“The US is projected to lose its international credit rating in 2012 going from ‘AAA’ to ‘AA.’ And projected to decline hence, the whole truth needs to be told or declining instruments of credit will be the least of America’s problems.”

I hope to hear something from Mr. Ferguson that addresses the need for America and the West to explore monetary systems that are backed by real value, other than this ‘print money out of thin air’ methodology that we have embraced since the thirties.

We laud the virtues of Roosevelt for bringing us out of the Great Depression, but we forget that when Britain and America went off the Gold standard, their inability to protect themselves from emerging (STATE BACKED) markets, sealed their financial doom.

The West has lost the greater war with the rising nations and they didn’t even fire a shot. The West’s pride is causing it to think they can bully other countries into submission. We need a reality check…yesterday.

Are the subprime loans the problem? If so how much would it cost to insure the actual mortgages? Would this solve the root of the problem? Why are we dealing with the top instead of the root cause?

My point exactly Paul. There are deeper issues to address. It’s like we’re pouring new wine into an old wine skin.

I was wondering why there has been little discussion about who stands to gain from this current financial downfall.

It seems there is little discussion on the repetitive nature of such financial catastrophes throughout history and when money tends to go away it has to end up in the someone’s hands.

The big question is whose hand’s has it fallen in now.

Niall,

You just discussed the deflationary scenario in the program –
do you think that hyperinflation is a real potential danger?

What would be the path to hyperinflation, and what would be
the consequences?

Thanks.

I also would like to know about the hyperinflation scenario.

I have been mulling a solution to our current financial crises and have been trying to figure out what is wrong with it (or if nothing is wrong, why have I not heard this solution discussed on your show or others).

The solution is based on the assumption that the “root cause” of our current crisis is the housing market collapse and the bad sub-prime loans. The housing market was over-inflated as over-the-top loans were easier to get. So let’s say that as a result of this market bubble bursting, my $200,000 house is really only “worth” $180,000. I can still afford (both) mortgages by being frugal – someone else might be heading to foreclosure.

There has been a lot of attention focused on saving those heading towards foreclosure (and complaints from people like me who responsibly sacrificed TVs and new cars to pay their mortgages). Both the banks and the buyers share responsibility for these problems (globally balanced, if not locally).

So here is the idea: revalue the home – and the loan – at $190,000. The bank takes a 10% hit on the loan – taken right out of the principle. I am still responsible for a 10% loss in value if I sold at the “real value” of the house.

The result, I think, is to save a lot of home buyers from foreclosure (the ones who were even further over their heads probably “deserve” to fail), so the banks and the market are better off. People like me now have the wiggle room to buy a big TV, a new car, and basically stimulate the economy.

When we get to details of implementation, we already have a system in place for assessing home values at the local level. Each locality would have it’s own re-valuation rate (in my area, maybe housing has dropped 20%, but in Detroit maybe it is 40% — so there the bank and buyer would each take 20% hits on the purchase price of the home/loan). Limit the process to primary residences. I can see arguments for limiting the process to purchases made since 2000 or to open it to all (let the banks come up with incentives to offer people to not take advantage of this program if they like).

This would affect local taxes revenues, but that is where the $7 Billion bailout fund could be used – to mediate any net loss in local property taxes. I would think that the reduction in foreclosures (more taxpayers) would come relatively close to balancing out the loss in the total value of local property.

This solution would avoid handing tax-payers’ money to banks or individual, if anything federal tax receipts would be transferred to local government.

Is there historical precedent for this? Am I missing something?

There is an economic sector that is part of the financial health of the country, a sector that needs instant attention. It is failing massively and as it fails, it is pulling society down with it. This sector is huge, far larger than that which builds or even drives cars. It is the sector ruled by the minimum wage, or influenced by the “draw down” of the minimum wage. It creates poverty (dare I say slavery) as an essential element of the economy, and due to it, homes can’t be paid for, credit living is essential and justice is never served at the core of America. Ever.

Could our current situation be fixed and future problems be avoided by making the stock market operate as it was originally intended: buying and selling stocks and bonds only — everything else is illegal. In addition, stocks and bonds must be held for two weeks to avoid short-term speculations. The original intent of the markets was to allow investment by people in business. Why can we not return to this?

Niall

You spoke @ China pulling out of developed nations and shifting focus to internal market “like Russia” in the 30s. If we use history as a guide, won’t Russia be a cautionary tale given the state of their finances?

What effect would a bailout of the auto industry likely have? Good idea or bad?

Yes, Niall is talking about the natural death of failed experiments as being the supposed basis of the market-but when Wall Street or the creators of wealth (which is made available only through leverage and other vlaue-free “moneys”) fail, how will they be allowed to fail?

I’m sorry for belaboring the point. But no one wants to tackle the idea that having this cabal of central banks all over the world may have some culpability. These same central banks manipulate worldwide currencies to their own benefit. State Treasuries don’t control how there money is spent. They are controlled by their central banks, which are privately owned institutions that have our ‘beings’ in a vice. Until this is addressed we won’t see change.

