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Laissez-Faire in Tokyo Land Use – Article by Alex Tabarrok

Laissez-Faire in Tokyo Land Use – Article by Alex Tabarrok

The New Renaissance HatAlex Tabarrok
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Tokyo, Japan’s capital city, has a growing population of over 13 million people but house prices have hardly increased in twenty years. Why? Tokyo has a laissez-faire approach to land use that allows lots of building subject to only a few general regulations set nationally. Robin Harding at the FT has a very important piece on the Tokyo system:

Here is a startling fact: in 2014 there were 142,417 housing starts in the city of Tokyo (population 13.3m, no empty land), more than the 83,657 housing permits issued in the state of California (population 38.7m), or the 137,010 houses started in the entire country of England (population 54.3m).

Tokyo’s steady construction is linked to a still more startling fact. In contrast to the enormous house price booms that have distorted western cities — setting young against old, redistributing wealth to the already wealthy, and denying others the chance to move to where the good jobs are — the cost of property in Japan’s capital has hardly budged.

This is not the result of a falling population. Japan has experienced the same “return to the city” wave as other nations.House_Prices_2

How is this possible? First Japan has a history of strong property rights in land:

Subject to the zoning rules, the rights of landowners are strong. In fact, Japan’s constitution declares that “the right to own or to hold property is inviolable”. A private developer cannot make you sell land; a local government cannot stop you using it. If you want to build a mock-Gothic castle faced in pink seashells, that is your business.

But this alone cannot explain everything because there was a huge property price-boom in Japan circa 1986 to 1991. In fact, it was in dealing with the collapse of that boom that Japan cleaned up its system, reducing regulation and speeding the permit approval process.

…in the 1990s, the government relaxed development rules, culminating in the Urban Renaissance Law of 2002, which made it easier to rezone land. Office sites were repurposed for new housing. “To help the economy recover from the bubble, the country eased regulation on urban development,” says Ichikawa. “If it hadn’t been for the bubble, Tokyo would be in the same situation as London or San Francisco.”

Hallways and public areas were excluded from the calculated size of apartment buildings, letting them grow much higher within existing zoning, while a proposal now under debate would allow owners to rebuild bigger if they knock down blocks built to old earthquake standards.

Rising housing prices are not an inevitable consequence of growth and fixed land supply–high and rising housing prices are the result of policy choices to restrict land development.

The policy choices were made–they can be unmade.

tokyo-japanThis post first appeared at Marginal Revolution.

Alex Tabarrok is a professor of economics at George Mason University. He blogs at Marginal Revolution with Tyler Cowen.

The Fed Can’t Raise Rates, But Must Pretend It Will – Article by Thorsten Polleit

The Fed Can’t Raise Rates, But Must Pretend It Will – Article by Thorsten Polleit

The New Renaissance HatThorsten Polleit
October 26, 2015
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Waiting for Godot is a play written by the Irish novelist Samuel B. Beckett in the late 1940s in which two characters, Vladimir and Estragon, keep waiting endlessly and in vain for the coming of someone named Godot. The storyline bears some resemblance to the Federal Reserve’s talk about raising interest rates.

Since spring 2013, the Fed has been playing with the idea of raising rates, which it had suppressed to basically zero percent in December 2008. So far, however, it has not taken any action. Upon closer inspection, the reason is obvious. With its policy of extremely low interest rates, the Fed is fueling an artificial economic expansion and inflating asset prices.

Selected US Interest Rates in Percent
Selected US Interest Rates in Percent

Raising short-term rates would be like taking away the punch bowl just as the party gets going. As rates rise, the economy’s production and employment structure couldn’t be upheld. Neither could inflated bond, equity, and housing prices. If the economy slows down, let alone falls back into recession, the Fed’s fiat money pipe dream would run into serious trouble.

This is the reason why the Fed would like to keep rates at the current suppressed levels. A delicate obstacle to such a policy remains, though: If savers and investors expect that interest rates will remain at rock bottom forever, they would presumably turn their backs on the credit market. The ensuing decline in the supply of credit would spell trouble for the fiat money system.

To prevent this from happening, the Fed must achieve two things. First, it needs to uphold the expectation in financial markets that current low interest rates will be increased again at some point in the future. If savers and investors buy this story, they will hold onto their bank deposits, money market funds, bonds, and other fixed income products despite minuscule yields.

Second, the Fed must succeed in continuing to postpone rate hikes into the future without breaking peoples’ expectation that rates will rise at some point. It has to send out the message that rates will be increased at, say, the forthcoming FOMC meeting. But, as the meeting approaches, the Fed would have to repeat its trickery, pushing the possible date for a rate hike still further out.

If the Fed gets away with this “Waiting for Godot” strategy, savings will keep flowing into credit markets. Borrowers can refinance their maturing debt with new loans and also increase total borrowing at suppressed interest rates. The economy’s debt load can continue to build up, with the day of reckoning being postponed for yet again.

However, there is the famous saying: “You can fool all the people some of the time and some of the people all the time, but you cannot fool all the people all the time.” What if savers and investors eventually become aware that the Fed will not bring interest rates back to “normal” but keep them at basically zero, or even push them into negative territory?

If a rush for the credit market exit would set in, it would be upon the Fed to fill debtors’ funding gap in order to prevent the fiat system from collapsing. The central bank would have to monetize outstanding and newly originated debt on a grand scale, sending downward the purchasing power of the US dollar — and with it many other fiat currencies around the world.

The “Waiting for Godot” strategy does not rule out that the Fed might, at some stage, nudge upward short-term borrowing costs. However, any rate action should be minor and rather short-lived (like they were in Japan), and it wouldn’t bring interest rates back to “normal.” The underlying logic of the fiat money system simply wouldn’t admit it.

Selected Japanese Interest Rates in Percent
Selected Japanese Interest Rates in Percent

The Fed — and basically all central banks around the world — are unlikely to accept deflation clearing out the debt, which would topple the economic and political structures built upon it. Fending off an approaching recession-depression with more credit-created fiat money and extremely low, perhaps even negative, interest rates is what one can expect them to do.

Murray N. Rothbard put it succinctly: “We can look forward … not precisely to a 1929-type depression, but to an inflationary depression of massive proportions.”

