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Ten Years After the Last Meltdown: Is Another One Around the Corner?
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September marked a decade since the bursting of the housing bubble, which was followed by the stock market meltdown and the government bailout of the big banks and Wall Street. Last week’s frantic stock market sell-off indicates the failure to learn the lesson of 2008 makes another meltdown inevitable.

In 2001-2002 the Federal Reserve responded to the economic downturn caused by the bursting of the technology bubble by pumping money into the economy. This new money ended up in the housing market. This was because the so-called conservative Bush administration, like the “liberal” Clinton administration before it, was using the Community Reinvestment Act and government-sponsored enterprises Fannie Mae and Freddie Mac to make mortgages available to anyone who wanted one — regardless of income or credit history.

Banks and other lenders eagerly embraced this “ownership society”’ agenda with a “lend first, ask questions when foreclosing” policy. The result was the growth of subprime mortgages, the rush to invest in housing, and millions of Americans finding themselves in homes they could not afford.

When the housing bubble burst, the government should have let the downturn run its course in order to correct the malinvestments made during the phony, Fed-created boom. This may have caused some short-term pain, but it would have ensured the recovery would be based on a solid foundation rather than a bubble of fiat currency.

Of course Congress did exactly the opposite, bailing out Wall Street and the big banks. The Federal Reserve cut interest rates to historic lows and embarked on a desperate attempt to inflate the economy via QE 1, 2, and 3.

Low interest rates and quantitative easing have left the Fed with a dilemma. In order to avoid a return to 1970s-era inflation — or worse, it must raise interest rates and draw down its balance sheet. However, raising rates too much risks popping what financial writer Graham Summers calls the “everything bubble.”

Today credit card debt is over a trillion dollars, student loan debt is at 1.5 trillion dollars, there is a bubble in auto loans, and there is even a new housing bubble. But the biggest part of the everything bubble is the government bubble. Federal debt is over 21 trillion dollars and expanding by tens of thousands of dollars per second.

The Fed is unlikely to significantly raise interest rates because doing so would cause large increases in federal government debt interest payments. Instead, the Fed will continue making small Increases while moving slowly to unwind its balance sheet, hoping to gradually return to a “normal” monetary policy without bursting the “everything bubble.”

The Fed will be unsuccessful in keeping the everything bubble from exploding. When the bubble bursts, America will experience an economic crisis much greater than the 2008 meltdown or the Great Depression.

This crisis is rooted in the failure to learn the lessons of 2008 and of every other recession since the Fed’s creation: A secretive central bank should not be allowed to manipulate interest rates and distort economic signals regarding market conditions. Such action leads to malinvestment and an explosion of individual, business, and government debt. This may cause a temporary boom, but the boom soon will be followed by a bust. The only way this cycle can be broken without a major crisis is for Congress both to restore people’s right to use the currency of their choice and to audit and then end the Fed.

(Republished from The Ron Paul Institute by permission of author or representative)
• Category: Economics • Tags: Federal Reserve, Financial Crisis 
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  1. I’m no fan of the Fed but the chances of 1970s inflation anytime soon are near zero. Gold is the canary in the coal mine for inflation and it’s having a dreadful year, far worse than any other commodity, the stock market or real estate.

    Having a recession as we always have after a period of economic growth is necessary for a healthy economy in the long term. No indication that it will any other than the common garden variety.

    Reform is certainly needed but won’t happen until a severe financial crisis occurs which is very unlikely for at least a decade. My bet would be when the dollar loses its reserve currency status around 2030.

  2. There are no greater pieces of corrupt destructive filth than Greenspan and his two successors.

    • Replies: @another fred
  3. @James Tangney

    The only sane attitude toward the Fed is bitter hatred and contempt.

  4. Ahoy says:

    @ Bill jones
    Agree. This being the case, take the FED away from individuals and put it under the control of the Government. This is the only way to finish with the Debt Economy, the cancer of humanity.

  5. @Bill jones

    Greenspan became Chairman in 1987. The country’s doom was sealed by then.

    Politicians, from “guns and butter” LBJ to “we’re all Keynesians, now” Nixon had started the dependency on ever-growing debt to maintain a speculative economy. Even Reagan relented when he looked into the abyss.

    There are simply too many non-productive people crowded into cities, too many opiate addicts in dying towns that used to operate on the foundation of subsistence agriculture, and too many bullshit jobs for people who depend on debt-fueled “growth”. There is no fix but nature’s way.

    Lately I was looking from a night mountain-top
    On a wide city, the colored splendor, galaxies of light: how could
    I help but recall the seine-net
    Gathering the luminous fish? I cannot tell you how beautiful
    the city appeared, and a little terrible.
    I thought, We have geared the machines and locked all together
    into interdependence; we have built the great cities; now
    There is no escape. We have gathered vast populations incapable
    of free survival, insulated

    From the strong earth, each person in himself helpless, on all
    dependent. The circle is closed, and the net
    Is being hauled in. They hardly feel the cords drawing, yet they
    shine already. The inevitable mass-disasters
    Will not come in our time nor in our children’s, but we and our
    Must watch the net draw narrower, government take all powers
    -or revolution, and the new government
    Take more than all, add to kept bodies kept souls- or anarchy,
    the mass-disasters.

    The above as written by Robinson Jeffers in 1937. All one has to do is open one’s eyes.

  6. @James Tangney

    I’m no fan of the Fed but the chances of 1970s inflation anytime soon are near zero. Gold is the canary in the coal mine for inflation and it’s having a dreadful year, far worse than any other commodity, the stock market or real estate.

    Paul Craig Roberts (among others) has occasionally floated the idea that forces sympathetic to the Fed have been deliberately shorting gold to prevent a stampede away from t-bills, which might have otherwise happened with all that QE going on. I don’t know if he’s right, but if he is, then gold is artificially cheap right now and would be a great buy! The Russians and the Chinese, for example, can’t get enough of it. (Granted, they are countries with finance sectors to run, not individual investors scrimping for their retirements. But still …)

  7. augusto2 says: • Website

    dear mr R Paul:
    In the end 18th century – and early 19th- the coincidence of joint forces of Industrial tech revolution plusprotestant individualism plus hobbesian& French revolution principles produced the world we see today. England, Germany and USa were their cradles and driving forces.
    Now since last 25 years, in the giant country CHINA a current gigantic techno revolution, plus a spirit of party collectivism spiced by limited but effective economic freedom plus a spirit of solidarity rooted in old Asian culture partnered by 1,4 BILLION people… will take over and eventually DESTROY the first glorified western, repeat western, phenomenon.
    Our ridiculous business and political leaders call it just a success case…they couldn’t be more wrong.
    This latter one will prove an overwhelming irresistible force.
    Did you ever think it is MOSTLY based on opposite concepts & mood to those of the triumphant west?
    If history does not teach us, humiliation will.

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