I love to see satirical condemnations like this, especially when the focus of the mockery is the Federal Reserve and its chief, Ben Bernanke. I don’t know much about this site or its author, but the satire is spot on. I am not sure what it will take for the United States and the rest of the world to invalidate the central bank system. That system is robbing us blind. Plus, it is the most anti-free market entity possible. We use to mock the cartel of commissars who attempted to steer the USSR’s economy, yet we let 13 bankers rig our economic system to benefit the bankers. Maybe I am just tired, but I hope that the anti-Fed rhetoric builds to something more. I hope more people discover how the Fed works against the citizens. I hope it happens before a serious reset button is pushed. Let’s finish with some humor…about the Fed.

Here is an article from Bloomberg describing the amounts received as loans from the Federal Reserve during the market blow up in 2008 and 2009. While taxpayers were enraged, and rightfully so, with the TARP bailout, which provided $300 billion to troubled banks, automakers, and other companies with strong lobbying arms, taxpayers should really be up in arms at the Fed, who provided $1.2 Trillion to the banks during the same time.  The reason this information is only coming out now is Bloomberg won a Freedom of Information Act (FOIA) lawsuit against the Federal Reserve who was not going to release this information.

This shows the secret, shady workings of the Fed along with the sole purpose the Fed exists: to help the banks. We need to end the Federal Reserve because it shows the government is working to help the banks, not the taxpayer. Rather than taking over the banks, writing down the assets, and then re-launching the banks, we, the taxpayers, will pay for this bailout with taxes and higher prices. Why higher prices? When the Fed prints this money to give to the banks, it causes the price of commodities, goods and services to rise. We pay more to live. Had the government taken over the banks like Sweden did during its banking crisis, the banks’ shareholders and bondholders would have lost their investment, but the taxpayer would have been spared. Even more importantly, we would be done with the liquidity mess. As it stands now, the banks will probably face another crisis when the European debt situation finally blows up.

Hat tip: The Big Picture

In yet another display that the Federal Reserve serves no purpose other than to help banksters, the Fed backtracked on its intention to lower the fee banks can charge for debit card transactions. Starting this July, banks were only going to be allowed to charge 12 cents per debit card transaction. This would help consumers as corporations could lower their prices since their processing fees would drop. However, the banks would feel a drop in revenues. Of course, it costs banks about 1 penny to process these transactions so making 12 cents is a nice markup. Apparently, it isn’t as good of a markup as they like so the Fed capitulated. Now, the fee will only drop to 24 cents. Certainly, this is better than the current 44 cents, but this is still egregious.

The Federal Reserve is set to provide relief to banks when it votes Wednesday afternoon to adopt controversial debit-card rules that are set to shift billions of dollars in revenue from financial institutions to merchants. According to a draft final rule released by the central bank, the Fed will vote to cut fees that retailers pay to accept debit-card payments to 21 cents, plus a conditional charge of a penny and 0.05% of the transaction value for fraud prevention. On the average debit transaction of $38, the Fed’s proposal would have retailers pay 23.9 cents. A proposal the Fed released in December that would have cut fees that retailers pay to accept debit-card payments by an average of 73%, to a range of 7 to 12 cents a swipe.

My solution: walk into your local bank (not ATM), make a teller wait on you, and withdraw cash to spend at the stores. If everyone did this, the banks would be forced to hire more tellers at the same time this 24X markup disappears. At that point, the bankers would beg people to use debit cards even if the banks only received 3 cents per transaction. The cost for the extra tellers would kill them. On the plus side for consumers, we may spend less. Holding cash has been shown to lower discretionary spending by consumers compared to debit and credit card transactions. It would be a win-win for consumers.

There is a decent article in the Huffington Post today about the Federal Reserve’s secrecy, citing how the Fed provided over $30 billion in loans to Goldman Sachs, the Royal Bank of Scotland, and Credit Suisse at the ridiculously low rate of 0.01%. Wish I could get a mortgage at that rate. This is all coming out due to a lawsuit from Bloomberg Financial to force the Fed to open its books on who it lends to.

One comment from the article really baffled me:

“It just points out that this was about secrecy to protect banks basically from embarrassment from transparency, which is not supposed to be what the Fed’s about,” said Dean Baker, co-director of the Center for Economic Policy and Research, in Washington.

