FedUpUSA

Archive for the ‘Monetary Policy’ Category

This is an interesting op-ed in the morning edition of the WSJ:

We’re now in the 37th month of central government manipulation of the free-market system through the Federal Reserve’s near-zero interest rate policy. Is it working?

Business and consumer loan demand remains modest in part because there’s no hurry to borrow at today’s super-low rates when the Fed says rates will stay low for years to come. Why take the risk of borrowing today when low-cost money will be there tomorrow?

Why borrow at all, in the main?  Borrowing is the taking of leverage — “gearing.”  It magnifies both gains and losses, and it is the losses that turn into trouble, as often they wind up being borne by someone other than the borrower.

They’re supposed to be borne by the borrower and lender, incidentally.  But the lender rarely actually eats them, especially when things get “really bad” — then the taxpayer gets soaked, directly or indirectly, as we have seen.

Federal Reserve Chairman Ben Bernanke told lawmakers last week that fiscal policy should first “do no harm.” The same can be said of monetary policy. The Fed’s prolonged, “emergency” near-zero interest rate policy is now harming our economy.

It always was Charles.

The Fed policy has resulted in a huge infusion of capital into the system, creating a massive rise in liquidity but negligible movement of that money. It is sitting there, in banks all across America, unused.

No.  Capital and borrowing are not the same thing.  They spend the same, but they’re not the same.  Capital is economic surplus — that which you have after you earn and pay the necessities of life (or to run your business.)  Borrowing is leverage — “mechanical advantage” if you will, but it is always a negative-sum game as not only does it have to be paid back but the interest expense means you must earn even more to pay it with.

The multiplier effect that normally comes with a boost in liquidity remains at rock bottom. Sufficient capital is in the system to spur growth—it simply isn’t being put to work fast enough.

The paradox of debt is that due to the negative sum nature of it there is always less of a multiplier than the liquidity increase would suggest.  That is, mathematically it is a negative game for the borrower in every case.  This does not mean that a borrower cannot turn that disadvantage into advantage, but it does mean that the odds are against him or her in doing so.

The poker player in Vegas is at a similar disadvantage due to the house “rake.”  If six similarly-skilled players sit at a poker table in Vegas and play long enough they will all wind up broke, because the house rake will consume all their money.  It is a certainty if the game goes on for long enough, the skills are evenly-enough matched, and their luck is reasonably even.

The only way for such a player to win is to be better than the other people at the table by a sufficient amount to overcome the house rake.  He must also stop playing when he has amassed enough winnings and depart.  This means that for the player of superior skill he is incented to play at a higher level of wager, becasue he wants the fewest number of hands dealt to make his money to keep the rake’s “rape” of his stack to a reasonable level.

We’ve also seen a destructive run of capital out of Europe and into safe U.S. assets such as Treasury bonds, reflecting a world-wide aversion to risk. New business formation is at record lows, according to Census Bureau data. There is still insufficient confidence among business people and consumers to spark an investment and growth boom.

Business formation comes from capital formation which is the product of economic surplus.  That’s all.  Since capital formation is born of savings, that is, economic surplus, zero interest rates destroy the incentive to do so.  Low interest rates tend to cause people to borrow for uneconomic purpose, just as inflation provides incentive to buy things that aren’t really needed right now “because they’ll go up in price tomorrow.”  This is all malinvestment of one form or another and it’s destructive to the health of the economy.

Just look at SYSCO, which reported results this morning.  They showed that food inflation was 6.8% over the last year, contrary to the government lie that “inflation is non-existent.”  Uh huh.

What Mr. Schwab is missing here is that The Fed is hardly an “independent” central bank.  It is in fact beholden to Congress, which has pumped up $5 trillion in debt over the last three years.  That debt has a servicing cost, and it is the “ultra low” interest rates that make this temporarily affordable.

How is Congress going to service this debt when the rate of interest rises?  More to the point, where are the adults in the room in Washington DC?  We’ve had this on both sides of the aisle — “we must stimulate the economy!” — with borrowed money.

Outright bribery of the electorate both hasn’t and can’t work to lead to a durable recovery.  Instead, it has backed Bernanke and Congress into a corner.  When rates rise to just a blended 4% Congress will be facing a $600 billion annual interest bill.  From where will the money come?

