Little by little, business is enlarged with easy money. With the exhaustless reservoir of the Government of the United States furnishing easy money, the sales increase, the businesses enlarge, more new enterprises are started, the spirit of optimism pervades the community.
While there are some that deny the idea of financial bubbles, recent history under Federal Reserve Czars, er Chairmen Greenspan and Bernanke, have provided us with two bubbles - the Internet/Technology bubble of the 1990s, and the Housing Bubble of the 2000s - and ample evidence of the economic havoc created when the central bank makes the cost of borrowing artificially cheap.
Bankers are not free from it. They are human. The members of the Federal Reserve boards will not be free of it. They are human. Regional bankers will not be free of it. They are human. All the world moves along upon a growing tide of optimism. Everyone is making money. Everyone is growing rich. It goes up and up, the margin between cost and sales continually growing smaller as a result of the operation of inevitable laws, until finally someone whose judgment was bad, someone whose capacity for business was small, breaks; and as he falls he hits the next brick in the row, and then another, and then another, and down comes the whole structure.
So, during the last bubble, you could turn on your TV and watch programs about flipping houses - the practice of borrowing money at, preferably, low interest to purchase a house, rehabilitating it, and quickly selling it for a healthy profit. Unfortunately, easy money drew more and more into the dream/illusion of easy money. Home builders overbuilt. Speculators overbought. Banks loosened lending standards and made loans to people who could never, ever pay loans back. Investment firms bundled up wads of bad loans, securitized them, and magically declared them AAA. It was pure fantasy until the bricks came tumbling down.
Reading the above quotes, it would be easy to mistake them for something that Ron Paul or Peter Schiff might have said. Turning back the clock a few years, perhaps Milton Friedman spoke them. No, these words were spoken by Senator Elihu Root of New York in December of 1913. So, we were warned of the dangers of the Federal Reserve system even before it existed.
Root continued...
That sir, is no dream. That is the history of every movement of inflation since the world's business began, and it is the history of many a period in our own country. That is what happened to greater or less degree before the panic of 1837, of 1857, of 1873, of 1893, and of 1907. The precise formula which the students of economic movements have evolved to describe the reason for the crash following this universal process is that when credit exceeds the legitimate demands of the country the currency becomes suspected and gold leaves the country.
Time and time again we have had financial crises - call them what you will: panics, recessions or depressions. Whenever government artificially circumvents the free market - either attempting to stimulate growth or prevent further contraction - the results are always the same. Interference in pricing, whether wage and price controls, interest rates, or other manipulation by government creates excesses that must be allowed to be cleared out so the economy can be put back on the path to health.
[B]ehind the system under which we are working, and under which we have grown so great and strong, stands always the Government of the United States, with its credit unimpaired, with its solvency undoubted, always ready to come to the rescue by the sale of its securities to bring gold. This bill proposes, however, to put in pawn the credit of the United States; and when your time of need comes, it is the United States that is discredited by the inflation of its demand obligations, which it can not pay.
Today, we have reached the point where the good credit of the United States is in danger of being irreparably impaired. Our solvency is in doubt. Our government does not sell securities to buy gold. Instead, it issues IOUs from the FED to buy securities in an effort to manipulate interest rates. We live in deflationary times, but many believe inflation is coming.
Our elected leaders have failed to listen to the wisdom of Elihu Root, Milton Friedman, Ron Paul and Peter Schiff. It is now 9-12-09. All across the country, everyday citizens, long suffering under the burden of taxation and a crushing system fueled by debt, are making their voices heard. It is time that their voices are heard. Many have warned where our current path will lead us. More are raising their voices warning of the danger that lies ahead. I can only pray that someone will listen before it is too late.
Afterward: Elihu Root quotes appeared in "Money of the Mind: Borrowing and Lending in America From the Civil War to Michael Milken" authored by James Grant.
I stumbled across the Elihu Root quotes while reading "The Conscience of a Libertarian: Empowering the Citizen Revolution With God, Guns, Gambling & Tax Cuts" authored by Wayne Ally Root, the 2008 Libertarian Vice-Presidential candidate and likely contender for the 2012 Libertarian Presidential nomination. While I haven't thought that far ahead, Wayne Allyn Root certainly strikes some good notes. He's not pitch perfect by any means, but if he can push the dialogue on the proper role of the federal government versus state government and individuals, and get people to think about monetary policy, constitutional government, etc. it could well be to the good.
