices so that the bank can start lending again. That’s when it becomes a bad bad bank.

The scheme is presented with the illusion that market forces will make a distinction between good and bad that is nonsense. The real distinction will be determined by the preparatory nationalization and state liquidation which precede anything this “Bad Bank” ever does. Without the subsidization, this hypothetical “Bad Bank” would already exist in the market — if it was profitable.

A “Bad Bank” is just a convoluted form of concealing tax-payer subsidization.

Why is Flaherty promoting credit as an economic solution?

Do Canadians really demand credit? or do they simply want money?

I am getting tired of hearing a lot of economic crap from our government. The repeated dogma seems to be “Canadians want credit.” but I do not believe that one bit. I do not hear Canadians asking for credit and even if I did, I would dismiss that Canadian as being crazy or irresponsible.

People need money. People do not need credit. There is a huge difference.

Canadians work hard enough and should keep their own damn money. Taxes should be reduced and the government has to stop inflating the money supply. People need credit like they need a hole in the head.

I wonder why does Flaherty keep repeating that Canadians are demanding credit when such a demand makes no sense. Extending credit only accentuates economic dependence and is an incentive to irresponsibility.

I think we are being deceived. If anybody benefits from extending credit, it will be the lenders first. Ordinary Canadians simply need money and extending credit is not the only way that Canadians can keep more money in their pockets.

Canadian banks are running out of credit-worthy borrowers

Why is the governor of the Bank of Canada, Mark Carney, telling the commercial banks that they should be lending out more money??? [I wonder why he should be talking at all? but that is a different story.] I would hope that the bankers know their customers better than the central bank does — they just have to. That is their business. They make profits by lending money to people.

The banks can lend more money but they can not create credit-worthy customers out of thin air. The banks can stimulate production in the short run by extending credit but the banks can not create productivity. There is a huge difference between short run production and long term productivity. It is the long term productivity that is the ultimate deciding factor for a lender because the lender needs the regular monthly payments.

Maybe one day, people will wake up to the fact that government enforced monopolies are the best way to misallocate resources. A monopoly on the issuance of currency is not free of economic law nor of naturally selfish human behavior.

Jörg Guido Hülsmann sums our hopeless predicament quite simply in his recent article Deflation and Liberty:

A paper-money system is not beneficial from an overall point of view. It does not create real resources on which our welfare depends. It merely distributes the existing resources in a different manner; some people gain, others lose. It is a system that makes banks and financial markets vulnerable, because it induces them to economize on the essential safety valves of business: cash and equity. Why hold any substantial cash balances if the central bank stands ready to lend you any amount that might be needed, at a moment’s notice? Why use your own money if you can finance your investments with cheap credit from the printing press?

Bernard Madoff just played the game like everybody else did

When things started to crumble, Bernard Madoff revealed that his whole business was a nothing more than a ponzi scheme. He promised returns to customers that were paid from the money given to him by new customers. Like all ponzi schemes, new customers kept the ball rolling and as long as new customers kept joining, nobody would know the difference. The scheme fails when the flow of new customers slows down.

I have a hard time sympathizing with his customers. They have thousands (sometimes millions) of dollars and they want to make more — nothing wrong with that. However, instead of working to earn more money, they handed it over to somebody without knowing his methods and they trusted his promises. They took a stupid risk. I think such greedy and blind trust fuels most of the evil commercial practices in this world. If people were more informed about the production processes, they would think twice before buying most of the junk they buy.

Bernard Madoff just played the same game that most other financial institutions play. His ponzi scheme is not the only sham currently in operation. There are others that are accepted practice. The main thing about his ponzi scheme is that it has few branches in the pyramid. Thus, it is easy to point out the sham. However, old age security, Canada Pension Plan and employment/unemployment insurance are ponzi schemes too. We simply accept those as normal practice.

The entire “credit crunch” is the failing of a massive ponzi scheme: fractional reserve banking backed by central banking of fiat money. Everything rolls along under the radar — we are cultured to think that low levels of inflation are normal and healthy — as long as the banks are able to continue making loans. The whole thing comes crashing down when the bank runs out of credit-worthy customers. Nobody ever looks at our centralized banking system as a ponzi scheme because when all else fails, the central bank can print more money! If Bernard Madoff had the backing of a central bank — the way the commercial banks do, his business plan would succeed.

Hat Tip to to Kate

Bernanke keeps flooding the money market

When the price of the US dollar is approaching zero, the Federal Reserve Chairman, Ben Bernanke reveals a bitter truth about the futility of monetary policy:

The U.S. economy “will probably remain weak for a time,” even if the credit crisis eases, Bernanke said yesterday in his speech. While the Fed can’t push interest rates below zero, “the second arrow in the Federal Reserve’s quiver — the provision of liquidity — remains effective,” he said.

