In FCIC Investigation Misses the “Big Picture” I made the case that the cause of this crisis is

  1. Loose monetary policies by central banks worldwide
  2. Fractional Reserve Lending
  3. Governments’ willingness to spend more money than they takes in

Barry Ritholtz responded with an email “We agree about ultra-low rates, but I have seen no credible evidence that “Fractional lending” was a causal factor; Nor have I found any evidence that the deficit as a cause of the credit crisis”

He also commented on my post in The Crisis Was Caused by [Insert Pet Peeve Here].

Let’ focus on Barry’s main rebuttal:

Never mind that this form of credit creation has been around for centuries, he is a vociferous critic of it.

Yep, Fractional Reserve Lending is centuries old. However, what kind of logical rebuttal is that?

The fact is FRL has caused problems for centuries. The best example is the John Law Mississippi Bubble. However, FRL has arguably made every bubble in history worse.

The idea that something cannot be a problem because it has been around for a long time is preposterous. So why do we have it?

FRL has suited the interests of bankers and politicians. That is why it has been around for centuries. Indeed, inflation and credit expansion benefit those with first access to money: banks, the wealthy, and governments (via increased taxes, especially property taxes and sales taxes).

Those at the bottom of the economic totem pole get hammered.

In regards to deficit spending, the fact remains that it cheapens the currency and fosters a flight to assets like stocks or housing. This adds to the problems of FRL. Cheap money eventually makes its way into the economy and a flight to asset mentality takes over.

We saw that in spades with housing.

Instead of looking at the root problem, people expect regulation to stop the effects of cheap money. The idea is silly if a few minutes of logical thought processes are spent analyzing the situation.

Public-Union Time Bomb

Secondly, and this does not pertain to Barry but others commenting on his post, I never said public unions are the cause of all problems. In fact it is ridiculous to see such allegations given I just clearly stated the Fed and FRL is.

I have certainly said that public unions have destroyed cities and states, and they have.

Indeed, public unions are the #1 problem cities and states face. Pensions are $3 trillion in the hole at the state level alone. I do not have an accounting of how much bigger the problem is at the city level but it is gigantic.

Might I point out that with a stroke of a pen, President Kennedy authorized collective bargaining of public unions. The result has been an increasing power grab by unions getting in bed with corrupt politicians demanding untenable salaries and benefits over the years.

Most see the crisis now. Very few have traced it back to a regulatory move by Kennedy, a move designed to buy politicians votes, and it did. It has bought corrupt politician votes ever since.

Now states are in a crisis level, and people ignore the problem and the cause as if bankers created that mess. Well bankers did not create that mess. Unions using tactics of coercion, bribery, and fear-mongering got us to this sorry state.

Such actions are just what one should expect as a function of exponential systems. People do not see the problem until it is too late.

Are Humans Smarter than Yeast?

Here is a video Bernanke needs to ponder with his 2% inflation target, and the World Economic Forum with its 4% GDP target and 6% credit growth target. After playing the video, think about China’s 10% target with its economy overheating already.

Most importantly, think about public union pension plans with expected annualized rates of return at 8% per year!

Please play that video to the end. It gets better as it progresses.

In FRL credit-based fiat systems, credit expands until the system blows up. History proves it, and no regulation has ever stopped it.

Mike “Mish” Shedlock
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