This is the trap into which Japan fell and what we are facing today.  It is an extraordinarily destructive cycle that is very, very difficult to break, because it requires pulling the liquidity support at the same time Congress dramatically raises taxes, cuts spending (real cuts, not the imaginary cuts from “baseline” budgeting) or both.  In short it requires admitting that we took fiscal heroin to avoid pain and accepting the accumulated damage for a period of time, accepting the “deferred depression” that we all tried to hide.

Charles Schwab leaves this unsaid, of course, but then again he’s running a brokerage.  Were people to think this thing through they’d realize that the mathematical conundrum presented by Schwab has no resolution that doesn’t ultimately result in that contraction asserting itself.  There is always the matter of timing, but not outcome — that which is fueled by nothing other than fiscal methamphetamine either leads to a nasty crash when you stop taking or heart failure.  Pick one — both suck but while one is nasty the other is fatal.

The testimony and questioning this morning is rather interesting….

Ryan is going to town on him as I write this and I have to wonder if he reads Tickers, as he’s pointing out:

• He’s bailing out fiscal policy with near-zero interest rates.  That is, we are able to run trillion dollar plus deficits because he is playing with ZIRP and QE.  Ryan basically told Bernanke that Congress is not comprised of adults and that Bernanke must pull system liquidity in order to force Congress to do its job!
• He used the words stable prices.  What he did not do is bend him over the desk and give him one or two good ones from behind on the “2% inflation” game, but it’s a start.
• He’s pointing out that trashing saver’s investment income and forcing them into risk is counter-productive.  Mr. Ryan recognizes capital formation will get the job done?  THAT is a change.
• He called him out on creating the housing bubble.  Heh heh heh…..

There’s more — but this is a change, and a marked one, in how the questioning is unfolding.  With that, here’s my commentary on the testimony.

February 2, 2012

Chairman Ryan, Vice Chairman Garrett, Ranking Member Van Hollen, and other members of the Committee, I appreciate this opportunity to discuss my views on the economic outlook, monetary policy, and the challenges facing federal fiscal policymakers.

The Economic Outlook Over the past two and a half years, the U.S. economy has been gradually recovering from the recent deep recession. While conditions have certainly improved over this period, the pace of the recovery has been frustratingly slow, particularly from the perspective of the millions of workers who remain unemployed or underemployed. Moreover, the sluggish expansion has left the economy vulnerable to shocks. Indeed, last year, supply chain disruptions stemming from the earthquake in Japan, a surge in the prices of oil and other commodities, and spillovers from the European debt crisis risked derailing the recovery. Fortunately, over the past few months, indicators of spending, production, and job market activity have shown some signs of improvement; and, in economic projections just released, Federal Open Market Committee (FOMC) participants indicated that they expect somewhat stronger growth this year than in 2011. The outlook remains uncertain, however, and close monitoring of economic developments will remain necessary.

As is often the case, the ability and willingness of households to spend will be an important determinant of the pace at which the economy expands in coming quarters. Although real consumer spending rose moderately last quarter, households continue to face significant headwinds. Notably, real household income and wealth stagnated in 2011, and access to credit remained tight for many potential borrowers. Consumer sentiment has improved from the summer’s depressed levels but remains at levels that are still quite low by historical standards.

Note that nice hidden statement in there.  The entire problem with the last 30 years is that we have continually spent more than we made through the economy.  Again, for Mr. Ryan (who will get this by fax) and the rest of those on The Hill:

Over the last 30 years there was no actual growth funded by output.  It was all borrowed.

That’s the root of the problem and it must be addressed.  Addressing it will cause financial contraction for some period of time — it cannot be otherwise, as the demand represented by that excessive borrowing was not real and as such the withdrawal cannot do other than cause direct contraction in the economy itself.

Household spending will depend heavily on developments in the labor market. Overall, the jobs situation does appear to have improved modestly over the past year: Private payroll employment increased by about 160,000 jobs per month in 2011, the unemployment rate fell by about 1 percentage point, and new claims for unemployment insurance declined somewhat. Nevertheless, as shown by indicators like the rate of unemployment and the ratio of employment to population, we still have a long way to go before the labor market can be said to be operating normally. Particularly troubling is the unusually high level of long-term unemployment: More than 40 percent of the unemployed have been jobless for more than six months, roughly double the fraction during the economic expansion of the previous decade.

There as been no recovery in employment.

