Fixing this crisis and future ones.

[jueco2005]

This financial crisis originated in the nominal economy. Greedy guys under their creative destruction gave birth to "derivates and CDS" able to buy the US economy 35 times. Despite that nothing has happened to the real availability of resources, (a supply side shock) we shall suffer.

Many of my friends and I agree to:

1-the reestablishment of a 100% reserve requirement on all bank demand deposits and equivalents; under this rule fractional reserve lending would be eliminated.

2-the elimination of central banks as lenders of last resort (which will be unnecessary if the first principle is applied and harmful if they continue to act as financial central-planning agencies).

3-establish an independent treasury, operating as bank on itself and to increase the money supply by 2% yearly (just as Milton Friedman suggested).

I ENCOURAGE YOU TO POST ANY COMMENTS AS WELL AS VOTING IN THE POLL.

 

[laminustacitus]

Quote from jueco2005:

This financial crisis originated in the nominal economy. Greedy guys under their creative destruction gave birth to "derivates and CDS" able to buy the US economy 35 times. Despite that nothing has happened to the real availability of resources, (a supply side shock) we shall suffer.

Wrong, the current financial crisis is more of a result of the Fed's policy of a minuscule interest rate to aid with a "soft landing" after the 2001 recession, essentially trying, as Professor George Reisman said, to create capital out of thin air. By messing with the money rate of interest, Greenspan skewed the coordination between producer's goods and consumers' goods in the economy. Sans this interference, the interest rate, reflecting the time-preferences of consumers (i.e. whether they prefer to spend and consume now, or whether they prefer to save and consume later), would serve to balance the investments of entrepreneurs on capital with the amount of savings present in the economy. Eventually, since the savings investors perceived in the economy to do their investments do not exist, rather it being an illusion caused the Fed's low rate of interest, parts of their investments must be liquidated for the money doesn't exist to finish them This liquidation, as entrepreneurs retool their investments to fit with economic reality will result in a recession.

For a greater understanding of my explanation F.A. Hayek's Prices and Production is a great book to read and Professor Garrison of Auburn University has created a set of powerpoints devoted to this concept of the business cycle: http://www.auburn.edu/~garriro/macro.htm.

 

[jueco2005]

True........but it all began in 1980 as a consequence of what Nixon did in the early 1970's. However, that entire paragraph from Hayek does not explain everything correctly, it is just his theory. I should agree that the main cause is excess of monetary supply.

Quote from laminustacitus:

Wrong, the current financial crisis is more of a result of the Fed's policy of a minuscule interest rate to aid with a "soft landing" after the 2001 recession, essentially trying, as Professor George Reisman said, to create capital out of thin air. By messing with the money rate of interest, Greenspan skewed the coordination between producer's goods and consumers' goods in the economy. Sans this interference, the interest rate, reflecting the time-preferences of consumers (i.e. whether they prefer to spend and consume now, or whether they prefer to save and consume later), would serve to balance the investments of entrepreneurs on capital with the amount of savings present in the economy. Eventually, since the savings investors perceived in the economy to do their investments do not exist, rather it being an illusion caused the Fed's low rate of interest, parts of their investments must be liquidated for the money doesn't exist to finish them This liquidation, as entrepreneurs retool their investments to fit with economic reality will result in a recession.

For a greater understanding of my explanation F.A. Hayek's Prices and Production is a great book to read and Professor Garrison of Auburn University has created a set of powerpoints devoted to this concept of the business cycle: http://www.auburn.edu/~garriro/macro.htm.

 

[Anaconda]

Quote from laminustacitus:

Wrong, the current financial crisis is more of a result of the Fed's policy of a minuscule interest rate to aid with a "soft landing" after the 2001 recession, essentially trying, as Professor George Reisman said, to create capital out of thin air.

No, he is right, the actual current crisis & bank failures is due to phantom assets aka mortgage derivatives on the books of banks & insurance companies. They lent against these "assets" so when the illussion was over, credit had to be called in all over the place.

The Fed growing money supply is an old story, plenty of M3 charts out there. Once USD became a true fiat, under Nixon, the floodgates were open. The bubbles & crises are just a by-product.

 

[laminustacitus]

Quote from jueco2005:

However, that entire paragraph from Hayek does not explain everything correctly, it is just his theory. I should agree that the main cause is excess of monetary supply.

Yes, but Hayek's theory gives an understanding of how such things, in general, come about rather than just an ad hoc explanation of derivatives and such.

 

[Anaconda]

Quote from laminustacitus:

Yes, but Hayek's theory gives an understanding of how such things, in general, come about rather than just an ad hoc explanation of derivatives and such.

It's obvious you do not understand the mortgage derivatives situation.

Since you apparently read some work of Mises institute, read more. The fed funds rate is only ONE measure of the Fed's monetary supply tools. It is actually the most overrated & over publicized one of all.

Hayek's explanation is a broad summary of something that has been going on for decades. The actual crisis has a specific mechanism which has roots to late 1990s. Just like the tech bubble & bust has a specific mechanism.

 

[jueco2005]

The way derivatives work is pretty much similar to fractional reserve lending. Only this time bank's themselves are creating this type of credit.

The main need for central banks is a "lender of last resort". By eliminating fractional reserve lending there is not need for a lender of last resort...........no need for a central bank as we know it.

 

[Stosh]

Quote from jueco2005:

The way derivatives work is pretty much similar to fractional reserve lending. Only this time bank's themselves are creating this type of credit.

The main need for central banks is a "lender of last resort". By eliminating fractional reserve lending there is not need for a lender of last resort...........no need for a central bank as we know it.

Yes, seems like most responders to your post missed the point. You are recommending a solid, stable framework under which these recent excesses would not have been possible, i. e., don't blame Greenspan, blame the system that gave him the power to have such an impact. Our banking system is a house of cards and making 30 year loans with short term deposits is silly, anyway. Stosh

 

[jueco2005]

Exactly............good to have someone here (like Anaconda) who understand this fraudulent system.

Quote from Stosh:

Yes, seems like most responders to your post missed the point. You are recommending a solid, stable framework under which these recent excesses would not have been possible, i. e., don't blame Greenspan, blame the system that gave him the power to have such an impact. Our banking system is a house of cards and making 30 year loans with short term deposits is silly, anyway. Stosh