Fed to Compound Credit Problem
Does this remind anyone of a famous quote from Thomas Jefferson? "The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered."
There is little doubt that we are facing perhaps the worst economic crisis since the Great Depression. For the moment, one might argue that the post-Watergate crisis that saw double-digit inflation and double-digit unemployment was worse than what we face today, and if today's crisis were in its final hours I would agree. Unfortunately, we face the dawn of this crisis, not its sunset. If improperly handled, this crisis will yield another Great Depression.
The current spotlight is on sub-prime mortgages, and financial institutions lending significant sums to people that can ill-afford those loans, all on the prospect of being able to sell this bad paper for profit or at worst being able to foreclose on property increasing in value. Truth be told, though, the sub-prime issue is only the tip of the iceberg. The collapse of the housing market did result in the sub-prime issue starting a financial avalanche, but this issue was stacked way atop many other more subtle problems that may well drive us into another Depression.
First and foremost, we are seeing a steady decline in the US job market. The alarm was first raised in 2004 when the AFL/CIO warned that the number of jobs sent overseas had doubled in the past year. In January of this year, the Peterson Institute for International Economics warned that as many as 20 million US jobs out of a 140 million job pool were at risk of off-shoring. That's over 14% of the jobs in the US that are at risk. While our unemployment numbers rise (6.1% as of September 2008), the Consumer Confidence Index continues to barely tread water. Over 25% of the people believe the job market will worsen in the next quarter. That means that 25% of the people are concerned about job security, and based on the Peterson numbers, rightfully so.
Next in line we have rising inflation. The increased cost of food and fuel is crippling most low to middle income homes. Lest we forget, that accounts for close to 95% of the American public. Why is the mortgage foreclosure rate so high? Quite simply, it's because the average American family has had their net income squeezed through rising fuel, home heating or cooling costs, and skyrocketing food costs. That money had to come from someplace, and in too many cases it came from the mortgage bill. This economic crisis will not end as long as the average family cannot afford to pay their basic bills.
This leads us to the topic of debt. The average American credit card-holder is in debt to the tune of $8000, so that's $16,000 per family on average. Tack onto that a mortgage and an auto loan, and it's not hard to see where most of America's income is going. As inflation rose, the number of bills being paid by credit card also grew. Now this credit-card crisis has yet to materialize in the banking industry, but rest assured this crisis will hit home over the next 4-6 months. Credit cards are unsecured loans. As consumers begin to default on those cards, banks will be forced to take write-downs. Who will come to the rescue? You guessed it - the American taxpayer. We've already done it twice, first with the $700 Billion white elephant that just cleared Congress and now by the Federal Reserve's unilateral (and most likely unconstitutional) decision to purchase corporate debt.
If you read that Bloomberg article linked at the top of this post, I'd recommend paying close attention to this one sentence: "Fed officials in a conference call with reporters didn't say how much commercial paper, which hundreds of companies use to finance payrolls and meet other cash needs, it plans to purchase."
Let's ignore the fact that the Fed has no clue how much commercial paper they will purchase. That fact alone bothers me since it's pretty much a blank check being written by the Fed. What bothers me more, though, is that "hundreds of companies use (commercial paper) to finance payrolls and meet other cash needs..." Clearly, the concept of out-of-control debt is not limited to the individual or the family. Companies need to borrow money just to meet their payroll requirements. This issue of debt is rampant throughout our economy. So rampant, that the Fed now feels obliged to offer a unilateral bailout to corporations by purchasing their debt.
So what has the government done to date about this crisis? They've increased debt and they've attempted to make it easier to obtain more debt. In case you've missed it, there's increased talk of yet another interest rate cut to stimulate borrowing. If debt is at the heart of the economic crisis, how are we supposed to believe that increasing debt is going to cure it? Has it not occurred to anyone that the solution is to decrease debt, not increase it?
What was that Jefferson said? "If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered."
Amazing foresight, wouldn't you say?