The key here is that tax receipts are inexorably tied to the Employment Rate.  But more tellingly the fact of the matter is that the US Government has never managed to extract materially more than 19% of GDP in taxes.  Expecting that we can do it now is naive — therefore, raising taxes will not raise revenue, but lowering taxes doesn’t spur actual revenue; the history is that what lower tax rates do is spur borrowing which in turn feeds bubbles instead of healthy economic growth!

The premise of continually borrowing more to create more and more fake demand is a Ponzi scheme.

Uncertain job prospects, along with tight mortgage credit conditions, continue to hold back the demand for housing. Although low interest rates on conventional mortgages and the drop in home prices in recent years have greatly improved the affordability of housing, both residential sales and construction remain depressed. A persistent excess supply of vacant homes, largely stemming from foreclosures, is keeping downward pressure on prices and limiting the demand for new construction.

The problem is not foreclosures.  It is the refusal of regulators to force actual values to be recognized by financial institutions, which in turn has prevented the market price from sinking to the level of actual value.

The fact of the matter is that the total loss that has to be absorbed in the housing market has been stymied by these policies, which in any firm without such “blessing” would be flagged instantly as an act of fraud, that is causing the market to remain “inflated” and is thus preventing it from clearing.

Yes, I know, everyone “hates” foreclosures. Except, that is, for the person without a house who would like to buy one cheap!  Funny how we all like low prices — except when we’re sellers, or worse, when we’re municipal governments that built tax bases and rates on bubble prices that were utterly ridiculous and banks that loaned money on fictitious values that would be rendered instantly insolvent were the truth to be recognized.  Then it’s “bad”.

In contrast to the household sector, the business sector has been a relative bright spot in the current recovery. Manufacturing production has increased 15 percent since its trough, and capital spending by businesses has expanded briskly over the past two years, driven in part by the need to replace aging equipment and software. Moreover, many U.S. firms, notably in manufacturing but also in services, have benefited from strong demand from foreign markets over the past few years.

Uh huh.  Look at the GDP report and the import/export balance lately?

More recently, the pace of growth in business investment has slowed, likely reflecting concerns about both the domestic outlook and developments in Europe. However, there are signs that these concerns are abating somewhat. If business confidence continues to improve, U.S. firms should be well positioned to increase both capital spending and hiring: Larger businesses are still able to obtain credit at historically low interest rates, and corporate balance sheets are strong. And, though many smaller businesses continue to face difficulties in obtaining credit, surveys indicate that credit conditions have begun to improve modestly for those firms as well.

Economic growth does not come from credit.  Bubbles come from credit.

Economic growth comes from economic surplus, otherwise known as “profit.”  Borrowing suppresses economic surplus as the cost of borrowed funds, otherwise known as “interest” comes off the top line and thus is a dollar-for-dollar charge against profit.

So low interest rates may appear to reduce this impact but in fact all they do is produce uneconomic output — that for which there is no driver from profit.  This is otherwise known as “malinvestment” and it is bad, not good.

Globally, economic activity appears to be slowing, restrained in part by spillovers from fiscal and financial developments in Europe. The combination of high debt levels and weak growth prospects in a number of European countries has raised significant concerns about their fiscal situations, leading to substantial increases in sovereign borrowing costs, concerns about the health of European banks, and associated reductions in confidence and the availability of credit in the euro area. Resolving these problems will require concerted action on the part of European authorities. They are working hard to address their fiscal and financial challenges. Nonetheless, risks remain that developments in Europe or elsewhere may unfold unfavorably and could worsen economic prospects here at home. We are in frequent contact with European authorities, and we will continue to monitor the situation closely and take every available step to protect the U.S. financial system and the economy.

Short form:

Let me now turn to a discussion of inflation. As we had anticipated, overall consumer price inflation moderated considerably over the course of 2011. In the first half of the year, a surge in the prices of gasoline and food–along with some pass-through of these higher prices to other goods and services–had pushed consumer inflation higher. Around the same time, supply disruptions associated with the disaster in Japan put upward pressure on motor vehicle prices. As expected, however, the impetus from these influences faded in the second half of the year, leading inflation to decline from an annual rate of about 3-1/2 percent in the first half of 2011 to about 1-1/2 percent in the second half–close to its average pace in the preceding two years. In an environment of well-anchored inflation expectations, more-stable commodity prices, and substantial slack in labor and product markets, we expect inflation to remain subdued.