Dr. Thorsten Polleit is the Chief Economist of Degussa (www.degussa-goldhandel.de) and Honorary Professor at the University of Bayreuth. He is the winner of the O.P. Alford III Prize in Political Economy and has been published in the Austrian Journal of Economics. His personal website is www.thorsten-polleit.com.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Blame the Federal Reserve, Not China, for Stock-Market Crash – Article by Ron Paul

Blame the Federal Reserve, Not China, for Stock-Market Crash – Article by Ron Paul

The New Renaissance HatRon Paul
September 6, 2015
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Following the historic stock-market downturn two weeks ago, many politicians and so-called economic experts rushed to the microphones to explain why the market crashed and to propose “solutions” to our economic woes. Not surprisingly, most of those commenting not only failed to give the right answers, they failed to ask the right questions.

Many blamed the crash on China’s recent currency devaluation. It is true that the crash was caused by a flawed monetary policy. However, the fault lies not with China’s central bank but with the US Federal Reserve. The Federal Reserve’s inflationary policies distort the economy, creating bubbles, which in turn create a booming stock market and the illusion of widespread prosperity. Inevitably, the bubble bursts, the market crashes, and the economy sinks into a recession.

An increasing number of politicians have acknowledged the flaws in our monetary system. Unfortunately, some members of Congress think the solution is to force the Fed to follow a “rules-based” monetary policy. Forcing the Fed to “follow a rule” does not change the fact that giving a secretive central bank the power to set interest rates is a recipe for economic chaos. Interest rates are the price of money, and, like all prices, they should be set by the market, not by a central bank and certainly not by Congress.

Instead of trying to “fix” the Federal Reserve, Congress should start restoring a free-market monetary system. The first step is to pass the Audit the Fed legislation so the people can finally learn the full truth about the Fed. Congress should also pass legislation ensuring individuals can use alternative currencies free of federal-government harassment.

When bubbles burst and recessions hit, Congress and the Federal Reserve should refrain from trying to “stimulate” the economy via increased spending, corporate bailouts, and inflation. The only way the economy will ever fully recover is if Congress and the Fed allow the recession to run its course.

Of course, Congress and the Fed are unlikely to “just stand there” if the economy further deteriorates. There have already been reports that the Fed will use last week’s crash as an excuse to once again delay raising interest rates. Increased spending and money creation may temporally boost the economy, but eventually they will lead to a collapse in the dollar’s value and an economic crisis more severe than the Great Depression.

Ironically, considering how popular China-bashing has become, China’s large purchase of US Treasury notes has helped the US postpone the day of reckoning. The main reason countries like China are eager to help finance our debt is the dollar’s world reserve currency status. However, there are signs that concerns over the US government’s fiscal irresponsibility and resentment of our foreign policy will cause another currency (or currencies) to replace the dollar as the world reserve currency. If this occurs, the US will face a major dollar crisis.

Congress will not adopt sensible economic policies until the people demand it. Unfortunately, while an ever-increasing number of Americans are embracing Austrian economics, too many Americans still believe they must sacrifice their liberties in order to obtain economic and personal security. This is why many are embracing a charismatic crony capitalist who is peddling a snake oil composed of protectionism, nationalism, and authoritarianism.

Eventually the United States will have to abandon the warfare state, the welfare state, and the fiat money system that fuels leviathan’s growth. Hopefully the change will happen because the ideas of liberty have triumphed, not because a major economic crisis leaves the US government with no other choice.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

Keeping the Bubble-Boom Going – Article by Thorsten Polleit

Keeping the Bubble-Boom Going – Article by Thorsten Polleit

The New Renaissance HatThorsten Polleit
August 19, 2015

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The US Federal Reserve is playing with the idea of raising interest rates, possibly as early as September this year. After a six-year period of virtually zero interest rates, a ramping up of borrowing costs will certainly have tremendous consequences. It will be like taking away the punch bowl on which all the party fun rests.

Low Central Bank Rates have been Fueling Asset Price Inflation

The current situation has, of course, a history to it. Around the middle of the 1990s, the Fed’s easy monetary policy — that of Chairman Alan Greenspan — ushered in the “New Economy” boom. Generous credit and money expansion resulted in a pumping up of asset prices, in particular stock prices and their valuations.

US Federal Funds Rate in Percent and the S&P 500 Stock Market Index

A Brief History of Low Interest Rates

When this boom-bubble burst, the Fed slashed rates from 6.5 percent in January 2001 to 1 percent in June 2003. It held borrowing costs at this level until June 2004. This easy Fed policy not only halted the slowdown in bank credit and money expansion, it sowed the seeds for an unprecedented credit boom which took off as early as the middle of 2002.

When the Fed had put on the brakes by having pushed rates back up to 5.25 percent in June 2006, the credit boom was pretty much doomed. The ensuing bust grew into the most severe financial and economic meltdown seen since the late 1920s and early 1930s. It affected not only in the US, but the world economy on a grand scale.

Thanks to Austrian-school insights, we can know the real source of all this trouble. The root cause is central banks’ producing fake money out of thin air. This induces, and necessarily so, a recurrence of boom and bust, bringing great misery for many people and businesses and eventually ruining the monetary and economic system.

Central banks — in cooperation with commercial banks — create additional money through credit expansion, thereby artificially lowering the market interest rates to below the level that would prevail if there was no credit and money expansion “out of thin air.”

Such a boom will end in a bust if and when credit and money expansion dries up and interest rates go up. In For A New Liberty (1973), Murray N. Rothbard put this insight succinctly:

Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance by repeated and accelerating doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop or sharply slow down, either because the banks are getting shaky or because the public is getting restive at the continuing inflation, that retribution finally catches up with the boom. As soon as credit expansion stops, the piper must be paid, and the inevitable readjustments must liquidate the unsound over-investments of the boom and redirect the economy more toward consumer goods production. And, of course, the longer the boom is kept going, the greater the malinvestments that must be liquidated, and the more harrowing the readjustments that must be made.

To keep the credit-induced boom going, more credit and more money, provided at ever lower interest rates, are required. Somehow central bankers around the world seem to know this economic insight, as their policies have been desperately trying to encourage additional bank lending and money creation.

Why Raise Rates Now?

Why, then, do the decision makers at the Fed want to increase rates? Perhaps some think that a policy of de facto zero rates is no longer warranted, as the US economy is showing signs of returning to positive and sustainable growth, which the official statistics seem to suggest.

Others might fear that credit market investors will jump ship once they convince themselves that US interest rates will stay at rock bottom forever. Such an expectation could deal a heavy, if not deadly, blow to credit markets, making the unbacked paper money system come crashing down.