“That is the fundamental problem with the Fed,” Baker added. “They’re supposed to be an agency of the government, not an agency of the banks. But reflexively, there they are protecting the banks, again and again and again.”

Why would Dean Baker think this? Is he really that ignorant? The Fed is not an agency of the government. It is no federal than Federal Express. The only oversight the government has on the Fed is the government’s ability to appoint the Federal Reserve members. Beyond that, the Fed is owned by the participating banks in each of the 13 regions. How can someone who holds such an impressive title, co-director of the Center for Economic Policy and Research, not understand the Federal Reserve is a bank owned by other banks. So why wouldn’t it look out for the banks first.

That is precisely what the Federal Reserve was created to do. In 1907, the US suffered another bank panic. These were very common before FDIC insurance. If one bank mismanaged its risk and went belly up, people, out of fear, would indiscriminately pull money from their bank – even if it was healthy. The thought was to get the money just in case their bank was teetering on the verge of collapse. Well, these runs would essentially guarantee the bank’s failure. FDIC changed this attitude, in my opinion; otherwise, we would have and still should see a run on Bank of America, Citi, Wells Fargo, and more as they are essentially insolvent.

Anyway, the only reason the US got through the banking panic was due to J.P. Morgan – the man, not the bank. He gathered all the head bankers in a room. He let them know how much money he and every other bank was going to put up to liquify the banking system. He told the bankers in the room to decide which banks survived and which ones died. Then he left the room.

This was painful for J.P. Morgan and the other bankers because they put their own money on the line (and actually lost a great deal in the process). So many of the bankers decided that this whole “using our own money” thing was dreadfully overrated. They wanted the taxpayers to cough up the dough to prop the banking system. That is how we got the Federal Reserve six years later in 1913.

When the Fed bailed out the banks in 2008, Bernanke said he had to hold his nose while doing it. Maybe he had to hold his nose because that line was nothing more than bull*&it. This is what the Fed was created to do, and if we see another banking panic, which is almost certain in my mind with the amount of derivatives on the banks’ balance sheets and exposure to Greek, Portugese, Spanish, and Irish debt, the Fed will bail the banks out again.

Today, the Federal Reserve Chief, Ben Bernanke, will hold a press conference to detail what the Fed’s plan is once the second round of Quantitative Easing ends. Some think they will let the plan end with the stipulation that the Fed stands ready to jump back in if needed while others believe that Quantitative Easing III will be announced. I really think it is totally anti-capitalist to have a cartel of 13 bankers control so much of our economy and markets, but that is where we are. I decided to write a letter to Uncle Ben, and I put it here first. Also, after the letter, I have some thoughts on how this decision should drive your investments.

Dear Chairman Bernanke:

Today, you will alert the markets to the Federal Reserve’s decision about extending QEII, implementing QEIII, or letting the markets function on a more normal basis. I do hope you choose the latter. Unlike most Americans, I realize that you actually work for the banks (since the Fed is owned by its member banks) and not the government (or its citizens) so I understand the banksters would be upset with you if QEIII doesn’t happen. Providing the banks with all that fresh liquidity has helped them make a fortune in the stock and commodity markets. I do feel for the banksters if you don’t do QEIII, I really do. I know this will probably mean that the banksters won’t be able to afford the newest Lamborghini. They would be forced to settle for the Mercedes S class. While this is a step down, I hear the S Class is awfully nice. In fact, I was driving my 1995 Jeep (saving up for a used Hyundai) on the highway the other day, and I was cut off by an S Class. As I drove into the ditch, I remember thinking the S Class maneuvered superbly. So I hope that you agree an S Class is an acceptable mode of transportation for the banksters.

If that doesn’t convince you to halt any attempt at QEIII, I hope you will look at the price of most commodities. Since the announcement of QEII, prices for staples like oil, grains, livestock, and industrial metals have increased around 50%. I do realize that the world is demanding more commodities as China, India and other emerging markets develop their economies, but I suspect the underlying demand hasn’t increased 50% in six months. I know you deny publicly that QEII caused any commodity inflation, but I know that you know that I know that you know (to quote Eddie Murphy) QEII is causing commodity prices to rise. Being the ever optimist that I am, I guess I could deal with a continued spike in commodities. Maybe it will allow me to shed those last, stubborn 10 pounds I have been trying to burn off since I won’t be able to afford as much food.