Against that backdrop, the Federal Open Market Committee (FOMC) decided last week to maintain its highly accommodative stance of monetary policy. In particular, the Committee decided to continue its program to extend the average maturity of its securities holdings, to maintain its existing policy of reinvesting principal payments on its portfolio of securities, and to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee now anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate at least through late 2014.

As part of our ongoing effort to increase the transparency and predictability of monetary policy, following its January meeting the FOMC released a statement intended to provide greater clarity about the Committee’s longer-term goals and policy strategy.¹ The statement begins by emphasizing the Federal Reserve’s firm commitment to pursue its congressional mandate to foster stable prices and maximum employment. To clarify how it seeks to achieve these objectives, the FOMC stated its collective view that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate; and it indicated that the central tendency of FOMC participants’ current estimates of the longer-run normal rate of unemployment is between 5.2 and 6.0 percent. The statement noted that these statutory objectives are generally complementary, but when they are not, the Committee will take a balanced approach in its efforts to return both inflation and employment to their desired levels.

Oh really Ben?  Your mandate is for stable prices.

I will note that 2% inflation produces this over the “longer term” for an item that costs $3.50 today (say, for example, a gallon of gasoline) and I’ve taken the liberty of extending it over a working man’s life (45 years)

That’s gas prices for you, Mr. 20 year old, by the time you’re 65.

How about your kids?  Let’s extend this out 100 years:

Oh yeah that’s gonna work out real well.

Now what if Ben is off by just 1%, and it’s 3% instead?

And over 100 years?

This is why a mandate of stable prices must be enforced as exactly that — stable, or unchanging, and we must start imprisoning those who “interpret” things otherwise.

Fiscal Policy Challenges In the remainder of my remarks, I would like to briefly discuss the fiscal challenges facing your Committee and the country. The federal budget deficit widened appreciably with the onset of the recent recession, and it has averaged around 9 percent of gross domestic product (GDP) over the past three fiscal years. This exceptional increase in the deficit has mostly reflected the automatic cyclical response of revenues and spending to a weak economy as well as the fiscal actions taken to ease the recession and aid the recovery. As the economy continues to expand and stimulus policies are phased out, the budget deficit should narrow over the next few years.

That’s a nice theory.  It does not, however, fit with the facts.

Unfortunately, even after economic conditions have returned to normal, the nation will still face a sizable structural budget gap if current budget policies continue. Using information from the recent budget outlook by the Congressional Budget Office, one can construct a projection for the federal deficit assuming that most expiring tax provisions are extended and that Medicare’s physician payment rates are held at their current level. Under these assumptions, the budget deficit would be more than 4 percent of GDP in fiscal year 2017, assuming that the economy is then close to full employment.² Of even greater concern is that longer-run projections, based on plausible assumptions about the evolution of the economy and budget under current policies, show the structural budget gap increasing significantly further over time and the ratio of outstanding federal debt to GDP rising rapidly. This dynamic is clearly unsustainable.

The CBO estimates ridiculously large expansion of the economy as a whole, expiration of all of the tax cuts passed (and no new ones) and ridiculously small expansion in overall spending at a number of levels.  The one place they’re reasonably accurate is in their projection of health expense, which has grown by about 9% over the last 30 years (from $53 billion to ~$820 billion) and will continue to do so.  This is not a demographic problem either, as is often said — it also present in the private economy which is not subject to that distortion.

These structural fiscal imbalances did not emerge overnight. To a significant extent, they are the result of an aging population and, especially, fast-rising health-care costs, both of which have been predicted for decades. Notably, the Congressional Budget Office projects that net federal outlays for health-care entitlements–which were about 5 percent of GDP in fiscal 2011–could rise to more than 9 percent of GDP by 2035.³ Although we have been warned about such developments for many years, the time when projections become reality is coming closer.

Actually it’s coming now.  With a 9% rate of growth the rule of 72 tells us that health spending doubles every eight years!  If you think we can keep doing this for even one more eight year cycle, you’re wrong.

We are literally a few years — three or four at the outside — from hitting the wall at 120mph as within four years we will have added $410 billion a year to deficits and in eight nearly one trillion per year.  That’s not a one-year deal, it’s every year and it will utterly destroy any attempt to bring balance to the budgetary process.

This must be stopped right now or it will kill us and we do not have time to address it.  Those are the facts.

