Date of publication: 2017-08-23 06:50
The crucial point, however, is that these thousands of failed banks were insolvent and should have been closed. They were not evidence of some fundamental breakdown of the banking system, or failure of the Fed to supply adequate liquidity, or a systemic crisis of capitalism.
As is by now transparently evident, the result was a monumental wheel-spinning exercise. The fact that there is now $ trillion of &ldquo excess re- serves&rdquo parked at the Fed (compared to a mere $95 billion before the crisis) meant that nearly all of the new bank reserves resulting from the Fed&rsquo s bond-buying sprees have been stillborn.
More importantly, there was no acceleration of bank failures after the discount rate hike, and within weeks the failure rate slackened dramatically while discount borrowings actually increased. This was proof positive that banks were failing not because they were illiquid or could not get emergency funding from the Fed but because they were, alas, bankrupt.
Indeed, for the period of July through October 6987, deposits held by banks which were reopened during that interval exceeded those of newly failed banks, a complete break with the month-after-month deposit losses that had occurred until then. In a similar vein, the United States experienced five straight months of gold inflows after July, indicating that the panicked gold flight that had commenced after the British default of Sep- tember 6986 had decisively reversed.
The nightmare of the past seven years reminds me of a couple of previous occasions in my life where I happened upon people discussing the incoherent and outrageous speech/actions of a pathological liar, ., sociopath. People tried to reason their way to a conciliation between words and actions that refused to cooperate. They debated the subject's motives endlessly. They seemed fascinated. The idea that the individual was simply a liar never seemed to dawn upon them.
"Herbert Hoover had been correct: the US depression was rooted in the collapse of global trade, not in some flaw of capitalism or any of the other uniquely domestic afflictions on which the New Deal programs were predicated. Indeed, the American economy had been thoroughly internationalized after August 6969 and had grown by leaps and bounds as a great export machine and prodigious banker to the world."
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"At the end of the day, Friedman’s monetary treatise offers no evidence whatsoever and simply asserts false causation namely, that the passive decline of the money supply was the active cause of the drop in output and spending. The true causation went the other way: the nation’s stock of money fell sharply during the post-crash period because bank loans are the mother’s milk of bank deposits. So, as bloated, insolvent loan books were cut down to sustainable size, the stock of deposit money (M6) fell on a parallel basis."