Maybe eventually — after the Fed prolongs the recession and fuels malinvestments — more Americans will wake up to the fact that inflating the money supply is not about stimulating the economy nor about helping the public. It is all about giving new money to the banks first. In Canada, monetary inflation goes unnoticed or without debate.

Term Loan Facility (TLF) is a license to print money offered by the Bank Of Canada

Talk about incremental conservatism now seems very hilarious. I am getting fed up of this new socialism that is creeping in from the Conservative government. We are now in a recession and Jim Flaherty and the Bank Of Canada are throwing more money at the economy. This is a highly disturbing and desparate move to increase the money supply:

The Bank said it plans to introduce a Canadian Dollar Term Loan Facility (TLF) in four auctions of $2 billion each in the coming weeks.

Under the plan, qualifying financial institutions will be able to offer non-mortgage loans as collateral — meaning they can offer most loans currently on their books.

This will prolong the recession by feeding malinvestments. I do not like this socialist / crony-capitalist trend of our supposedly “conservative ” government. The real solution to financial woes is to let businesses fail.

Canadian Lenders Assurance Facility — more bank bailouts?

This Canadian Lenders Assurance Facility sounds like one more bailout in disguise. The government is backing loans that nobody else will insure. How is that possible? It is possible because the government can print money and extort taxes.

If what the minister says is true, why are we not seeing insurance companies from “around the world” taking on the risk of these insured mortgages which “provide a reliable backstop for Canadian mortgage-backed securities, which are well accepted around the world” instead of the government? The truth is that these securities are only accepted because the people around the world expect the government will bail them out — at any cost, I might add — when they fail. I say let them fail. The more bitter truth is that the insurance companies and the banks do not have any money to do so even if they wanted to — their money depends on constant inflation of the money supply.

This temporary program will be offered to lenders on commercial terms so there is no expected fiscal cost.

Why is he calling it temporary? It makes no sense to call this temporary when the mechanism and the reliability of these markets hinges on bailouts.
No expected fiscal cost? Yeah, the money will fall from the sky!

Many countries have recently announced new and comprehensive policy initiatives to restore or protect the stability of their financial systems. “I welcome the decisive and far-reaching actions that many countries are taking, which will provide critical support to financial stability,” said Minister Flaherty.

I beg your pardon, Mr. Minister? Countries around the world are just printing money, nationalizing their banks and now you are doing the same.

Ladies and gentleman, friends and neighbors, get ready to enjoy more socialism and price inflation in Canada.

Jim Flaherty announces mortgage bailouts

Jim Flaherty announces mortgage bailouts to the tune of $25Billion and none of this goes through parliament. That is a lot of money going to people who are not able to keep up with their payments.

This is nonsense:

Flaherty said the plan will make mortgages “more available and more affordable” for Canadians, adding that it will have “no fiscal cost to taxpayers.”

No fiscal cost to taxpayers?? Yeah, instead of screwing the taxpayer through open accounting-style taxes, the inflation of the money supply will screw the taxpayer through rising prices.

Who would have thunk it?

No Canadian bank bailouts but “make credit available” instead?

Speaking of Canadian banks, I think we may be getting a few mixed messages from the government. Jim Flaherty insists that the government will not bailout any banks and presents a muddied message that insists that credit must be made available:

“The government stands ready to take whatever actions are necessary to protect the stability of the Canadian financial system.”

“I think what we have right now is adequate.” But he would not give any details about what specific measures he was contemplating and dodged questions about expanding CMHC lending programs, except to say it is a possibility. Any new measures will target the availability of credit, and not aim at subsidizing banks for their losses, or even focus on the cost of credit.

“So what I’ve said to the banks is, do as much as possible in the present circumstances” Mr. Flaherty said. “My concern, again, is less the cost of credit – that is, the price – but the availability of credit. We have to ensure that credit continues to be available.”

I am happy to hear Stephen Harper reiterate that there will not be any bailout of Canadian banks. However, I am not satisfied when I hear this:

‘The government has a series of options at its disposal … to ensure both the availability of credit and the cost of credit coming down, and we’re doing that to ensure there’s money available,” he said.

How can the government make credit available? What are these secret options at the government’s disposal? They had better get their story together because Flaherty seems unconcerned about interest rates wheras Harper is. Maybe that was just a slip up.

Regardless, get ready for an inflation of the money supply.

There is nothing that the government does that is rightfully productive. The government is not some rich zillionaire who can hand out donations to “make credit available” as a goal. Anything the government does is funded by what the government takes away. When the government acts to “make credit available” to the economy, we find ourselves somewhere along a continuum between an independent monetary system and a banking system that requires bailouts to prevent collapse. Whatever makes a bailout wrong is the same thing that makes a policy to “make credit available” wrong too — just to a less dramatic degree.

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