Having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences. Over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and thus reduce productivity growth. To the extent that increasing debt is financed by borrowing from abroad, a growing share of our future income would be devoted to interest payments on foreign-held federal debt. High levels of debt also impair the ability of policymakers to respond effectively to future economic shocks and other adverse events.

No.  This grossly understates the case; we will not make it through the next one cycle (eight years) say much less two.  To believe we can manage to spend over three trillion dollars at the Federal level in 16 years is an outrageous lie and the idea that we can absorb another $400+ billion annually in deficits before 2016 and $800+ billion annually by 2020 is preposterous. 

That which cannot happen will not happen.

This puts the lie to claims by Ryan, Southerland, Miller and others that “those over 50 will not see their Medicare tampered with.”  Oh yes they will, as for them to “not have it tampered with” they’d have to make it through four cycles of doubling, not two, which would increase Federal health spending at present rates of acceleration to more than $13 trillion by the time that person reaches 85, or some 16 times the present amount.

I have put forward a number of points on this issue and how to address it under the Health Care topic — we have to stop bleating and start doing, right here and right now.  Look particularly at my postings on this topic from 2009 and 2010.

Even the prospect of unsustainable deficits has costs, including an increased possibility of a sudden fiscal crisis. As we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy. Although historical experience and economic theory do not indicate the exact threshold at which the perceived risks associated with the U.S. public debt would increase markedly, we can be sure that, without corrective action, our fiscal trajectory will move the nation ever closer to that point.

No, we will go off the cliff.  Stop mincing words Ben — see above, and that’s just health care; it ignores everything else.

To achieve economic and financial stability, U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time. Attaining this goal should be a top priority.

Even as fiscal policymakers address the urgent issue of fiscal sustainability, they should take care not to unnecessarily impede the current economic recovery. Fortunately, the two goals of achieving long-term fiscal sustainability and avoiding additional fiscal headwinds for the current recovery are fully compatible–indeed, they are mutually reinforcing. On the one hand, a more robust recovery will lead to lower deficits and debt in coming years. On the other hand, a plan that clearly and credibly puts fiscal policy on a path to sustainability could help keep longer-term interest rates low and improve household and business confidence, thereby supporting improved economic performance today.

Nonsense. Again, we have never managed to grow the economy faster than we’ve accumulated debt over the last 30 years.  We must accept this and reduce debt, which means we must accept economic contraction.  I know nobody wants to, myself included, but what I want and what I must do are two different things.

Fiscal policymakers can also promote stronger economic performance in the medium term through the careful design of tax policies and spending programs. To the fullest extent possible, our nation’s tax and spending policies should increase incentives to work and save, encourage investments in the skills of our workforce, stimulate private capital formation, promote research and development, and provide necessary public infrastructure. Although we cannot expect our economy to grow its way out of our fiscal imbalances, a more productive economy will ease the tradeoffs that we face and increase the likelihood that we leave a healthy economy to our children and grandchildren.

You cannot both add to debt and support capital formation (which is saving.)

It’s really that simple — we must accept the economic adjustment that has to be made, and we must accept it now.

The Market-Ticker

Discussion (registration required to post)

How is borrowing money based on fraudulent claims of asset value and future income any different from counterfeiting money?

Let’s compare three financial criminals. The first is an old-fashioned counterfeiter who doctors up paper and runs a printing press to produce fake currency.

The second  criminal borrows money based on a fraudulent asset and phantom future income. For example, the criminal might obtain a credit card based on false assets and income, or borrow money against a property that is worth far less than he claims and base his credit on an inflated fantasy income he does not actually receive.

The third criminal borrows money from the Federal Reserve at zero interest and extends a loan to a fraudulent borrower because a government agency has guaranteed the loan. Whatever income the lender receives is pure gravy, and whatever losses are incurred when the fraud is uncovered are made good by the taxpayer.

Since our banking system is based on money being borrowed into existence (i.e. fractional reserve), then how is creating money unsecured by either assets or income any different from actually counterfeiting bills? The outcome is identical: money created out of thin air.

If I fraudulently obtain credit based on bogus claims of future income, borrow a large sum and promptly squander it on consumption, then the lender has no recourse: there are no assets to grab and no income to tap. In effect, I had a good time at the expense of all holders of the currency, as my money-created-from-thin-air diluted the currency without adding any productive value.