In any case, if Fed members follow up their words with deeds, they might soon learn that the ghosts they have been calling will indeed appear — and possibly won’t go away. For instance, higher US rates will suck in capital from around the word, pulling the rug out from under many emerging and developed markets.

What is more, credit and liquidity conditions around the world will tighten, giving credit-hungry governments, corporate banks, and consumers a painful awakening after having been surfing the wave of easy credit for quite some time.

China, which devalued the renminbi exchange rate against the US dollar by a total of 3.5 percent on August 11 and 12, seems to have sent the message that it doesn’t want to follow the Fed’s policy — and has by its devaluation made the Fed’s hiking plan appear as an extravagant undertaking.

A normalization of interest rates, after years of excessively low interest rates, is not possible without a likely crash in production and employment. If the Fed goes ahead with its plan to raise rates, times will get tough in the world’s economic and financial system.

To be on the safe side: It would be the right thing to do. The sooner the artificial boom comes to an end, the sooner the recession-depression sets in, which is the inevitable process of adjusting the economy and allowing an economically sound recovery to begin.

Dr. Thorsten Polleit is the Chief Economist of Degussa (www.degussa-goldhandel.de) and Honorary Professor at the University of Bayreuth. He is the winner of the O.P. Alford III Prize in Political Economy and has been published in the Austrian Journal of Economics. His personal website is www.thorsten-polleit.com.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

How Student Loans Create Demand for Useless Degrees – Article by Josh Grossman

How Student Loans Create Demand for Useless Degrees – Article by Josh Grossman

The New Renaissance Hat
Josh Grossman
July 19, 2015
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Last week, former Secretary of Education and US Senator Lamar Alexander wrote in the Wall Street Journal that a college degree is both affordable and an excellent investment. He repeated the usual talking point about how a college degree increases lifetime earnings by a million dollars, “on average.” That part about averages is perhaps the most important part, since all college degrees are certainly not created equal. In fact, once we start to look at the details, we find that a degree may not be the great deal many higher-education boosters seem to think it is.

In my home state of Minnesota, for example, the cost of obtaining a four-year degree at the University of Minnesota for a resident of Minnesota, North Dakota, South Dakota, Manitoba, or Wisconsin is $100,720 (including room and board and miscellaneous fees). For private schools in Minnesota such as St. Olaf, however, the situation is even worse. A four-year degree at this institution will cost $210,920.

This cost compares to an average starting salary for 2014 college graduates of $48,707. However, like GDP numbers this number is misleading because it is an average of all individuals who obtained a four-year degree in any academic field. Regarding the average student loan debt of an individual who graduated in 2013, about 70 percent of these graduates left college with an average student loan debt of $28,400. This entails the average student starting to pay back these loans six months after graduation or upon leaving school without a degree. The reality of this situation is that assuming a student loan interest rate of 6.8 percent and a ten-year repayment period, the average student will be paying $326.83 every month for 120 months or a cumulative total re-payment of $39,219.28. Depending upon a student’s job, this amount can be a substantial monthly financial burden for the average graduate.

All Degrees Are Not of Equal Value

Unfortunately, there is no price incentive for students to choose degrees that are most likely to enable them to pay back loans quickly or easily. In other words, these federal student loans are subsidizing a lack of discrimination in students’ major choice. A person majoring in communications can access the same loans as a student majoring in engineering. Both of these students would also pay the same interest rate, which would not occur in a free market.

In an unhampered market, majors that have a higher probability of default should be required to pay a higher interest rate on money borrowed than majors with a lower probability of default. In summary, it is not just the federal government’s subsidization of student loans that is increasing the cost of college, but the fact that demand for low-paying and high-default majors is increasing, because loans for these majors are supplied at the same price as a major providing high salaries to its possessor with a low probability of default.

And which programs are the most likely to pay off for the student? The top five highest paying bachelor’s degrees include: petroleum engineering, actuarial mathematics, nuclear engineering, chemical engineering and electronics and communications engineering, while the top five lowest paying bachelor’s degrees are: animal science, social work, child development and psychology, theological and ministerial studies, and human development, family studies, and related services. Petroleum engineering has an average starting salary of $93,500 while animal science has an average starting salary of $32,700. This breaks down for a monthly salary for the petroleum engineer of $7,761.67 versus a person working in animal science with a monthly salary of $2,725. Based on the average monthly payment mentioned above, this would equate to a burden of 4.2 percent of monthly income (petroleum engineer) versus a burden of 12 percent of monthly income (animal science). This debt burden is exacerbated by the fact that it is now nearly impossible to have student loan debts wiped away even if one declares bankruptcy.

Ignoring Careers That Don’t Require a Degree

Meanwhile, there are few government loan programs geared toward funding an education in the trades. And yet, for many prospective college students, the trades might be a much more lucrative option. Using the example of plumbing, the average plumber earns $53,820 per year with the employer paying the apprentice a wage and training.

Acknowledging the fact that this average salary is for master plumbers, it still equates to a $20,000 salary difference between it and someone with a four-year degree in animal science while having no student loans as a bonus. Outside of earning a four-year degree in science, technology, engineering, math or, accounting with an average starting salary of $53,300, nursing with an average starting salary of $53,624, or as a family practice doctor on the lower end of physician pay of $161,000, society might be better served if parents and educators would stop using the canard that a four-year degree is always worth the cost outside of a few majors mentioned above. Encouraging students to consider the trades and parents to give their children the money they would spend on a four-year college degree to put a down payment on a house might be a better use of finite economic resources. The alternative of forcing the proverbial square peg into a round hole will condemn another generation to student debt slavery forcing them to put off buying a home or getting married.

Loans Drive Overall Demand

The root of the problem is intervention by the federal government in providing student loans. Since 1965 when President Johnson signed the Higher Education Act tuition, room, and board has increased from $1,105 per year to $18,943 in 2014–2015. This is an increase of 1,714 percent in 50 years. In addition, the Higher Education Act of 1965 created loans which are made by private institutions yet guaranteed by the federal government and capped at 6.8 percent. In case of default on the loans, the federal government — that is, the taxpayers — pick up the tab in order for these lenders to recover 95 cents on every dollar lent. Loaning these funds at below market interest rates and with the federal government backing up these risky loans has led to massive malinvestment as the percentage of high-school graduates enrolled in some form of higher education has increased from 10 percent before World War II to 70 percent by the 1990s. Getting a four-year degree in nearly any academic field seemed to be the way in which to enter or remain in the middle class.

