Ray wrote "....Had the Fed not acted as aggressively as they did, inflation would have destroyed the US banking system. How were banks supposed to survive when they had to borrow funds at 15% to finance mortgages made 10 years earlier at 5% ? The US business economy also was set to collapse, as rising prices of inflation were making purchases far too expensive for consumers. whose wage increases were lagging the increase in prices. …."
Why should the banking system have been saved at the expense of farmers and other small businesses that depended on borrowing money? IMO a farmer or construction business shouldn`t be any lower on the totem pole than a 6 or 7 figure banker in the 1980`s.
With fractional reserve banking (lending out $10 for every $1 they have in deposits) there`s no excuse for a bank to go bust. I`d like to sell 10 bushel of corn for every one bushel that I produce.
The answer to your question is quite evident...if you destroy the banking you destroy the economy and everyone else in it. The farmers who took on too much debt in the '70s made bad financial decisions and were going under regardless of whether the Fed tightened or not. Double digit inflation would have cut their customers' ability to buy their products and the resultant loss of revenue would have made those who were heavily indebted fall into default.
But for the rest of the economy, continued double digit inflation would have done far more harm than the increase in interest rates exacted. We have seen this time and again in places like the Weimar Republic, Russia in 1991, and Venezuela today. Runaway inflation, left unchecked, is the cancer of an economy and must be prevented at nearly all costs because if allowed to fester, will become a cost of all costs.
Thus the rate increase to wring inflation out of the economy made sense and actually produced the disinflationary period that followed that was a key factor in the unprecedented economic expansion seen since.
If not for a fractional reserve banking system, you would still be plowing with horses and oxen, and the world still would be stuck in the 1800s.
There is nothing wrong with fractional reserve banking, what's wrong is when the fraction becomes too small and the economy grows too quickly. That creates a role for a central bank to regulate the fraction in the aggregate, which is measured by the supply of money created. There are all kinds of statistics that show that the buying power of a dollar has fallen by x% in the last hundred years since the advent of fractional reserve banking, but at the same time the standards of living of people in the industrialized world has increased far more rapidly than the decline in currency buying power. Just compare the increase in standards of living of any one century with what occurred in the last century, and you will see that the last century truly revolutionized the standards of living on earth, and that woupld not hgave been possible without fractionalized reserve banking.
Yes, everyone would like to create money out of thin air, which is why the task is left to a central bank that is supposed to be devoid of a vested interest in the process. That is why what the Fed has done the last ten years is worrisome, they have a vested interest now in overproducing money. That does not mean that the vested interest will corrupt their decisions, but it does mean the motive exists. Which is why Congress should be executing its oversight function even more now than ever. Regrettably, the Fed has allowed itself to be the enabler of Congress' fiscal irresponsibility, and that is a major problem that could bring down the US and world economy. Its not the fractional banking, its the abdication of oversight that is the real problem, for that is what corrupts the system and leads to massive catastrophe.
Case in point : there would not have been a financial crisis had Congress exercised its oversight function over Fannie Mae and Freddie Mac in 2004, 2005, and 2006. Had Congress restricted those housing agencies from financing mortgages to borrowers who were not credit worthy enough to deserve such loans, you never would have had the defaults that caused the financial institutions to fail.
And this is what gets me about all those who complain about the Fed or fractional banking or any other pseudo-economic nonsense : the real problem is their Congress fails to perform its oversight function over the activities of the Federal Reserve, yet the same people who knock the Fed and the fractional reserve system will re-elect their Congressperson in 90% of all Congressional elections.
If you ask me, the pointing of fingers is being made in the wrong direction. Force the Congress to do its job in regulating the Federal Reserve that Congress created, because its the failure to regulate the Federal Reserve and other government agencies that causes the problems that destroy economies.
The jury is still out on a lot of the "benefits" of the debt money system. Tractors and jet airplanes would`ve come on the scene just fine, had we stayed on the gold standard. See, we create all this phony wealth that the rest of the world seems to go along with and then we do stupid things, fight stupid wars vote ourselves stupid politicians that approve of socialism. Maybe had we stayed on the gold standard farmers wouldn`t have gotten in trouble in the 80`s and in the 2010`s, true in the spring of the year there wouldn`t be a 36 row planter planting $400/bag Channel seed in every field and a 12 chopping head combine in every 300 bpa field in the fall. Perhaps we`d have 12 row planters and 6 row combines harvesting 200 bushel corn, but I think we`d be better off, price wise and sustainability wise, quality of life wise.
Any of us that know anything, know this country`s debt can never be repaid and eventually will crash, if creditors don`t willingly take a shave and a haircut.
Remember that when the world was on a hard gold standard, you have a depression - 25% unemployment, bread lines, etc... - once every 25 or so years. And this was because the supply of money was artificially pegged to how much gold a nation had in its vault and not on the need for liquidity. When economies weakened, and there was a need for liquidity for banks to be able to make loans to jump start the economy, the nation could provide only so much money as the value of their holdings of gold rose. But in an economic downturn, savings would slide as they were being used to support businesses, so the investment capital necessary to push up the price of gold so that sufficient liquidity could be provided would not materialize. It was a vicious cycle that turned every recession into a depression and choked off every economic expansion. And that's why there was such slow progress in lifting standards of living.
