Steve Forbes has posted an essay entitled "How The Federal Reserve And Uncle Sam Ruined GE Capital" on his magazine's website. His essay has so much fantasy in it that I find it highly entertaining. Below, I have quoted Forbes and given my responses to his words.
Forbes:
GENERAL ELECTRIC’S mega-announcement that it is getting rid of most of its finance businesses is a damning indictment of both the Federal Reserve and bank regulators. Together, they have damaged the functioning of credit markets and almost paralyzed bank lending, thereby severely hampering recovery from the economic crisis of 2008–09.
This is completely untrue. Since The Great Recession, which was caused by lax lending standards along with lax insurance standards, regulations on these institutions have changed only slightly. To say that these regulations have paralyzed bank lending is laughable. Large financial institutions have been able to get money for next to nothing and then have been able to reinvest this money in things like treasuries, thereby making money without any real risk. Since this is safer than lending to, for example, consumers, banks have been avoiding lending. Also, since Conservatives have been doing all they can to slow down the economy by making sure that government spending is reduced and wages remain stagnant, why would banks want to lend money to businesses that cannot get blood from a stone (the stone being customers who have no money)?
Forbes:
They are turning the crucial financial industry into a backwater utility that’s more concerned with pleasing power-hungry regulators who hold their very corporate lives in their hands than in providing the crucial financial and innovative products and services that have made our capital markets the envy of the world and that have been the handmaiden to past impressive U.S. economic growth.
Is this a joke? Instead of letting bad financial institutions die, the federal government bailed out many financial institutions, spending a large sum of money to save these institutions. The government saved these institutions from bankruptcy. Now, Mr. Forbes would have you believe that it is the goal of regulators to crush these same institutions. Mr Forbes, please tell me the institutions crushed by regulators that didn't deserve it. Please tell me the regulations that are so crippling the industry. You cannot because they only exist in your mind.
Forbes:
The conventional wisdom posits that banks and financial behemoths such as GE Capital were suddenly possessed of an insatiable bout of greed several years ago and recklessly expanded their activities, which brought the world to the brink of economic cardiac arrest.
The panic necessitated massive government bailouts of banks and companies like GE, yet, despite the heroic efforts of the Fed and other central banks, the global economy still hasn’t recovered from the events of 2008–09.
TRUE: This is the conventional wisdom, meaning this is what most people believe, because this is what actually
happened.
Forbes:
Balderdash! That narrative has it backwards. Government blunders, not some sudden failure of free markets, brought on the crisis. As is all too typical in such situations, the blame fell on the private sector, and the genuinely guilty parties, such as the Federal Reserve, assumed more power.
I'm laughing here. "Government blunders"? Are you going to completely ignore the lax lending standards by which lending institutions were giving money to anyone regardless of their ability to pay it back? Are you going to ignore the fact that the companies that insured these loans did not have nearly enough money to cover all the bad loans? Are you going to ignore the huge amount of debt that financial institutions had developed because of the huge number of bad mortgages? Yes, I guess you are. :)
Forbes:
–Weakening the dollar. During the early part of the last decade the Federal Reserve, with the quiet but enthusiastic support of the Treasury Department, began to weaken the dollar. The Fed thought cheap money would stimulate recovery from the 2000–02 recession.
With a mercantilist mentality that would have disgusted Adam Smith, Treasury officials believed that a dollar gradually losing its value would stimulate exports, thereby ignoring several hundred years of experience that has demonstrated that countries with unstable currencies always underperform those with stable currencies. They thought a slow-motion devaluation wouldn’t arouse the wrath of our trading partners, as we tried to rig the rules in our favor. Adam Smith could have told those officials and misguided economists that such manipulation would gain them nothing and would, in fact, hurt the economy: Volatile currencies hamper wealth-creating investments.
Psst!, Mr. Forbes, increasing the money supply is standard policy for both Democrats and Republicans when money gets too tight. If it is not done, the economy grinds to a halt--no money means no commerce. Were you asleep for this part of economics class?