But just as with the housing bubble, keeping interest below market levels while increasing the money supply in terms of loans — while having the taxpayer on the hook for a majority of these same loans — leads to an avalanche of defaults and is a recipe for disaster.

Josh Grossman is a social studies teacher in southeastern Minnesota. He enjoys reading anything he can about Austrian Economics or historical revisionism from the perspective of the Austrian School.

Fact-Checking Paul Krugman’s Claim To Be “Right About Everything” – Article by Andrew Syrios

Fact-Checking Paul Krugman’s Claim To Be “Right About Everything” – Article by Andrew Syrios

The New Renaissance Hat
Andrew Syrios
June 10, 2015
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But can the debate really be as one-sided as I portray it? Well, look at the results: again and again, people on the opposite side prove to have used bad logic, bad data, the wrong historical analogies, or all of the above. I’m Krugtron the Invincible!

Thus wrote the great Paul Krugman. A man so modest as to proclaim that “I think I can say without false modesty, a huge win; I (and those of like mind) have been right about everything.”

Quite a claim. Indeed, predictions are extraordinarily difficult. Even to an expert in a subject who has dedicated his life to a field of study, predicting the future proves elusive. Daniel Kahneman referenced a study of 284 political and economic “experts” and their predictions and found that “The results were devastating. The experts performed worse than they would have if they had simply assigned equal probabilities to each of three potential outcomes.”

A whole book of such wildly inaccurate predictions by experts was compiled into the very humorous The Experts Speak with such prescient predictions as Dr. Alfred Velpeau’s “The abolishment of pain in surgery is a chimera. It is absurd to go on seeking it” and Arthur Reynolds belief that “This crash [of 1929] is not going to have much effect on business.” Indeed, a foundational block of Austrian economics (that some Austrians unfortunately forgot regarding premature predictions of hyperinflation) is that the sheer number of variables in the world at large makes accurate forecasting extraordinarily difficult.

So it must be a rare man indeed that can be right about everything. And this man, Paul Krugman is not.

Predicting a Bubble He Recommended

Paul Krugman likes to reference the fact that he predicted the housing bubble. Of course, he also sort of recommended it. From a 2002 column of his,

To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

In 2009, when this came out, he denied its obvious implication and wrote, “It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.” So that doesn’t count as a recommendation? It certainly sounded like he was agreeing with Paul McCulley on inflating a housing bubble. And he verified that that’s exactly what he meant in a 2006 interview where he said,

As Paul McCulley of PIMCO remarked when the tech boom crashed, Greenspan needed to create a housing bubble to replace the technology bubble. So within limits he may have done the right thing. But by late 2004 he should have seen the danger signs and warned against what was happening; such a warning could have taken the place of rising interest rates. He didn’t, and he left a terrible mess for Ben Bernanke.

The best Krugman can possibly say is that he thought Greenspan went too far with the housing bubble he recommended.

Deflation is Around the Corner

While running victory laps because the United States hasn’t seen massive price inflation, Krugman seems to have forgotten what his prediction actually was. In 2010 he wrote, “And what these measures show is an ongoing process of disinflation that could, in not too long, turn into outright deflation … Japan, here we come.”

Robert Murphy called him on this and noted Krugman’s response,

… Krugman himself … said of his 2010 analysis: “(In that post, I worried about deflation, which hasn’t happened; I’ve written a lot since about why).”

Note the parenthetical aside, and the timing: Krugman in April 2013 is mentioning in parentheses to his reader that oh yes, as of February 2010 he was “worried about deflation, which hasn’t happened.” In other words, Krugman entered this crisis with a model that predicted how prices would move in response to the economic situation, and chose his policies of government stimulus accordingly. He was wrong, and yet maintains the same policy recommendations.

But of course to Krugman, anyone who predicted price inflation can’t explain why that hasn’t happened. Such people are just those “… who take a position and refuse to alter that position no matter how strongly the evidence refutes it.” Krugman is different.

Europe Will Do Better Than the United States

In 2008, Krugman wrote:

… tales of a moribund Europe are greatly exaggerated. … The fact is that Europe’s economy looks a lot better now — both in absolute terms and compared with our economy.”

Later he noted that “Americans will face increasingly strong incentives to start living like Europeans” and that “he has seen the future and it works.” (I should probably note that that is a quote he borrowed from Lincoln Steffens about the Soviet Union.)

Then Greece went bankrupt and the international consensus is unquestionably that the crisis hit Europe harder.

The Euro Will Collapse

Niall Ferguson counted eleven different times between April of 2010 and July 2012 that Krugman wrote about the imminent breakup of the euro. For example, on May 17th, 2012, Krugman wrote,

Apocalypse Fairly Soon. … Suddenly, it has become easy to see how the euro — that grand, flawed experiment in monetary union without political union — could come apart at the seams. We’re not talking about a distant prospect, either. Things could fall apart with stunning speed, in a matter of months, not years. And the costs — both economic and, arguably even more important, political — could be huge.

Most of these predictions are laced with weasel words such as “might,” “probably,” and “could” (more on that shortly). Still, while I’m no fan of the euro, and it might still collapse, as of today, three years later, it has not. If the word “imminent” means anything at all, Krugman was wrong.

The Sequester Will Doom Us All

Paul Krugman at least admitted the sequester was “relatively small potatoes.” But for “relatively small potatoes” he makes a big deal about it, referring to it as “one of the worst policy ideas in our nation’s history.” And it “will probably cost ‘only’ around 700,000 jobs.” (Note the word “probably” again.)

Then later, he decided that these were actually quite large potatoes, stating,

And, somehow, both sides decided that the way to buy time was to create a fiscal doomsday machine that would inflict gratuitous damage on the nation through spending cuts unless a grand bargain was reached. Sure enough, there is no bargain, and the doomsday machine will go off at the end of next week.

The economy has done quite well since then actually. Indeed, how $85.4 billion dollars in “cuts” (from the next year’s budget not the previous year’s spending) could affect anything in a $17 trillion dollar economy is simply beyond me. And of course, it didn’t.

Interest Rates Can’t Go Below Zero

In March of this year, Krugman wrote in regard to some European bonds with negative nominal yields,

We now know that interest rates can, in fact, go negative; those of us who dismissed the possibility by saying that people could simply hold currency were clearly too casual about it.”