A gold standard is not the answer. You had a gold standard at the beginning of the Second World War, and no one was saying they had to cede Europe to the Nazis because the price of gold wasn't high enough to provide the liquidity needed to wage war against them. When there are emergencies, nations will do what they have to do to defend themselves regardless of how much gold they have in the vault. And governments over time have learned they always can create emergencies to justify spending whether its legitimate or reckless. The gold standard doesn't reign in politicians from doing stupid things, but it does put a heavy damper on businesses that are seeking to grow and employ more people. And it hurts consumers who want to buy cars and houses and furnishings and benefit from technologies that make their lives more enjoyable, because a gold standard extends out to lifetimes the ability to raise standards of living among the population. If we were still on a gold standard, my joke about indoor plumbing a couple of months ago would actually have been a legitimate question.
Fiscal discipline of politicians, brought about by vigilant financial markets that force that discipline on politicians and voters who understand the dangers of profligacy, is the only way to maximize growth while reducing inflationary pressures. Regrettably, America lost that discipline in the last 40 years, and will pay a terrible price for its failings. Elected officials are supposed to bring a inner sense of wisdom towards financial responsibility with them when they take office. That changed in the last forty years. Granted, America was under-leveraged in 1980, but by the time the war on terror was in gear, someone i n the government should have woken up and said if we are going to fight a war of this cost, we are going to have to pay for it by sacrificing some other spending. Same with the financial crisis nearly ten years later, if you're going to spend a trillion dollars a year to cushion the effect of a depression caused by a collapse of the banks, then you are going to have to cut back somewhere else, or let the shareholders of the failed institutions lose their capital because they failed to govern the activities of their company.
But no, in America those who make decisions think they can have everything they want, and leave it to someone later to pay for it. That is the most irresponsible form of government, and the people of this country should be irate. Yet 40% of the country always will vote blue and another 40% red, and the 20% left will decide which set of selfish imbeciles will run the circus for the next two years. And nobody pays attention to the 800 pound gorilla in the room, that being the fact that neither red nor blue knows what the f*ck they are doing to the long term prospects of the country that they say they love so much.
They tried term limits at the Federal level as a way of getting rid of politicians due to time served, but that didn't work because it punishes both the responsible and the irresponsible. They tried balanced budget amendments, but that didn't work because the people who spend the money are addicted to spending the way an addict is addicted to the drug they take. The Federal Reserve abdicated its role in bringing discipline to politicians, because it realized they were going to spend the country into debt, and if the Fed didn't finance it, the economy would collapse and the Fed would be blamed, not the Congress. The country had a glimpse of what the catastrophe is going to look like with the financial crisis, and the people cried for the government to get them back their money at any cost instead of rebelling against the whole corrupt system. So the Fed printed free money to put the stock market back up to where it was, and instead of stopping there, printed even more money to put the market up another 50% after that ! And the politicians spend more than a trillion dollars a year beyond what they collect in taxes. And still the same people vote the same way and nobody cares. With this kind of mentality, a gold standard would not help...look at Europe, they have a hard rule about not over-running their budgets by more than 2% per year, and half the countries don't follow the rule. And does the central bank or the legislature try to stop them ? No, they have the central bank finance it by buying in three quarters of all the corporate bonds in Europe ! Is this a bad dream or what ?
You know you can learn a lot from rats, not the squealing kind but the little insidious furry ones that break into you feed bags. When left alone to their own devices void of any community, and given two bottles of water, one unadulterated and one laced with cocaine or heroin, they will drink from the laced water every time. Its no different with people in today's America. The politicians will act irresponsibly because they are insulated from a community that is supposed to force them to be responsible. People go about doing whatever they want because no one is permitted to cast judgment on anyone else, and even if you could, who has the time ? Lying has become an accepted way of life in America, and just try to get someone to admit they are wrong about anything, they will deny you to their death. Hardly anyone demands responsibility from anyone, even from their kids. A teacher calls a parent to complain about their child, and the parent goes off on the teacher for being too strict or selectively coming down on just their kid. A coach of a town soccer team plays the kids who come to practice more in games than the kids who never come to practice, and the parents of the kids who don't come to practice complain to the soccer league board to get the coach thrown out.
And you think a gold standard is going to change any of this ? Forget it, the rats drink the laced water until it kills them !
The only thing you can do in this kind of lost situation is prepare for the inevitable catastrophe, when the laws of economic nature re-assert themselves. At least you will be in a position to survive and even have some investment capital at that point to buy a lot of cheap assets for your heirs, so that someday those assets will be worth something for them. In the last depression, real estate assets fell by 70%, financial assets by 90%. They've never looked back since. That will happen again, and probably not too far into the future. So prepare now, so that you will be able to take advantage of those bargain prices when they arrive. It almost happened in 2009 but the governments of the world still had some bullets left. Those have been spent now, but the underlying problems still remain. The next time, government won't be able to pull a rabbit out of its hat, and then the ax will fall. The greatest transfers of wealth occur during depressions, from the haves to the have nots. Your farm land will be your collateral, make sure you have as much equity in it as you can, because you'll have the chance to buy up some very good assets for a huge discount and still keep your farm and your business.
Never underestimate the ability of people to do the wrong thing. Just be there to profit from their foolishness.