My Take on the Crash(es)

A market begins to fall when its investors either run out of cash to keep putting money in, or they become spooked and refuse to keep putting it in.  This is why the central banks are inflating the money supply, to keep these markets from running out of cash and going into free fall, as the investors would have long ago run out of cash to keep putting in.  They’re not trying to improve the economy so much as they’re trying to maintain the upward trend in asset prices so that huge banking institutions continue to reap ‘profits’ from the increase in the price of the assets on their balance sheets.  The Federal Reserve and other central banks around the world say that doing so will create jobs.

The main problem with this is that inflation doesn’t actually cause any real economic activity that could create jobs.  Increasing asset prices is not equal to increasing economic activity.  Real economic activity is only created by investments that expand existing firms or create new firms that provide services or manufacture goods.  Today’s inflationary monetary policies encourage the exact opposite.  When central banks use inflationary monetary policies, the easiest way to make money is to buy assets before the prices increase, and resell them after they do, in a self-reinforcing cycle.  No good or service is generated in the process.

Central banks cause inflation to occur by expanding the amount of debt that is held in the economy.  They loan new money into existence by giving loans to private banks.  The private banks then are supposed to loan the money to other people who can then invest the money.  The banks make a profit by charging a higher interest rate than the central bank did.  Traditionally, this could potentially be effective in generating real economic activity because businesses could be loaned the money to invest in the production of goods and services.

This whole system depends on the private banks re-loaning the money once they get it from the central banks.  Instead of doing this, however, the banks now choose to ‘invest’ the money directly into securities (stocks, bonds, real-estate investment trusts, insurance, derivatives, etc.), driving up the prices of assets without generating any economic activity.  They do this because it’s the easiest and quickest way to make money.

This ability for banks to invest in securities in the United States used to be impossible due to a critical piece of legislation called the Glass-Steagall Act of 1933.  In a nutshell this act made it illegal for a bank to be both a loaning institution that can benefit from the easily accessible central bank money while participating in the trading of securities.  The idea was that participating in both at the same time would create a conflict of interest that would encourage the banks to utilize their unlimited funding to invest directly in markets, artificially driving up prices and creating asset bubbles.

The Glass-Steagall Act was repealed in 1999 by the Financial Services Modernization Act (aka Gramm-Leach-Bliley Act).  Anyone who’s been paying attention for the last 13 years knows the financial catastrophes that have occurred since 1999.  It can easily be argued that the majority of the fault lies with that one simple piece of legislation.

Several bubbles have been created directly as a result of the repealing of Glass-Steagall.  Trillions of dollars of wealth have been both created and destroyed in the ups and downs of those bubbles.  What’s most alarming about this fact is that the debt that was used to create these catastrophes still exists, even though the assets no longer do.

The government's supposed solution to this problem is to keep feeding the beast.  Not only have they ramped up their loaning to banks by cutting interests rates to effectively less than zero (yes, they’re paying banks to borrow money from them), they have also purchased the now-worthless assets generated during the bubble at 100 cents on the dollar.  This has freed up the banks to start again at creating bubbles just like they did before. 

In theory, the loans, derivatives, stocks and other securities that the government has purchased do still exist, but they’re essentially worthless.  They only represent a debt that at some point must be paid.  Doing this was essentially a tax on the American taxpayers to sustain the ability of banks to create and explode asset bubbles.  So now, not only do banks get to grenade our economy, they also get to pass their resultant debts on to the taxpayers.

This cycle has not magically stopped since 2009 when the market bottomed and the economy began to recover from the last market crash.  The banks have continued to do what they’ve always done.  Stocks have been driven back up to nearly the same level that they were before the crash.  Most commodities are at near all-time highs.  Real-estate prices have resumed their climb.  More debt is being created.  People still can’t find jobs.  We’re on another crash course!

How has this been allowed to continue?  How is it that there aren’t constant demonstrations against this?  Why aren’t Americans angry enough about this to change it?  Reinstatement of Glass-Steagall would be a good start.  Auditing of the Federal Reserve should be in order as well.