But as Robert Murphy points out, “The foundation for the Keynesian case for fiscal stimulus rests on an assumption that interest rates can’t go negative.” Murphy also points out that Krugman should admit he was wrong again because back in 2009, Krugman wrote,

And the reason we’re all turning to fiscal policy is that the standard rule, which is that monetary policy plus automatic stabilizers should do the work of smoothing the business cycle, can’t be applied when we’re hard up against the zero lower bound. [i.e. zero percent interest]

“Inflation Will be Back”

In 1998, Paul Krugman predicted “Inflation will be back.”

Nope.

“The Rate of Technological Change in Computing Slows”

Same article as the last one, “… the number of jobs for IT specialists will decelerate, then actually turn down.”

Aside from a short dip after the 2001 recession, the answer would be nope again.

Weasel Words and “Accurate Predictions”

Let’s take a look at Paul Krugman’s “accurate prediction” of the financial crisis. On March 2nd, 2007, he predicted the following explanation would be given a year from then for the financial crisis he was sort of predicting,

The great market meltdown of 2007 began exactly a year ago, with a 9 percent fall in the Shanghai market, followed by a 416-point slide in the Dow. But as in the previous global financial crisis, which began with the devaluation of Thailand’s currency in the summer of 1997, it took many months before people realized how far the damage would spread.

So the crisis would begin in China? Almost.

He concluded that column by saying, “I’m not saying that things will actually play out this way. But if we’re going to have a crisis, here’s how.”

That’s a good hedge, just like with the euro. He can say he got the financial crisis right (albeit happening in a different way than he expected), but then say he didn’t get the euro wrong because he added “probably” before any prediction about it.

Normally, there would be nothing wrong with these weasel words. Given the nature of predictions, any prediction that is made should have a qualifier in front of it. It’s simply an admission that you aren’t omniscient. But you can’t eat your cake and have it too. Either Krugman was right about the crisis (sort of) and wrong about the euro (and many other things) or neither should count at all.

Or course, this doesn’t refute Krugman’s theories. But then again, Krugman may want to slow down on his victory laps.

Andrew Syrios is a partner in the real estate investment firm Stewardship Properties. He graduated from the University of Oregon with a degree in Business Administration and a Minor in History.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

The Japanese Deflation Myth and the Yen’s Slump – Article by Brendan Brown

The Japanese Deflation Myth and the Yen’s Slump – Article by Brendan Brown

The New Renaissance Hat
Brendan Brown
October 4, 2014
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The slide of the yen since late summer has brought it to a level some 40 percent lower against the euro and US dollar than just two years go. Yet still Japan’s Prime Minister Shinzo Abe and his central bank chief Haruhiko Kuroda warn that they have not won the battle against deflation. That caution is absurd — all the more so in view of the fact that there was no deflation in the first place.

Some cynics suggest that Abe’s and Haruhiko’s battle cry against this phoney phantom is simply a ruse to gain Washington’s acquiescence in a big devaluation. But whatever the truth about their real intent, Japan’s monetary chaos is deepening.

Japanese Prices Have Been Stable

The CPI in Japan at the peak of the last cycle in 2007 was virtually at the same level as at the trough of the post-bubble recession in 1992, and up a few percentage points from the 1989 cycle peak. Hence, Japan alone has enjoyed the sort of price stability as might be enjoyed in a gold-standard world. Prices have fallen during recessions or during periods of especially-rapid terms-of-trade improvement or productivity growth. They have risen during cyclical booms or at times of big increases in the price of oil.

If price-indices in Japan were adjusted fully to take account of quality improvements they would have been falling slightly throughout, but that would also have been the case under the gold standard and was fully consistent with economic prosperity.

yenslumpSuch swings in prices are wholly benign. For example, lower prices during recession coupled with expectation of higher prices in expansion induce businesses and households to spend more. A valid criticism of the Japanese price experience of the past two decades has been that these swings have lacked vigour due to various rigidities. Particularly valid is the claim that price falls should have been larger during the post-bubble recession of 1990-93 and subsequent potential for recovery would have been correspondingly larger.

Prices in Japan did fall steeply during the Great Recession (2008-10) but the perceived potential for recovery was squeezed by the Obama Monetary Experiment (the Fed’s QE) which meant an immediate slide of the US dollar. It was in response to the related spike of the yen that Prime Minister Abe prepared his counter-stroke. This involved importing the same deflation-phobic inflation-targeting policies that the Obama Federal Reserve was pursuing. Washington could hardly criticize Tokyo for imitating its own monetary experiment.

Deflation and “The Lost Decade”

The architects of the Obama Monetary Experiment have cited as justification Japan’s “lost decade” and the supposed source in deflation. In fact, though, the only period during which the Japanese economy underperformed other advanced economies (as measured by the growth of GDP per capita) was from 1992-97. The underperformance of that period had everything to do with insufficient price and wage flexibility downward, the Clinton currency war, and the vast malinvestment wrought by the prior asset price inflation, coupled with a risk-appetite in Japan shrunken by the recent experience of bust.

Moreover, as time went on, from the early 1990s, huge investment into the Tokyo equity market from abroad compensated for ailing domestic risk appetites. Yes, Japan’s economy could have performed better than the average of its OECD peers if progress had been made in de-regulation, and if Japan had had a better-designed framework of monetary stability to insulate itself from the Greenspan-Bernanke asset price inflation virus of the years 2002-07. (The Greenspan-Bernanke inflation caused speculative temperatures in the yen carry trade to reach crazy heights.) But deflation was never an actual or potential restraint on Japanese prosperity during those years.

True, there was a monetary malaise. Japan’s price stability was based on chance, habit, and economic sclerosis rather than the wisdom of its monetary policy. It had been the huge appreciation of the yen during the Clinton currency war that had snuffed out inflation. Then the surge of cheap imports from China had worked to convince the Japanese public that inflation had indeed come to an end. Lack of economic reform meant that the neutral rates of interest remained at a very low level and so the Bank of Japan’s intermittent zero rate policies did not stimulate monetary growth.

The monetary system in Japan had no secure pivot in the form of high and stable demand for non-interest bearing high-powered money. In Japan the reserve component of the monetary base is virtually indistinguishable from a whole range of close substitutes and banks had no reason to hold large amounts of this (given deposit insurance and the virtual assurance of too-big-to-fail help in need). Monetary policy-making in Japan meant highly discretionary manipulation of short-term interest rates in the pursuance of fine-tuning the business cycle rather than following a set of rules for monetary base expansion.