The way the debt-counterfeit game is played in the U.S., the lender is also a  financial criminal who exploits the moral hazard extended by Federal agencies. If you can’t lose money on a loan, then why not give money to fraudulent borrowers? As long as they pay enough interest to cover your origination costs, then the rest is  pure profit.

We might also ask: how is writing a derivative based on false claims of asset valuation any different from counterfeiting? Once again the creation of an “asset” that can be sold to unwary investors for cash that is based on fraudulent claims of valuation is the equivalent of counterfeiting currency: both add no  productive goods or services to the economy and both are created out of thin air.

Since the Federal Reserve creates money out of thin air to buy assets which can be sold later to credulous investors, then how is the Federal Reserve not counterfeiting dollars? It adds no goods or services to the economy and dilutes the currency, in effect stealing value from all holders of the currency.

The U.S. financial system is one vast, interconnected web of complicity, fraud and counterfeiting.

For more on our counterfeit economy and policies, please see Our Counterfeit Economy and Counterfeit Money, Counterfeit Policy.

Charles Hugh Smith – Of Two Minds

This sort of thing has gone well beyond “policy” and in my opinion borders on criminal incitement:

The truth is, right now the U.S. economy needs a little more inflation, not less. It’s sacrilege, I know, but our slavish devotion to low-inflation policies is keeping us mired in a depression.

The truth is that such policies (intentional inflation) amounts to theft of earned capital from the prudent.

Theft is a crime.  In the case where the amount in question is large enough (and that threshold is surprisingly small in reality) it is a felony for which one can imprisoned for a term of many years.

Even better, an organized conspiracy – that is, two or more people combining their efforts to commit a predicate felony – likely meets the definition of Racketeering.  Indeed, one of the predicate offenses in the RICO law is robbery.

I think it’s about time that we stop this nonsense and as the citizens of this nation start demanding the criminal investigation, indictment and prosecution of each and every person who advocates, advances, promotes or intentionally causes inflationary policies, given that:

1. They are, at their core, nothing more than common theft.and
2. The Federal Reserve Act of 1913, as amended, explicitly states that one of the goals of monetary policy is Stable Prices (and the word “Stable” is defined in Websters as “unchanging.”)

The original Coinage Act (of 1792) provided that the penalty for intentional debasement of the currency was death.

It’s time to bring that law back onto the books and start enforcing it; the gallows can be erected right in front of the Wall Street “bull” or in front of the Washington Monument – pick one.

The commodification and expansion of credit and the transformation of housing from shelter to speculation doomed the nation to debt-serfdom.

How did America become a land of debt-serfs? We can trace our debt-serfdom to three core dynamics which now dominate the American economy.  To understand the transition from a state of minimal financial wealth/maximum freedom to one of debt servitude (illusory wealth and sacrifice of freedom for all that lifetime debt can buy), we first need to  understand the gradual nature of this transmogrification.

It has become a cultural given that major political changes are often wrought by conspiracies, official or informal.  Conspiracies–otherwise known as crony or cartel capitalism and insider manipulation of process and perception–do exist. However, major cultural shifts are long,  drawn-out affairs that result not from conspiracy but from the steady application of self-serving agendas by wealthy, politically powerful special interests.

It may be difficult for many to imagine, but it was once difficult to obtain credit.Two generations ago, “if you want a loan, you have to prove you don’t need it.”  Applications for credit cards, auto loans and mortgages were examined by bank officers in your local branch, people who had actual working knowledge of your payment history, account balances, etc. (Student loans did not exist.)

A modest home improvement loan required lengthy applications and a face-to-face meeting with a  senior bank officer, who asked probing questions about your personal finances. (I know this because I went through the process in 1980.)

Credit card limits were low–$500 was common–and it required an application to raise the limit on your one credit card (multiple cards were frowned upon as risky). An increase in your credit card limit was a reason to celebrate–you’d won the trust of your bank through prudent management of your money.

I know this sounds like 1880, but it was actually 1980, a mere 30 years ago.People had a home mortgage, but prior to 1970 the balances were modest in terms of annual income, and  the primary reason people got a mortgage was not to speculate on housing but because it was cheaper to own than rent, as millions of veterans qualified for low-down payment VA loans. (The Armed Forces were much larger in those days, in terms of active-duty personnel as a percentage of the population.)

In this environment of what we might call “artisan credit” issued by local bank branches, debt was frowned upon as risky and buying things required saving money.The auto industry had long depended on auto loans to sell millions of vehicles, but a hefty down payment was generally required.

