The Bubble Economy and Credit Expansion

Credit expansion is what was responsible for both the stock market and the real estate bubbles. Since its establishment in 1913 and certainly since the expansion of its powers in World War I, responsibility for credit expansion itself has rested with the Federal Reserve System. The Fed is the source of new and additional reserves for the banking system and determines how much in checking deposits the reserves can support. It has the power to inaugurate and sustain booms and to cut them short. It launched and sustained the stock market and real estate bubbles. It had the power to avoid both of these bubbles and then to stop them at any time. It chose to launch and sustain them rather than to avoid or stop them.

To be responsible for a bubble and its aftermath is to be responsible for a mass illusion of wealth, accompanied by the misdirection of investment, overconsumption, and loss of capital, and the poverty and suffering of millions that follows. This is what can be traced to the doorstep of the Federal Reserve System and those in charge of it...

The real estate bubble, like the stock market bubble before it, was caused by credit expansion. The credit expansion was instigated and sustained by the Federal Reserve System, which could have aborted it at any time but chose not to. As a result, the Federal Reserve System and those in charge of it at during the real estate bubble bear responsibility for major harm to tens of millions of Americans...

The conclusion to be drawn is that the housing bubble was indeed the product of credit expansion, not a "saving glut."

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My thoughts: George Reisman at his best.

Reisman on Economic Stimulus

As was shown earlier, economic recovery requires greater saving and the accumulation of fresh capital, to make up for the losses caused by credit expansion and the malinvestment and overconsumption that follow from it. Yet the imposition of "stimulus packages" results in the further loss of capital. The Keynesians not only do not know this, but would not care even if they did know it.

Because of their ignorance of the role of capital in the economic system and resulting inability to see even the clearest evidence that suggests it, the Keynesians can conceive of no cause of a recession or depression but an insufficiency of consumption and no remedy but an increase in consumption. This is the basis of their calls for "stimulus packages" of one kind or another...

Even though stimulus packages may be able to generate additional economic activity, they cannot achieve any kind of meaningful economic recovery. Their actual effect is the creation of a system of public welfare in the guise of work. That is in the nature of employing people not for the sake of the products they produce but having them produce products for the sake of being able to employ them...

The blind rush into massive "stimulus packages" is the culmination of generations of economic ignorance transmitted from professor to student in the guise of advanced, revolutionary thinking — the "Keynesian revolution." The accelerating destruction of our economic system that we are now experiencing is the product of a prior destruction of economic thought. Our entire intellectual establishment has been the victim — the willing victim — of a massive intellectual con job that goes under the name "Keynesianism." And we are now paying the price.

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My thoughts: The Keynesian politicans will never let reason, logic, or facts stand in their way or trying to manipulate the economy.

Lawrence Summers: Competing Views

Summers a smart choice

...in choosing to keep the 53-year-old economist close to his side, Obama made the calculation that he needs this centrist voice to calm markets - and he needs a counselor with Summers' proven ability to sense economic dangers lurking around the corner.

At Monday's press conference, Obama called Summers, appointed director of his National Economic Council, "one of the great economic minds of our times....His thinking, writing and speaking have set the terms of debate." The President-elect added that he plans to "rely heavily on his advice as we navigate the uncharted waters of this economic crisis."...

Summers' appointment, alongside that of Geithner at Treasury, marks a continued centrist path for the President-elect, and promises that an Obama White House will be the target of incoming fire from both ends of the political spectrum. If Summers wants to limit the future role of Fannie Mae and Freddie Mac - both now under government conservatorship-- he'll have to battle liberal-left affordable housing lobbyists and their powerful Democratic advocates like House Financial Services Committee Chair Barney Frank...

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Larry Summers: Heavyweight Centrist or Lightweight Leftist

Summers apparently does not see, or if he does see, does not care, that in presenting his proposal for redistribution, what he is urging is armed robbery on a massive scale. That is the essence of any policy of "redistribution," whether advocated by Summers and Obama or by Lenin, Stalin, or Mao...

A proposal this hare-brained makes Summers come across more as an intellectual lightweight than as any kind of brilliant thinker able to identify the errors in others' thoughts...

Summers should be fired. He's too shallow and ignorant and his ideas too evil for him to serve in the United States Government in any capacity. Although generally viewed as a prominent professional economist, his actual knowledge of the subject is minimal. This conclusion follows from the fact that the essential subject matter of economics is capitalism. And Summers' ideas on redistribution reveal that he fails to understand the nature of the most essential feature of capitalism, namely, private ownership of the means of production and the indispensable role it plays in the standard of living of the average person.

His views may qualify him to be an economic advisor to Hugo Chavez of Venezuela or Robert Mugabe of Zimbabwe, but certainly not to be an economic advisor to the President of the United States. Before anyone assumes that position, he should know and understand the ideas of Ludwig von Mises, who is far and away the leading theorist of capitalism, and whose works explain its operation as it is has never before been explained. In the absence of extensive knowledge of Mises, one is, simply put, an economic ignoramus, irrespective of the degrees, awards, and public acclaim one may enjoy.

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My thoughts: Reisman is correct. Summers is portrayed as a moderate, but he is a redistributionist leftist.