On 2008-10-10, Ed Huntress wrote:
I'm not trying to measure inflation here so much as to show that the idea
Ron Paul is promoting, that a lack of "sound" (i.e., gold-backed) money
somehow led to our present fix. That isn't where these bubbles come from.
They come from an excess of credit and borrowing. You can have such an
excess with gold-backed money just as well as with fiat money. It's mostly
caused by things that go on in the banking industry, not the Treasury.

This is correct.

And the reason for this happening, is that with the new financial
structures, derivatives etc, there are many players that act like
quasi-banks, borrowing money and lending it, without being subject to
reserve restrictions. So during the growth years, all of that stuff
ballooned, leveraged up and expanded.

Now we are seeing banks insolvent due to drops of prices of assets
that they carry, due to this rapid de-leveraging. The assets of the
banks are below their liabilities.

Banks being insolvent (negative equity), there is no surprise that
bank lending cannot take place.

I cannot see how government can quickly put together a machine (loan
officers, attorneys, computer stuff) to make business loans. I doubt
that this will go very far and they should know it too.

So, then, a plan is to put forth to invest money into insolvent
banks. In other words, replenish their assets by giving them money
comparable to what they lost. This is not something that a private
investor would normally do. In any case, a question is just how much
money is needed to make the banks solvent. The amount may be very
large.

If I can offer a diagnosis of what happened, I would say that for a
large part this is due to reckless people managing "other people's
money". So they took risks that their investors would not ordinarily
take if they were informed.

These outsize risks were masqueraded by funky accounting because
exotic securities that they owned never had a market with quotes. So
they marked to theoretical values that they were free to assume with
wide latitude. As a result, 1) they got big bonuses and 2) a lot of
losses were hidden.

Growth is available money supply encouraged profligacy, public and
private. So at this point we are a country with huge public debt, huge
private debt, deficits, and inability to reduce both.

This is largely a result of republican philosophy to get rich quickly,
and squandering public money, which I despise. I want to get rich
slowly in a stable financial system.

The solution is not gold standard, but it must involve abandoning
profligacy, greater regulation of lending and activities leading to
creation of money, and stricter accounting standards.

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