If you still aren’t convinced, I will make a desperate plea by reminding you that our nation became great with a market based economy. While we never had true capitalism, it was as close to a capitalist society as was ever seen. Maybe if we start to move towards the principles, upon which we were founded, we could correct our inefficiencies and malinvestment and start to grow again. I know – silly, isn’t it. I am so naive to believe in things like principles. If you find my thoughts humorous, I ask you don’t share them with the banksters. They may attempt to read it while driving their new Lamborghinis and run me off the road (as they laugh their tails off). I can’t afford to repair another front end to my Jeep, and I haven’t saved enough for that Hyundai either.

Sincerely,

Kirk Kinder

I know, I know. I am being too much of a smart ass. I just find sarcasm soothing when I am in an uncontrollable situation. I do think that the Fed’s decision is a critical step though. It will have a dramatic effect on your wallet so we need to understand how.

The reason it will be such a big decision is the fate of the dollar rests in the Fed’s hands. If they undertake more Quantitative Easing, the dollar will drop even further than it already has. To put it in perspective, the dollar is around the low last seen in 2008 before the crash. If it breaks this trend, the drop could be severe. This means inflation will be even more painful than it has been for the past six months. If QEIII is announced, then it would be wise to think about investing in commodities, especially gold and silver, along with stocks. I would also look at parking cash in foreign currencies. Everbank has FDIC backed CDs denominated in foreign currencies.

If the Fed halts its Quantitative Easing program in June, I expect commodities and stocks to slowly lose value as money moves to Treasuries. Last summer, the stock/commodity markets were tanking and Treasuries/the US dollar was doing quite well. Then QEII was announced, and the opposite happened. The general consensus of most is Treasuries will get hammered if the Fed stops buying them through its QE program. Bill Gross, the manager of the largest bond fund in the world, has sold all his Treasuries expecting rates to rise and bond prices to fall once QE ends.

As mentioned previously, most market pundits agree. I am certainly a contrarian here, which I like. I always remember that the market attempts to provide the most pain to as many people as it can. I do feel a bit relieved in that Jeff Gundlach shares my view. He has outperformed Bill Gross’ bond fund for the past decade or so.

I still believe the natural tendency of the economy is to deflate. We have way too much debt as a nation that must be reduced through repayment or default. Without massive amounts of money printing, liquidation will begin, and investors will move to the dollar or Treasuries as it is seen as a more guaranteed return than commodities or stocks. Long term, Treasuries are doomed, but a guaranteed payment – even if it loses value due to interest rates rising – is better than an unguaranteed return from stocks/commodities.

Please take a moment to read my disclaimer and remember I am not advocating you invest in any particular way. I am just throwing out ideas for you to ponder. So ponder away and watch out for those Lamborghinis and Mercedes S Classes. They will drive you right off the road. :^)

Most Americans are rightfully upset at the TARP/bank bailout from 2008. No one, outside the government, Fed or the banking industry, can really justify giving our money to multi-millionaire bankers. Of course, the government is trying to justify TARP claiming the US taxpayer has received this amount back plus interest.

I have always argued that TARP was a drop in the bucket. The real bailout came from the Federal Reserve, which has printed over a trillion dollars. The process works as such: 1) Banks give the Fed their toxic assets as collateral; 2) Fed loans the banks money at zero percent; 3) The Fed bases their lending on the prices paid for the toxic assets, not the fair market value; 4) Banks take this fresh money and invest in stocks, commodities, bonds. They could loan this money, but they really haven’t been doing that over the past couple years. Again, this money from the Fed was printed or created out of thin air.

The bill is coming due for this money printing in the form of inflation, namely food, fuel, and utilities. The increase in your grocery bill is your payback for the banks. Below is a piece from Dylan Ratigan (hat tip Zero Hedge). Dylan nails it on the head. This liquidity sloshing around is finding its way to commodities, stocks, and other risky assets. This is causing prices to rise, and, more importantly, leading to unrest in parts of the world where food and fuel make up a large part of their annual expenses.