The Yen After Abenomics

When Prime Minister Abe effected his coup against the old guard at the Bank of Japan there was no monetary constitution to flout. Massive purchases of long-dated Japanese government bonds by the Bank of Japan are lowering the proportion of outstanding government debt held by the public in fixed-rate form. But this is all a slow-developing threat given a gross government debt to GDP ratio of around 230 percent and a current fiscal deficit of 6 percent of GDP. Bank of Japan bond-buying has strengthened irrational forces driving 10-year yields down to almost 0.5 percent despite underlying inflation having risen to 1 percent per annum.

It is doubtless the possibility of an eventual monetization of government debt has been one factor in the slump of the yen. More generally, as the neutral level of interest rates in Japan rises in line with demographic pressures (lower private savings, increased social expenditure) one might fear that BoJ manipulation of rates will eventually set off inflation. Part of the yen’s slump, though, is due to a tendency for that currency to fall when asset price inflation is virulent in the global economy. This stems from the huge carry trade in the yen.

The yen could indeed leap when the global asset price-inflation disease — with its origins in Fed QE — moves to its next phase of steep speculative temperature fall. The yen is now in real effective exchange rate terms at the record low point of the Japan banking crisis in 1997 or the global asset inflation peak of 2007. So, the challenge for investors is to decide when the Abe yen has become so cheap in real terms that its hedge properties make it a worthwhile portfolio component.

Brendan Brown is an associated scholar of the Mises Institute and is author of Euro Crash: How Asset Price Inflation Destroys the Wealth of Nations and The Global Curse of the Federal Reserve: Manifesto for a Second Monetarist Revolution. See Brendan Brown’s article archives.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

At the Fed, the More Things Change, the More They Stay the Same – Article by Ron Paul

At the Fed, the More Things Change, the More They Stay the Same – Article by Ron Paul

The New Renaissance Hat
Ron Paul
February 16, 2014
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Last week, Federal Reserve Chairman Janet Yellen testified before Congress for the first time since replacing Ben Bernanke at the beginning of the month. Her testimony confirmed what many of us suspected, that interventionist Keynesian policies at the Federal Reserve are well-entrenched and far from over. Mrs. Yellen practically bent over backwards to reassure Wall Street that the Fed would continue its accommodative monetary policy well into any new economic recovery. The same monetary policy that got us into this mess will remain in place until the next crisis hits.

Isn’t it amazing that the same people who failed to see the real estate bubble developing, the same people who were so confident about economic recovery that they were talking about “green shoots” five years ago, the same people who have presided over the continued destruction of the dollar’s purchasing power never suffer any repercussions for the failures they have caused? They treat the people of the United States as though we were pawns in a giant chess game, one in which they always win and we the people always lose. No matter how badly they fail, they always get a blank check to do more of the same.

It is about time that the power brokers in Washington paid attention to what the Austrian economists have been saying for decades. Our economic crises are caused by central-bank infusions of easy money into the banking system. This easy money distorts the structure of production and results in malinvested resources, an allocation of resources into economic bubbles and away from sectors that actually serve consumers’ needs. The only true solution to these burst bubbles is to allow the malinvested resources to be liquidated and put to use in other areas. Yet the Federal Reserve’s solution has always been to pump more money and credit into the financial system in order to keep the boom period going, and Mrs. Yellen’s proposals are no exception.

Every time the Fed engages in this loose monetary policy, it just sows the seeds for the next crisis, making the next crash even worse. Look at charts of the federal funds rate to see how the Fed has had to lower interest rates further and longer with each successive crisis. From six percent, to three percent, to one percent, and now the Fed is at zero. Some Keynesian economists have even urged central banks to drop interest rates below zero, which would mean charging people to keep money in bank accounts.

Chairman Yellen understands how ludicrous negative interest rates are, and she said as much in her question and answer period last week. But that zero lower rate means the Fed has had to resort to unusual and extraordinary measures: quantitative easing. As a result, the Fed now sits on a balance sheet equivalent to nearly 25 percent of US GDP, and is committing to continuing to purchase tens of billions more dollars of assets each month.

When will this madness stop? Sound economic growth is based on savings and investment, deferring consumption today in order to consume more in the future. Everything the Fed is doing is exactly the opposite, engaging in short-sighted policies in an attempt to spur consumption today, which will lead to a depletion of capital, a crippling of the economy, and the impoverishment of future generations. We owe it not only to ourselves, but to our children and our grandchildren, to rein in the Federal Reserve and end once and for all its misguided and destructive monetary policy.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

Bernanke’s Legacy: A Weak and Mediocre Economy – Article by John P. Cochran

Bernanke’s Legacy: A Weak and Mediocre Economy – Article by John P. Cochran

The New Renaissance Hat
John P. Cochran
February 8, 2014

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As Chairman Bernanke’s reign at the Fed comes to an end, the Wall Street Journal provides its assessment of “The Bernanke Legacy.” Overall the Journal does a reasonable job on both Greenspan and Bernanke, especially compared to the “effusive praise from the usual suspects; supporters of monetary central planning. The Journal argues when accessing Bernanke’s performance it is appropriate to review Bernanke’s performance “before, during, and after the financial panic.”

While most assessments of Bernanke’s performance as a central banker focus on the “during” and “after” financial-crisis phases with much of the praise based on the “during” phase, the Journal joins the Austrians and John Taylor in unfavorable assessment of the more critical “before” period. It was this period when the Fed generated its second boom-bust cycle in the Greenspan-Bernanke era. In the Journal’s assessment, Bernanke, Greenspan, and the Fed deserve an “F.” While this pre-crisis period mostly fell under the leadership of Alan Greenspan, the Journal highlights that Bernanke was the “leading intellectual force” behind the pre-crisis policies. As a result of these too-loose, too-long policies, just as the leadership of the Fed passed from Greenspan to Bernanke, the credit boom the Fed “did so much to create turned to mania, which turned to panic, which became a deep recession.” The Journal’s description of Bernanke’s role should be highlighted in any serious analysis of the Bernanke era:

His [Bernanke’s] role goes back to 2002 when as a Fed Governor he gave a famous speech warning about deflation that didn’t exist [and if it did exist should not have been feared].[1] He and Mr. Greenspan nonetheless followed the advice of Paul Krugman to promote a housing bubble to offset the dot-com crash.

