Tag Archives: banking system

Deja Vu All Over Again

The economy was booming.  Money was easy and the interest rates charged by the Federal Reserve were very low on a historic basis.   Brokerage firms and banks were lending money on margin to almost all comers regardless of credit quality.   The US was riding high with exports moving higher and industry growing and jobs plentiful.  

There was concern about sovereign debt.  A neighbor had defaulted on its bonds and no payments were being made.  That concerned the markets but buyers were still plentiful.   The US sent private bankers to the neighbor to negotiate terms of the repayment of the defaulted bonds.  The US government didn’t want to be seen publicly putting pressure on the neighbor because of diplomatic concerns.   Great Britain had abandoned the gold standard to ease its economic burdens from war debts.  Then it went back on the gold standard to demonstrate its leading role in international finance.  This of course constrained its ability to expand its burgeoning socialist agenda of that day and transfer payments to the Dole.  It and particularly France were counting on reparations payments from Germany to shore up their balance sheets. 

The German economy was in the doldrums due to revolutions, near revolutions and hyperinflation that destroyed savings and what little wealth was left after the War.   The terms of the reparations were renegotiated for slightly easier terms.  But even though payments were too much as everyone really knew and there was another default in only a couple of years.  

Meantime in the US foreign debt bond were a hot item for purchase even after the default of Mexico and other nations.    Then there was the explosion of common stock issues for all sorts of industries and enterprises.   There were calls and demands for some quarters to cool speculation in the market, some from the highest levels of government, including Herbert Hoover.   Some mergers were made and huge deals structured during this period.  GE acquired American Marconi which became a company you are more familiar with–RCA.  Also AT&T made a deal to protect its market with an up and coming competitor–ITT.  They agreed that ITT could build and operate systems overseas but not in the 48 States.  That deal lasted for over sixty years.  There was plenty of cash and liquidity.  That was considered a good thing and sign of wealth.  It might also have meant there was a dearth of really good investments with long term prospects.  All that liquidity meant it was easier for companies to raise money by issuing new stocks rather than borrowing money even though rates were relatively low.   All of this activity was reflected in the explosive growth of broker dealers from about 250 before WWI and over 6500 by 1929.  

The Federal Reserve finally raised the discount rate to 6% from 5% which many wanted to cool the economy which almost everyone thought was over heating. But it was too little and too late.   One notable financier got out of the market before the ’29 crash when he heard his shoe shine boy talking about what stock he was going to buy.   He knew that was not a good sign and he was right.  Of course there were those who believed things were just fine.  One noted academic in August of 1929 that the market had reached a permanently high plateau.   But it had reached the edge of a cliff.  When the Crash came the Federal Reserve poured money into the system buying government bonds and giving liquidity to Wall Street banks.  But, alas even with this pool of money and other efforts made by the major banking houses on Wall Street these efforts could not overcome one major problem.  There simply were no buyers.  Even if banks were willing to loan money for stock purchases there were no takers.  Yes, there were a couple of rallies but within a year or so the market had lost 90% of its value.

First they pumped money, then they tightened the money supply and deflation came along and reduced prosperity across the board.  The Smoot-Hawley Act that imposed high tariffs on imported goods to protect American jobs had exactly the opposite effect and cost jobs.

If you want to understand the headlines of today it would do you well to read some histories of the 1920’s.  There are many choices.  Discount rates of the Fed, inflation rates, deflation fears, easy money, lose lending standards, speculations and accusations of speculations, gold standard and foreign debt defaults were issues of that day just as they are now.  Then unemployment became the issue of the day.

For those who procrastinate too much–remember, don’t worry about the mules yet, just load the wagon.  My uncle.  www.olcranky.wordpress.com


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Treasury Off the Reservation?

The premier cabinet positions and the ones that have the longest history are Defense, State and Treasury.  Of course in the old and more honest days, Defense was called the War Department.  It was only after WWII that political correctness started making inroads and euphemisms became the standard of the day and the War Department was changed to the Department of Defense.   Over our history we have had some quite bright fellows as Secretary of the Treasury.  Hamilton was the first leading light in this regard.  Samual Chase during the War Between the States was the architect of the financial schemes that allowed the Yankees to fund their war effort to invade the South.  He was clever, no doubt about it.   He had greater resources at hand than his counter part in the South and used them well.  The Yankees used their industrial base and control of finances to maximum advantage under Chase.  By the way he and Lincoln were bitter political enemies and many speculated rightfully that he had his own ambitions for the White House.   He was also a target of the Boothe conspiracy that ended in the assassination of Lincoln.

A little study of history and some common sense make it apparent that the only reason for a Treasury Department is if we have a capitalist economic system.  That is its raison d’etre.  If the Government is socialist or communist then you don’t need a Treasury department at all.  A simple Comptroller to disburse funds would suffice.  After all under such a system the Government owns everything and controls everything in the economy.  The purpose of the Treasury is to support and nurture private enterprise.  Yes, does  issue Government debt but only for purposes of fostering a free flow of commerce throughout the nation which in turn produces tax revenues for the Government to function.  It is there to sustain a banking system for the private economy.    The whole idea of taxes implies a captitalist system.  Stalin didn’t need taxes to run the Soviets.  He owned everything already.  There was no one to tax but the Government itself.  Again if you don’t have a capitalist system their is no need for a banking system as we know it.  A money dispensary to convert notes to cash would be sufficient.    In a socialist system you don’t need a bank to start your small business venture.  Under the capitalist system you go to a bank with your plan and proposals and projections and seek funding to start your barbershop.  But in the socialist system you ask a bureaucrat if you can run 0ne of the state owned barbershops.  There is no need for banks or a Treasury. 

I fear our current Treasury is going very far afield from its intended purpose.  Its mission is being changed to foster Government programs rather than the private economy.  The bailouts and takeovers of private industry are occurring at break neck speed.  Our Treasury will soon be that dispensary to hand out funds to those favored by those in power and for no other purpose.  We are watching this transformation with our eyes wide open.  But it is incremental in its growth and many are not looking at the big picture and  nor looking far enough down the road.   I think we are better off having some banks fail and yes, maybe have some temporary pain in our economy, than  we are having the Government take over a vast majority of our banking system.  Once the Government owns the banks then they have become nothing more than an arm of the Government.  Regrettably the current Treasury department is helping with this program rather than opposing it.   I suppose the only good news is that if we continue on this road we will eliminate at least one Government bureaucracy and all those employees because it simply won’t be needed anymore.  We need Treasury to do its  job to support private enterprise and not be a co-conspirator with Congress to socialize our economy.

Of all the statistics and numbers I have seen  bandied about in the news over the last week or so, the most troubling was the information from the census bureau about the birth rate.  Births are up substantially it appears.  The largest increase if over 50 years according to the reports.  What is so sad was the detail that of all those births about 40% were to unwed mothers.  No matter what happens with anything else we are doomed as a nation if that number holds true.  The family unit is vital.  A mom and child (or children) are not a good unit for society in large numbers.  The implications of those numbers overshadow so much else.  They bode ill I fear for the future.

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