I fear that the Fed is heading down the path forseen by Austrian economist Ludwig von Mises:

“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.”

The Fed is clearly bent on printing money. The talks of Quantatitive Easing III is probably next. If so, expect prices to rise even faster for everyday goods.

Visit msnbc.com for breaking news, world news, and news about the economy

In a recent article, Nouriel Roubini, known as Dr. Doom in many economic circles for accurately calling the housing/banking crisis, argued against a gold standard for our currency. His arguments claim that the business cycle will be more violent (and frequent) and that the Fed would be unable to adequately fight inflation or deflation. Personally, I think these arguments are bunk.

With regards to the business cycle, Roubini argues:

When you had a traditional gold standard, boom and bust with severe swings in economic activity were the norm-really big ones. It was only once we moved to fiat money that central banks were able to smooth the business cycle, and make it less volatile, as we did during the financial economic crisis.

It is true that the US experienced a “panic” every twenty years or so (1809, 1859, 1873, 1893, 1907) when we were on the gold standard. These panics were also violent recessions as Roubini stated. However, these panics were short in duration, usually between 18 and 24 months, and the growth after the recessions was robust. This is indicative of a true business cycle. The economy grows rapidly, which results in too much inventory and malinvestment, then a recession emerges clearing the economy of the malinvestment. Austrian economists argue that the business cycle is a natural part of life, just like the seasons. Further, any tinkering with nature results in unintended consequences that usually prove more dire than the original problem.

Roubini is correct that the Fed has lessened the pain of the past recessions. Going back to the 1990 recession, the decline in GDP has been shallower than the panics before the Fed’s inception in 1913. The Fed has done this by flooding the economy with money when a recession hit. However, the Austrians will argue that this practice keeps the economy from correcting the malinvestmenet, which leads to lower economic activity going forward. Eventually, the malinvestment must be dealt with leading to economies like Japan since 1990 or the US of the 1930s.

It appears that we could be facing this type of situation now. The economy is no longer receding, but the growth is sub-par relative to previous expansions. We also have structural issues that will plague us such as a defunct banking sector and historically high debt relative to GDP. Only time will tell if this is the case or if these supposed structural issues aren’t really issues at all.

Managing Deflation or Inflation

Roubini also claims that a gold standard would keep us from being able to manage inflation or deflation. To that, I argue that the gold standard keeps both inflation and deflation in check. With a stable money supply, it is much harder to see prices rise for all goods and services. Certainly, some products or commodities could see rapid price increases or decreases, but this would be due to traditional supply/demand dynamics. If the amount of oil decreases, then prices would naturally rise, and vice-versa. However, the entire economy won’t face drastic changes in price levels with a more predictable money supply.

The graph below shows that the standard of living for citizens in various countries was relatively stable for hundreds of years before central banks took over the money supply. After 1913, the year the Fed was founded, inflation gained a larger influence on our lives.

Another point about the previous panics that we don’t face today is bank runs. The panics of old were bad because they were almost always paired with a bank run. Some of the banks deserved to fail, but people use to go to the bank and demand their deposits regardless of the health of their bank. Even a healthy bank can fail if enough depositors demand their money. Today, people believe the FDIC will protect their money. If not, we would have experienced a massive bank run in 2008, and all the banks would have failed despite the government’s actions. Had FDIC existed during the previous panics, those recessions may not have been as bad.

While Roubini may have done a nice job of predicting the crisis in 2008, he still believes that 13 men behind closed doors can do a better job of managing an economy and money supply than the gold standard. I disagree.

Saw this article on the Huffington Post, and I couldn’t believe it was published. This guy is brewing a heavy batch of Kool Aid to get us to buy this argument. I posted a response on Huffington Post, but the word limit kept me from making my points. Here I can pontificate at length (though I will try to keep it short so as not to bore you).  I want to address many of his points directly.

Point 1

Two years ago, we stood at the brink of an economic catastrophe. Ordinary American families were questioning whether their money was safe in banks. A growing financial panic threatened to sink our nation into an economic downturn that rivaled the Great Depression.