As Fed transcripts show, Mr. Bernanke was the board’s intellectual leader in its decision to cut the fed-funds rate to 1% in June 2003 and keep it there for a year. This was despite a rapidly accelerating economy (3.8% growth in 2004) and soaring commodity and real-estate prices. The Fed’s multiyear policy of negative real interest rates produced a credit mania that led to the housing bubble and bust.

For some of the best analysis of the Fed’s pre-crisis culpability one should turn to Roger Garrison’s excellent analysis. In a 2009 Cato Journal paper, Garrison (2009, p. 187) characterizes Fed policy during the “Great Moderation” as a “learning by doing policy” which, based on events post-2003, would be better classified as “so far so good” or “whistling in the dark.” The actual result of this “learning by doing policy” is described by Garrison in “Natural Rates of Interest and Sustainable Growth”:

In the earlier episode [dot.com boom-bust], the Federal Reserve moved to counter the upward pressure of interest rates, causing actual interest rates not to deviate greatly from the historical norm. In the later episode [housing bubble/boom-bust], the Federal Reserve moved to reinforce the downward pressure on interest rates, causing the actual interest rates to be exceedingly low relative to the historical norm. Although the judgment, made retrospectively by economists of virtually all stripes, that the Fed funds target rate was “too low for too long” between mid-2003 and mid-2004, it was almost surely too low for too long relative to the natural rate in both episodes. (p. 433)

Given this and other strong evidence of the Fed’s role in creating the credit-driven boom, the Journal faults “Mr. Bernanke’s refusal to acknowledge that the Fed made any mistake in the mania years.”

On the response to the crisis, the Journal refrains from the accolades of many who credit the Fed led by the leading scholar of the Great Depression from acting strongly to prevent another such calamity. According to the Fed worshipers, things might not be good, but without the unprecedented actions and bailouts things would have been catastrophic. The Journal’s more measured assessment:

Once the crisis hit, Mr. Bernanke and the Fed deserve the benefit of the doubt. From the safe distance of hindsight, it’s easy to forget how rapid and widespread the financial panic was. The Fed had to offset the collapse in the velocity of money with an increase in its supply, and it did so with force and dispatch. One can disagree with the Fed’s special guarantee programs, but we weren’t sitting in the financial polar vortex at the time. It’s hard to see how others would have done much better.

But discerning readers of Vern McKinley’s Financing Failure: A Century of Bailouts might disagree. Fed actions, even when not verging on the illegal, were counter-productive, unnecessary, and contributed to action-freezing policy uncertainty which contributed to the collapse of the velocity of money. McKinley describes much of what was done as “seat-of-the-pants decision-making” (pp. 305-306):

“Seat of the pants” is not a flattering description of the methods of the regulators, but its use is justified to describe the panic-driven actions during the 2000s crisis. It is only natural that under the deadline of time pressure judgment will be flawed, mistakes will be made and taxpayer exposure will be magnified, and that has clearly been the case. With the possible exception of the Lehman Brothers decision … all of the major bailout decisions during the 2000s crisis were made under duress of panic over a very short period of time with very limited information at hand and with input of a limited number of objective parties involved in the decision making. Not surprisingly, these seat-of-the-pants responses did not instill confidence, and there was no clear evidence collected that the expected negative fallout would truly have occurred.

While a defense of some Fed action could be found in Hayek’s 1970s discussion of “best” policy under bad institutions (a central bank) where he argued that during a crisis a central bank should act to prevent a secondary deflation, the Fed actions went clearly beyond such a recommendation. Better would have been an immediate policy to end the credit expansion in its tracks. The Fed’s special guarantee programs and movement toward a mondustrial policy should be a great worry to anyone concerned about long-term prosperity and liberty. Whether any human running a central bank could have done better is an open question, but other monetary arrangements could clearly have led to better outcomes.

The Journal’s analysis of post-crisis policy, while not as harsh as it should be,[2] is critical. Despite an unprecedented expansion of the Fed’s balance sheet, the “recovery is historically weak.” At some point “a Fed chairman has to take some responsibility for the mediocre growth — and lack of real income growth — on his watch.” Bernanke’s policy is also rightly criticized because “The other great cost of these post-crisis policies is the intrusion of the Fed into politics and fiscal policy.”

Because the ultimate outcome of this monetary cycle hinges on how, when, or if the Fed can unwind its unwieldy balance sheet, without further damage to the economy; most likely continuing stagnation or a return to stagflation, or less likely, but possible hyper-inflation or even a deflationary depression, the Bernanke legacy will ultimately depend on a Bernanke-Yellen legacy. Given, as the Journal points out, “Politicians — and even some conservative pundits — have adopted the Bernanke standard that the Fed’s duty is to reduce unemployment and manage the business cycle,” the prospect that this legacy will be viewed favorably is less and less likely. Perhaps if the editors joined Paul Krugman in reading and fully digesting Joe Salerno’s “A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis,” they would correctly fail Bernanke and Fed policy before, during, and after the crisis.

But what should be the main lesson of a Greenspan-Bernanke legacy? Clearly, if there was no pre-crisis credit boom, there would have been no large financial crisis and thus no need for Bernanke or other human to have done better during and after. While Austrian analysis has often been criticized, incorrectly,[3] for not having policy recommendations on what to do during the crisis and recovery, it should be noted that if Austrian recommendations for eliminating central banks and allowing banking freedom had been followed, no such devastating crisis would have occurred and no heroic policy response would have been necessary in the resulting free and prosperous commonwealth.

Notes

[1] See Joseph T. Salerno, “An Austrian Taxonomy of Deflation — With Applications to the U.S.” Quarterly Journal of Austrian Economics 6, no. 4 (2001).

[2] See John P. Cochran’s, Bernanke: The Good Engineer? Mises Daily Article, 21 March 2013 and Bernanke: A Tenure of Failure, Mises Daily Article, 31, July 2013.

[3] See John P. Cochran, Recessions: The Don’t Do List, Mises Daily Article, 17 February 2013.