Forbes:
The unstable dollar also corrupted the priceless information conveyed by market prices, which led to the massive destruction of capital, particularly in housing. When money loses value, investors turn to such hard assets as oil, copper, gold, silver, land and houses. Rising prices were a reflection of the weaker dollar, not a surge in real value. But the rise falsely led people to believe that scarcity was at play or that demand had suddenly surged. Capital poured in; supply increased. Then the bubble burst. In the case of housing the inflationary boost in prices was abetted by government rules to “encourage nontraditional home buyers.” Fannie Mae and Freddie Mac demanded more subprime mortgages, as did government bureaucracies. It’s no surprise that the banks and others responded.
It is true that when the money supply is increased, inflation increases. However, from the years 2000-2008, the average inflation rate never got above 3.4% per year. The increase in money supply does not explain the dramatic rise in housing prices during this time. Housing prices weren't rising just because of an increase in money supply. A classic bubble was occurring...where more and more people were jumping on the housing bandwagon because "they aren't making any more land" and "housing is a good traditional investment".
Also, lending companies were making bad loans like crazy. No one was forcing them to do it. Their loans were insured, so they had no fear of making the loans. They were putting money to buy homes in the hands of people who should not have gotten the loans and when these people bought up the existing houses, prices rose and construction companies made more houses.
Then the bubble burst? I love how you gloss over this. How and why did the bubble burst? Oh yeah, eventually all of those bad loans came home to roost.
Unfortunately, the financial institutions making the loans were having contests to make as many loans as possible, and no one was being punished for making risky loans. Also, these institutions failed to inform the companies insuring them that they had made their standards really lax and the companies insuring the loans never seemed to notice how lax their standards had become. None of this was forced by the government. In fact, if government regulators were deeply involved, they would have noticed early both the changes in lending policies and the lack of proper coverage by the insurance companies.
However under the George W. Bush (regulation is BAD) regime, that wasn't going to happen. Also, Fannie Mae and Freddie Mac have no ability to force either lending companies to make bad loans or to force mortgage insurers to insure more loans than they have the capital to cover...but you are ignoring that, right?
Forbes:
The same phenomenon was at play during the weak-dollar 1970s. Oil surged from $3 a barrel to almost $40. When Ronald Reagan ended that decade’s terrible inflation, oil crashed to around $10 before stabilizing in the $20-to-$25 range. From 1985 to 2002 oil
averaged little more than $21 a barrel.
You know, it is true that there was some terrible inflation in the 1970's due to Nixon (a Republican) taking us off the gold standard and printing money without backing, but you also ignore how the formation of OPEC also caused oil prices to skyrocket. You also
ignore that after oil prices soared, people started switching to smaller cars which lessened demand for oil. In addition, people started driving less and companies learned how to be more fuel efficient. This reduced demand and helped drop oil prices.
Furthermore, it is true that Reagan tightened the money supply which caused a recession..but hey..you think a tight money supply is good right? Hey, how come you don't mention the recession caused by the tightening of the money supply? Oh yeah, that would invalidate your earlier point that a tight money supply is good.
Forbes:
Unfortunately, the 2008–09 bust didn’t lead to a period of semi-responsible behavior by our central bank, as happened for much of the 1980s and 1990s. In the aftermath of the 2008-09 panic, the Fed proceeded to quadruple bank reserves, while simultaneously suppressing interest rates across the board.
OK, this is the most laughable thing yet. You mean you think it was a bad idea for The Fed to make more money available when bank lending ground to a halt? So, you'd like a repeat of what happened during The Great Depression? If The Fed hadn't made tons of
money available RIGHT away, The Great Recession would have become the second Great Depression since money movement had completely locked up at the time. What do you think would have happened if The Fed hadn't made more money available and no one could borrow money? Yes...complete financial meltdown...but hey...Mr. Forbes must think that is a good idea.
Forbes:
This was like dumping sand into a machine: Just as with oil markets, credit markets can’t operate optimally without true prices
.
Umm...the sand in the machine was when the financial markets locked up. When you dump sand in a machine..it doesn't move..and that is what was happening before The Fed opened up the money gates to get things moving again. The Fed money was lubrication for a locked up machine. Did you at all pay attention to what was happening BEFORE The Fed increased reserves? No?