These saviors shouldn’t be so quick to say we are through this mess yet. I never thought we would revisit the Great Depression, but the worst very well could be in front of us. People should still be worried about their banks. They may seem better as the government allows them to use inaccurate accounting for their assets, but this just masks the true condition of the banking sector. Certainly, there are great banks out there. You need to find one and put your money there. Here is a post discussing the good, bad and ugly banks in Florida and Maryland. With the FDIC watch list up to 877, the banking system is far from healthy.  The other reason this logic is flawed is the Great Depression didn’t emerge after the 1929 stock market crash. People like Herbie (the author) assume that we had the stock market crash, and the bread lines developed the next day. The Great Depression didn’t happen that way. It was a long, drawn out process where optimism surfaced only to be batted down with a grim reality. This was a decade long event. So even if we avoided a larger financial panic, the balance sheet recession lasts much longer, and it is where the most damage emerges. The reason I don’t believe we will face a Great Depression is three-fold. One, we already had safety nets in place to keep the food lines from developing. We have over 40 million food stamps so we have a serious problem; we just don’t see people waiting in lines. Please see The Modern Day Bread Line. Second, we had excessive rains in Iowa and drought from Oklahoma to Maryland that ravaged the agricultural industry. With 25% of Americans still living and subsisting on the family farm, these weather incidents only exacerbated a difficult economic environment creating a massive number of homeless and jobless. Third, we enacted massive tariffs on just about every imported product with the Smoot-Hawley Act. This, in turn, prompted other countries to do the same, and international trade collapsed. This is why an otherwise bad recession turned into the Great Depression. Incidentally, we could still end up facing the third problem if we keep saber rattling with China and other countries. Once the tariffs begin, economies will shrink.

Point 2

The TARP investments that the Bush and Obama administrations made in GM and Chrysler, as well as the hard decisions that those companies made to adapt and compete, turned those automakers around and saved at least one million jobs. Since GM and Chrysler emerged from bankruptcy, the auto industry has added 76,300 jobs – the strongest growth in 10 years – and for the first time since 2004, all of the big three American auto companies are operating profitably.

In fact, independent experts have estimated that overall, without the federal government’s response to the financial crisis, including TARP, there would be nearly 8.5 million fewer jobs today and the unemployment rate would exceed 15 percent.

First, it wasn’t the cash we gave GM and Chrysler that turned them around or started to turn them around anyway. It was bankruptcy. The fact that the union contracts were re-negotiated in bankruptcy court and the health care/pension plans were modified reduced GM and Chrysler’s operating costs. We should have forced them into bankruptcy from the start and saved ourselves the $5 billion we gave them. Many might point out that we were repaid this initial amount, but in actuality, GM used other government handouts to pay back the initial TARP funds.

Also, the 8.5 million jobs is bunk. If the situation we faced was so perilous to collapse the economy, then didn’t it really save all our jobs? So shouldn’t we say it saved $125 Million jobs. After all, if a collapse would have taken place without TARP then the economy would have just quit working. Second, the 8.5 Million job number comes from a study done by Mark Zandi, an economist at Moody’s. If you want to get an understanding of how wrong an economist can be, check out this article by Barry Ritholtz at the Big Picture. With this guys track record, his margin of error is probably plus or minus 20 million jobs.

Point 3

Many people think that TARP cost $700 billion. But Treasury is now confident that the lifetime cost to taxpayers will be less than $50 billion. Repayments have continued to exceed expectations. Three-fourths of the TARP funds provided to banks have already been returned. And the exit strategy AIG announced last week puts taxpayers in a considerably stronger position to recoup our investment in that company.

Many people think that TARP funds only went to Wall Street. But more than 450 small and community banks participated in TARP, which helped them deliver credit to local small businesses and families. Additionally, more than 3.3 million struggling homeowners have had an opportunity to stay in their homes or find more affordable alternatives because of foreclosure prevention programs either financed by TARP or created as a result of TARP in the private sector.

We got three fourths of the funds back for two reasons. One, we forced some banks to take the money when they didn’t need it (this was to protect the identity of the real crapburgers that did need it). Two, the money came from the Fed. The Fed has loaned to the banks at near zero rates, which the banks levered up to make money during the stock market rise in 2009. This Fed money is essentially provided by taxpayers in a round about way (story for another post). Regarding the 3.3 million homeowners the program helped, the author failed to see the results of the HAMP program. It was a bureaucratic nightmare to run the program, and over 80% of those receiving assistance end up defaulting again anyway. In effect, it has been taxpayer money down the drain to delay the inevitable result of foreclosure.