A household with minimal savings was deemed a credit risk; the only way to get credit was to  slowly build up savings and perfect history of paying one’s bills and debts.  The only way for many to qualify for a credit card was to pledge cash savings to the bank: if you failed to pay, the bank would take your savings for payment of your debt.

You see the problem with this low-credit, low-risk environment: profits were slim, not just for banks but for retailers and the real estate industry.If people had to save up to buy a new item of clothing or an appliance, then the retailers were limited in how many gew-gaws they could sell. If people stayed put and didn’t buy and sell their houses frequently, then developers, lenders and realtors had a very limited field of profit-making opportunities. If only people who qualified via stringent credit standards had access to credit, then the transactionf ees and interest earned from credit were also limited.

The “solution” to that low-risk, low-churn, low-credit environment was the commodification and mechanization of credit.  An analogy can be found in industrial consumer goods such as autos. When autos were hand-made by artisanal craftsmen, they were extraordinarily expensive.  When Henry Ford mechanized the production, effectively turning them into mass-produced commodities, they became affordable to tens of millions of households.

The same thing happened with credit when computers took over the task of qualifying borrowers. A computer program assessed credit on a simple point system, and voila, the costly task of assessing credit risk fell to pennies per borrower. Not entirely by happenstance, banks  found that millions of households that had been viewed as risks now qualified for credit,  as the issuing  and servicing of credit–credit card annual fees, transaction fees, late fees, etc.–became a fast-growing, monstrously profitable gusher for banks.

Retail sales could now be driven by desire rather than arduous, purposeful savings and  a prudent credit record. The consumerist vision of the American Dream can be summarized thusly: to become a better, grander, different person, all you need to do is consume  differently.With access to commoditized credit, virtually anyone with a job could buy, buy, buy on whim, impulse and advert-created desire.  Easy, almost-universally accessible credit in vast amounts created the perfect world for both retailers and banks.

Powerful real estate interests funneled the rapid expansion of credit into vast profits by incentivizing “moving up,”  a code-phrase for transforming the housing market from one focused on security and shelter to speculation: the more times people sold and bought homes, the more transaction fees could be generated and the more developments sold.

A great number of seemingly subtle policy changes drove this transformation of housing from shelter to a speculative market accessible to Everyman and Everywoman: jumbo loans, expansion of Federally guaranteed mortgages, the easing of credit standards, the erasure of capital gains on owner-occupied residences, and so on. All these worked to expand access to credit, the incentives to churn and the size of loans available to consumers and homeowners.

What was not visible at the start of this commodification of credit was the inevitable end-game:anyone with a pulse and a willingness to lie/prevaricate/mislead via omission was issued jumbo mortgages to speculate in a real estate bubble of truly epic proportions; consumers were issued not one or two credit cards, but dozens, many with astronomical credit limits given the modest income of the borrower; students became indentured debt-serfs to lenders via massive student loans, and the need for saved cash essentially vanished as “no down payment” mortgages, auto loans and credit-based purchases became the norm.

Credit is a form of leverage.If a household earns the median household income of $49,000 a year, then trade-offs and disciplined sacrifices have to made to save up enough cash to buy consumer goods, education, a bigger, more luxurious house, etc.  With access to abundant credit, then the need for adult-level discipline, sacrifice and trade-offs  all go away; the household can indulge every desire and goal with child-like abandon.

So a household income of $49,000 can leverage purchases made with borrowed money up to $250,000 or even higher; with no down payments and super-low “teaser” interest rates, such a household could leverage their modest income into $500,000 in debt for everything from a university education to a McMansion to a boat to lavish overseas vacations–there was almost no limit to the debt “qualified” once down payments/cash vanished as a requirement and interest rates were manipulated below market rates to foster the illusion of solvency.

The initial conditions of any system set up the end-state. The commodification of credit to serve the interests of powerful industries made a credit bubble and collapse inevitable.It also made debt-serfdom inevitable.A culture and economy that once rewarded adult values and behaviors–discipline, sacrifice, trade-offs and the understanding that there is a price to every decision–was transformed into one that richly rewarded adolescent abandon, impulse and the temptations to lie to get what you want right now, or even more telling, “what I deserve.” In that phrase, the propaganda of the marketer reached perfection.