Forbes:
Government easily floated bundles of bonds with almost zero net interest costs. Bonds for big businesses proliferated, while credit for new and small businesses stagnated.
As mentioned earlier, banks and other lending institutions do not want to bother to lend to businesses who have no customers especially when they can take the money and invest it in treasuries which are pretty much guaranteed money. Big business made money by cutting costs..firing workers and paying them nothing. New businesses are always have difficulty getting capital in a recession, and it is even harder for them to get money when lending institutions can instead invest in treasuries. Small businesses are often hurt in a recession since people like Forbes encourage all help to go to big business and to let small businesses fend for themselves. People like Forbes love big businesses like Walmart that come in and cripple small businesses and so do big banks.
Forbes:
–Uncle Sam overdoses on regulations. Dodd-Frank and power-grabbing regulators have unloosed a never-ending cascade of suffocating rules and restrictions. Banks have had to hire swarms of compliance officers and support personnel, all of whom are a straight expense and, in the real world, do nothing to promote better banking practices. They, along with a parasitical army of regulators, who, like soldiers quartered in people’s homes in days of yore, are permanently encamped at bank offices and are an ever present dampener on vigorous lending practices.
Here I have to wonder what Forbes has been smoking. Regulations that would prevent another financial meltdown have definitely not been put in place and the watered down regulations that have been put in place barely change anything. Notice that Forbes doesn't
mention any of these regulations that are causing such problems...because it is a fantasy in his mind.
Forbes:
Government bureaucrats have taken to conversing with individual members of the boards of directors of big banks each month to make sure these stewards are seeing that their charges are behaving themselves. This isn’t backseat driving; it’s driving from the back
seat.
Gosh, government regulators are talking to members of the boards of directors of big banks each month? My goodness, what an encumbrance! Then Forbes makes the ridiculous leap that regulators talking to members of the board of directors is the equivalent of controlling them.
Let me guess how these meetings go:
Regulator; How's it going?
Board Member: Fine!
Regulator: OK! See you next month!
Oh..the HORROR.
Forbes:
One of the most invidious power grabs Washington has made involved designating those institutions whose failure could supposedly wound the financial system as “systemically important financial institutions (SIFI).” Such “too big to fail” labels have meant extra regulatory expenses and intrusiveness. Uncle Sam has slapped this designation on not only large banks but also companies like GE. Worse, bureaucrats have done the same with insurers such as MetLife and are salivating at the prospect of slapping it on big mutual fund companies.
Let me see if I have this right...those institutions that were bailed out instead of being allowed to fail...the government put extra regulations on them to try and prevent the same situation from happening again? SHOCKING!
Why would anyone want increased regulations on these colossal failures to prevent them from failing again? The fact that most citizens HATED the idea that these too big to fail institutions were ever bailed out and would scream bloody murder if it ever happened again...I guess their opinions don't really matter, eh?
Forbes:
One of the great virtues of a free-market economy is that if government stifles a needed service, entrepreneurs will figure out new ways to meet that need. Today a number of new entities, including many online, are rising up to fill this vacuum, as are players in the equity fund space. (You’ll notice that the Empire is readying to strike back, calling this activity by the sinister-sounding name of “shadow banking.”)
OK, so the financial industry causes a disaster...the government rescues everyone by bailing out the bad institutions that caused the problem in the first place....but it is the GOVERNMENT that is the evil empire? Right....
Forbes:
GE’s legion of critics will point to mistakes GE Capital made before 2008–09 and to the fact that during the panic it needed federal guarantees in order to continue getting short-term financing.
But this severe situation would never have arisen had the U.S. government not messed up its basic responsibility of preserving the integrity of the currency.
BALONEY. The Fed increased the money supply in both 2000-2002 and again in 2008 because the economy would have been much worse without it. Forbes seems to be a member of the Austrian school of economics. These people believe that an increase in money supply is the root of all evil. Thank goodness FDR didn't believe this or we might STILL be in The Great Depression.