Point 4

Many people think that TARP created a precedent for future bailouts. But President Obama and Treasury Secretary Geithner worked tirelessly with Congress to enact the Dodd-Frank Act, which will ensure that the American people are never again put on the hook for the reckless acts of a few financial firms. That law gives the government new tools to shut down and dismember failing institutions rather than bail them out with taxpayer dollars.

This is the most egregious argument. This was a massive moral hazard, and the Dodd-Frank Act won’t do squat to stop this in the future. If a similar problem arises again, the Congress will reneg on the law to hand money over. Or, the Fed may have let our representatives in DC know that the better bailout comes from the Fed anyway as they can just print money and give it to the banks without any audit or consequence. So the government may not appropriate taxpayer dollars again for a bailout. They will let the Fed do it through the back door. We can see that the banks have not learned their lessons as Wall Street runs just as it did before the crash of 2008. If we allowed banks to fail and people to lose their jobs and bonuses, Wall Street would have changed their mode of operandi.

Herb Allison served as Assistant Secretary for Financial Stability from 2009 until September 30, 2010 at the US Department of the Treasury, where he oversaw the TARP program.

Sounds like a fancy title that Herb held, but based on this article, I wouldn’t let the guy act as the Commissioner of a Fantasy Football League cause even this fantasy piece is too hard to believe.

I saw this video from the National Inflation Association (hat tip Zero Hedge). This is a continuation of the inflation/deflation debate that is going on today among many economists, bloggers, and Wall Street money thieves. The first video is from the NIA where they make their case for not only inflation, but hyperinflation. NIA attempts to deflate the argument of the deflationists that we will experience a Japanese style economy for years to come. Essentially, the NIA argues that Japan’s savings rate allowed the government to borrow from its citizens to fund government stimulus even at absurdly low rates. In America, we depend on foreign creditors since we have a low savings rate. Right now, Japan is our largest creditor with over $1 Trillion in US Treasuries. Further, Japan’s savings rate is now dropping from its historical average of 10% to 3%. This means they have less to loan us going forward. NIA also points to other foreign creditors such as the Middle East diversifying out of US dollars and into gold. Eventually, these countries will stop funding us as our social security and Medicare liabilities increase our need for debt. The NIA estimates our debt to GDP when unfunded liabilities are added in (mostly SS and Medicare) is 560%.

Second, Japan has other factors that put it in a better position than the US when the Japanese deflation began in 1989. Japan had a large trade deficit which continues today. The US, on the other hand, has an enormous deficit. This deficit will effect our ability to pay for needed goods, especially commodities (think oil). This will drive up the cost of goods, which is inflationary.Also, the peak spending for a person is age 46. The last of the baby boomers hit age 46 in 2010 so we are on the verge of an economic slowdown in the US.

While I cannot argue against these facts, I don’t think the NIA makes a case for hyper-inflation…at least not now. Maybe we will have a problem funding our debt in the future once the unfunded liabilities of Medicare and Social Security kick in, but right now we have a classic debt deflation environment. People and corporations are paying down debt as opposed to leveraging up by taking on more debt. The only way you can rid yourself of debt is by reducing spending to pay down debt, selling assets to pay down debt, or defaulting. We are experiencing all three right now.

The chart above shows consumer credit, especially revolving credit like credit cards, is shrinking. Part of this is consumers paying off cards, but it is also consumers defaulting on debt. Everyone screams about the US government taking out more debt, but the reality is the government is only taking on debt as fast as the private sector is shedding debt. It is a zero sum game, at least until the unfunded liabilities kick in.

I don’t want the above statement to imply that government debt isn’t the wrong policy. It is. I am just pointing out that it is not inflationary right now.

This second video is another argument that we won’t experience a Japanese style deflation. Like the NIA, this author claims that there is a difference between Japan and the US. Namely, the Japanese consumer does not like to take on debt like Americans do. The Japanese pay cash for items; we charge it. Japan also saves more than we do. For the NIA and this author, I point to the credit demand in the previous graph. We are reducing our reliance on credit. As this debt deflation continues, I expect our reliance on debt to decrease. As Mike Shedlock points out frequently on his blog, consumers are going to pay down credit cards charging 20% interest, rather than save in a bank paying 1%.