So how do we fix an economy and culture gutted by debt, its people reduced to debt-serfdom? We write off all bad, uncollectable debt, and we severely restrict credit to everyone and every financial entity. Now that the economy has become dependent on debt the way a junkie is dependent on heroin, going “cold turkey” will be painful.  But just as for the junkie, the only alternative to rehabilitation/moving beyond addiction is extinction. There is a price to every decision.

Charles Hugh Smith – Of Two Minds

Another one comes to the light…

We as a society must stop pretending. Most of us think that we still have money in the bank to protect, so we go along with the game of extend and pretend. For some of us, the game has already ended. The rapacious zero interest rate policy that I call Bernankecide has already robbed millions of savers of their life savings. This is the reality that has yet to hit home for many Americans who are content to wallow in the status quo. Unfortunately, the longer it takes for them to wake up, the worse their, and our, fate will be.

It is not just “money to protect.”  It is also unpayable political promises, most-particularly the concept of unlimited health care spending for seniors.  The tab for this is somewhere around $50 – 70 trillion dollars.  We do not have it, we cannot acquire it, and thus it will not be paid.  This is not subject to any sort of honest debate.

My mother and millions of other senior citizens are among the victims of the game that policy makers and those who empower them are playing. Their life savings are gone because Bernankecide, the financial genocide of the elderly, forced them to spend their principal. Now the government is indirectly confiscating 8% of my income because I must support my mother. That percentage is likely to grow as her health deteriorates.

Or worse, take “more risk.”  This of course means you might earn a return, but you might also make a loss.  The former is ok, the latter ruinous.  Neither should be happening but both are, and we the people are to blame.  We vote for people who promise us ponies, whether we can fund them or not.  But we also demand “cheap” credit which inherently means we will subsidize losses, since nobody in private business will intentionally lend at a loss.

Millions of other boomers are in the same boat. They are forced to pay this immoral hidden tax because Ben Bernanke decided that the innocent must pay for the sins of the guilty. While Bernanke’s ZIRP goes on allowing the banksters to continue to collect their fat bonuses, it steals the savings of millions of Americans, eliminates their disposable income, and cuts the spending power of millions of others who must now support those rendered destitute. The guilty benefit, and the innocent are punished.

Bernanke knows that, yet he continues to side with the criminal bankers in support of the financial genocide of the super elderly, and their children, the baby boomers who must increasingly support them.

Yep.  Those who did the right thing are being destroyed.  I see it daily around me, and yet I also see rampant consumerism still running amok.  The drunks are still boozing it up; we the people continue to play the “aspirational consumption” game even though we cannot cash the checks we write.  Then, when the chickens come home to roost, we watch as the banksters get bailed out and continue on their way, and we refuse to rise, in no small part because if we do the credit cards will be cut off and we refuse to accept that just as a drug habit requires both a pusher and an abuser for the drugs to get consumed, credit abuse requires both a borrower and lender.

Among the OWS protesters are those calling for forgiveness of student loans. They may be acting in their own self interest, but it is a just cause, and must be a part of the cleansing of the system. The student loan thing is a long running racket that preys on the inexperience of children and young people just starting out in life.

Here I disagree.  Students should be able to go bankrupt, not have loans forgiven.  There must be a consequence for both borrower and lender.  Being stupid must come with consequences.  The only way one learns is via the reward and pain system – you are rewarded for doing smart things, and suffer pain for doing dumb ones.  Bankruptcy is pain.  It’s not intractable pain, but it’s pain – it cuts off or severely raises the price of credit for some time.

The student loans are the tip of the iceberg. Bankers have made and sold trillions of dollars worth of loans that they knew, or should have known, could not be repaid. That’s fraud. It must be prosecuted. Today, central bankers and governments are refunding those loans, knowing that a substantial portion of them cannot be repaid. Worse, they are buying them above par because of today’s fake low interest rates. Then they guarantee them by obligating us and future generations to repay them. This is criminal.

Yes it is.  And the stooges such as Obama, Geithner and the rest (including Congress) are the reason it’s happening.  Were any of these people raise their hand and say “no more damnit!” it would end tomorrow.

Read the rest folks.  It’s worth it.  Lee points out what I’ve been saying for a long time: We are quickly coming to the end of the line for this process to be carried out and remedied via reformation – that is, peaceful, lawful means. 

The other possibilities are all ugly, and they’re approaching – quickly.