John P. Cochran is emeritus dean of the Business School and emeritus professor of economics at Metropolitan State University of Denver and coauthor with Fred R. Glahe of The Hayek-Keynes Debate: Lessons for Current Business Cycle Research. He is also a senior scholar for the Mises Institute and serves on the editorial board of the Quarterly Journal of Austrian Economics. Send him mail. See John P. Cochran’s article archives.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Why Do Banks Keep Going Bankrupt? – Article by Kirby R. Cundiff

Why Do Banks Keep Going Bankrupt? – Article by Kirby R. Cundiff

The New Renaissance Hat
Kirby R. Cundiff
November 4, 2013
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The banking industry is unstable. Banks are regularly going bankrupt. Crises in the banking industry have occurred in three distinct time periods during the twentieth century—during the Great Depression of the 1930s, during the Savings and Loan crisis of the 1980s and 1990s, and during the Great Recession from 2007 to present.

Why the banking industry is so vulnerable to bankruptcies and what can be done to correct this problem?

Debt to assets, or leverage, ratios vary significantly from industry to industry. They are typically under ten percent in most high tech industries and go up to forty percent for public utilities. Average debt ratios in the banking and financial services industry are in the fifty to seventy percent range, however, and many banks have much higher leverage ratios.

Firms attempt to minimize their total financing costs or Working Average Cost of Capital (WACC). The component costs of capital (cost of debt and cost of equity) are determined by investors’ perceptions of the risk and return possibilities associated with buying debt or equity in a given company or individual.

A credit card loan has a higher interest rate than a home loan because the credit card loan is riskier—i.e. there are no assets to seize if the money is not paid back. Similarly, a high-risk company normally pays a higher interest rate on its debt than a lower-risk company and increasing leverage is normally associated with increasing risk. Due to deposit insurance, however, this isn’t the case with banks.

Moral Hazard

The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 in the United States. Most of the European countries (including Cyprus) have similar organizations that insure deposits up to 100,000 EUR. (See Deposit Insurance.)

Since depositors believe that their bank accounts are insured by governments, they do not generally know or care how much risk banks incur when they invest their depositors’ money. This creates a moral hazard problem with very little oversight by depositors of a bank’s management of their assets. Bank managers can take a lot of risk and, if they make profits, they keep the money. If they lose money, the taxpayers pay for the losses. In theory, this moral hazard problem is mitigated by subordinated debt, investors with deposits over the deposit insurance limit, and banking regulations. But these approaches are clearly not working.

In a series of agreements called the Basel Accords, the Basel Committee on Bank Supervision (BCBS) provides certain recommendations on banking regulations in regards to capital risk, market risk and operational risk. The purpose of these accords is to ensure financial institutions have enough capital to meet their obligations. The Tier I and Tier II capital controls of the Basel Agreements are supposed to prevent banks from taking too much risk with depositors’ assets. Tier 1 capital consists largely of shareholders’ equity. Tier 2 capital comprises undisclosed reserves, revaluation reserves, general provisions, hybrid instruments and subordinated debt.

The capital ratios are:

  •   Tier 1 capital ratio = Tier 1 capital / Risk-adjusted assets
  •   Total capital (Tier 1 and Tier 2) ratio = Total capital (Tier 1 + Tier 2) / Risk-adjusted assets
  •   Leverage ratio = Tier 1 capital / Average total consolidated assets

To be well-capitalized under federal bank regulatory definitions, a bank holding company must have a Tier 1 capital ratio of at least six percent, a total capital ratio of at least ten percent, and a leverage ratio of at least five percent (Capital).

The leverage ratios allowed under the Basel agreements are far higher than the typical leverag ratios in most industries and are far higher than would exist in a free-market financial system. Under a free-market system, depositors would not put their money in overly-leveraged banks and banks would be forced to decrease their leverage ratios and behave more like mutual or money market funds. Banks would be less likely to use short-term liabilities (deposits) to fund long-term assets (loans).

The S&L Crisis

Massive bank leverage would not create as much instability if the money supply was stable as in the 1800s under the gold standard. Under the current debt-is-money system, inflation and interest rates can vary wildly from year to year. The Savings and Loan Associations (S&Ls) made many low interest 30-year fixed rate home loans when inflation was low in the 1960s—five percent interest rate loans were typical. As inflation increased, the S&Ls still had these long-term home loans on their books, but the market now demanded higher interest rates on deposits (eighteen percent at times). The interest rates that many savings and loans were receiving on their assets (30-year fixed rate loans) were much lower than the interest rates the same S&Ls were paying on their liabilities (deposits). This duration mismatch resulted in the mass insolvency of the Savings and Loan Industry and a bailout of the S&Ls by the American tax payers exceeding $100 billion.

The Great Recession

The banking defaults of the Great Recession (2007 to present) were also caused by unstable interest rates combined with high leverage. The Federal Reserve lowered rates in the early 2000s to stimulate the economy after the bursting of the dot.com bubble. This resulted in many people borrowing money at very low interest rates to buy homes. Then the Federal Reserve raised interest rates and many people were no longer able to make their home payments. Again the result was massive bank insolvency and a substantial decrease in home values. Another huge taxpayer -funded bailout of the banking system followed, and the Federal Reserve has been printing money ever since, trying to stimulate the economy in the wake of yet another bubble it created.  The disbursements associated with placing into conservatorship government-sponsored enterprises Fannie Mae and Freddie Mac by the U.S. Treasury, the Troubled Asset Relief Program (TARP), and the Federal Reserve’s Maiden Lane Transactions are probably around $400 billion. How much of these disbursements will be paid back is currently unclear.

During the recent crises in Cyprus, proposals were seriously considered to ignore the 100,000 EUR deposit insurance and seize a fraction of even small depositors’ money. Most depositors lost access to their accounts for over a week and large depositors are still likely to lose a large fraction of their assets. This crisis has made some depositors more likely to pay attention to the solvency of their banks, but most depositors still believe that deposit insurance will cover any possible losses. If banks are to become more stable, the amount of equity relative to debt in the banking system must be drastically increased to something resembling what it would be without government deposit insurance, central bank subsidies, and treasury bailouts. Given the lobbying power of bankers in Washington, DC and around the word, such is unlikely to occur. The boom-bust cycle of banking bubbles followed by banking crises will most surely continue.

For further reading on this topic see this from The Freeman.

Kirby R. Cundiff, Ph.D. is an Associate Professor of Finance at the Rochester Institute of Technology. He is a Chartered Financial Analyst and a CERTIFIED FINANCIAL PLANNERTM Professional. 

This article was originally published by The Foundation for Economic Education.