Further, our savings rate is climbing, albeit slowly. The latest estimate from the Bureau of Economic Analysis (BEA) has the US consumer saving 6.2% of her or his pay.

So these arguments may be true now, but I believe we will see the savings and debt repayment continue. It has to continue. We have too much debt as a nation. This is my biggest argument. See this previous post. With a debt to GDP ratio of 380%, we can’t afford to take on more debt. Until we get to a healthier level, say 175% debt to GDP, we will have a sub-optimal economic environment. Japan is living proof. As the previous post shows, Japan’s crash came after its consumers and corporations had an unhealthy debt to GDP ratio. In 1989 when Japan’s crash hit, the Japanese government had a healthy debt to GDP ratio. As the consumer and corporation improved its debt ratio, the government exploded theirs. Today, Japan, as a nation, still has a high debt to GDP ratio. They are no closer to a healthy balance sheet today than they were when the funk began two decades ago.

This last video is from Reason TV. I think this video nails it on the head as far as the causes and responses of Japan. We are following the same actions exactly. The only thing I would add to this video is unmanageable debt levels were a key cause to Japan and the US situation. What really scares me about this video is the opening where President Obama believes that Japan waited too long to implement monetary and fiscal stimulus. This is wrong lesson…if you believe what I just wrote. Reducing debt and putting capital in the hands of the private market is the key.

Alan Greenspan appeared on CNBC’s Squak Box this morning. Here is a recap of what he said. Personally, I am glad I went for a run rather than listen to his drivel. But, it just seems that the Costanza principle applies to Greenspan. For those who never watched the show about nothing, George Costanza experimented by saying and acting in the exact opposite way that his instincts told him. He concluded that if every instinct or thought he had was wrong, then the opposite must be correct. It landed George a date with a hot blonde and a job with the New York Yankees.

I think the same applies for Easy Al Greenspan. If he had acted in the exact opposite fashion to what he actually did, we would be in a much better position right now. Most people assume I am merely pointing out the common argument that Greenspan left interest rates too low after the 2000 tech bubble. He certainly did that, and it led to excessive debt consumption and the housing bubble. However, Greenspan’s entire resume wreaks of faulty decisions. He was quick with the bailouts after the Asian currency crisis, Russian currency debacle, and Long Term Capital Management fiasco. Rather than letting the market rid itself of these inefficiencies, Greenspan kicked the can down the road. Of course, the press lauded him for these “decisive” actions.

Even beyond that, he is the sole reason Glass-Steagall died. As you can tell from reading this blog, I am not a huge fan of regulation. However, I feel Glass-Steagall was common sense. For those who don’t know, Glass-Steagall was implemented in the 1930s, and it separated the depository banks from the investment banks. When you hear depository bank, think George Bailey. It is where Mom and Pop put their life savings, which are eventually loaned to mortgagees and businesses. Investment banks should bring to mind Gordon Gekko. These are the Wall Street hot shots that raise capital for companies and take risks with their own portfolios. In the 1930s, the government separated those two. This gave the depository banks that store Mom and Pop’s life savings the backing of the Federal Reserve in case the bank ran into trouble. The investment banks were on their own to suffer the consequences if their risky behavior backfired.

Starting in the late 1980s, the banks wanted to merge those functions. The depository banks wanted the huge profit margins of the investment banks while the Gordon Gekkos wanted the backing of the Federal Reserve should they get into trouble. So the banks worked on Greenspan for years to overturn this law. At first, the Greenspan Fed allowed the depository banks to earn 5% of their revenues through investment banking activity. Then this got upped to 25%. Finally, in 1997, Greenspan felt the banks were managing their risk well so he tore down the wall that separated the two. In 2008, we, the taxpayers, were bailing out the banks who took massive risks thanks to Greenspan.

So Greenspan essentially screwed up every major decision he made while serving as the Fed Chairman. Maybe he should have spent some time watching Must See TV on Thursday night. He may have caught the Costanza Principle episode.