On Detroit, we are just prolonging the inevitable. Why is GM the most popular auto manufacturer worldwide, but is suffering here at home? Because they have outsourced there capital base. They now want to prop it up for a few months so that they can give us the illusion of stability and then they will sell off their interests and we’ll (taxpayers) be stuck holding the bag. Oy vay…

Re: Wadell’s point
For anyone who’s interested, a very good documentary about the [abuse of] power of central banks is the documentary Zeitgeist. The addendum is particularly relevant.
http://video.google.com/videoplay?docid=7065205277695921912

I would like to ask the same question that David Regus asked. Who stands to gain from this downturn ?

I’m a twenty year Navy veteran and before I retired I worked in private industry for over thirty years. I invested in a manner that I thought to be wise and just recently watched my nest egg loose $40,000.

We Americans are the victims of the biggest shill game in the history of this country and I’m (as the saying goes, mad as hell). Your guest today said that point fingers will not solve the problem but I disagree. The American psyche needs to see fingers point and people responsible for this outrage punished; our sense of fairness has been trampled upon. Read De Tocqueville on capital punishment.

What is rubbing salt into the open wound is that companies that are receiving billions of dollars in tax payer funding are planning to give their top managers bonuses, have business meetings at luxury resorts and are doing this publicly. They are literally thumbing their collective noses at us and laughing at what chumps we are. The Congress should be ashamed of themselves for not being better managers of our money and their conduct is just as outrageous as the Wall Street folks. The people that got us into this through greed, malfeasance, and just plan incompetence should be made to feel the pain in their pocket books and in the courts. Once that is done then we can get about rebuilding what they destroyed.

It is all about greed. What a mess the politicians, speculators and wall street financial executive thugs have gotten this country in. All in the name of greed and power, while Congress turned their heads in the other direction, and this country has gone to hell in a hand basket. And to think Citigroup or bank would even think about handing out bonuses to their executives and Americans can barely feed their families. What has the world gone to. And to see those executives pictures on TV smiling MAKES ME SICK TO MY STOMACH!!!!!!!

I guess what would really be funny if inflation would rise to the point of the dollar being worthless and all of those greedy people on wall street and congress would lose the value of their greedy millions and billions. “If you live by the sword you will die by the sword.”

Hyperinflation comes from massive printing of additional money by a government. “massive” means in comparison to the current money supply.

The Fed manages the money supply and has not engaged in inflating the money supply excessively. Instead the Fed tries to achive monetary stability, in which the total amount of money and credit neither shrinks nor expands too rapidly. But….”tries” doesn’t always lead to stability of course.

Nonetheless, without massive printing of new dollars, hyperinflation is impossible.

The recent huge deficit spending is *financed through new US treasury bonds/bills* — not thru printing money.

See?

Instead of too many dollars, we have too many treasury notes, in a sense.

The current situation is one where consumers think to delay purchases, and this leads to falling demand for goods and then lower prices and more job losses.

This is “deflation” — falling prices. And don’t think it’s just a momentary blip, or re-adjustment — that would be the good case. The probability is different — that we get further deflation, leading to further job losses, and a feedback loop. And *this* is what the Fed and Congress have to fight.

Good explanation Hal, but your comment presupposes that the FED system and central banking systems that operate all over the world outside of the auspices of the government is the right policy. I reject that.

The printing of currency and the issuing of instruments of credit need to be returned to the congress as the CONSTITUTION says. We’ve tried this experiment (off the gold standard and free money) and rich folks got richer. Now its time to return to capitalism 101 or admit the fact that we’re headed toward socialism. I don’t advocate one over the other, I just want us to stop deceiving ourselves.

Wadell, I think fractional reserve lending (what the Fed tries to manage) tends to cause a boom/bust cycle which is actually based on credit (loans of various sorts).

One interesting idea is whether a fixed amount of dollars per capita could be issued (changing every day with births/deaths), and then credit could then be regulated to be more conservative. The current 3-10% reserve requirements seem very agressive and risky. But that is so far from where we are that we’d have to move gradually (and in good economic times) towards such a more conservative system.

One caller started down the right road, but of course the point, Tom, was lost on your guest I’m afraid. My guess is that it’s partly because he didn’t get to finish his point.

25 billion dollars can be “earmarked,” if you will, (from the TARP as it’s called) for banks and big financial firms, but not one penny of that 25 billion can go for preventing 3 million workers from being thrown out of their jobs as a result of the Detroit crisis.

This is the White House view as I think most of us are aware, and I heard nothing from your guest that would help dissuage the President from going forward with his “middle class massacre.” What hatred this administration has for the working poor in this country.

That’s okay, Mr. Bush. If I were you I’d quit worrying so much about my historical legacy as President and begin worrying about the salvation of my soul.

[...] crisis of 2008 on NPR’s On Point with Tom Ashbrook. Listen to the discussion by visiting On Point or subscribe to the [...]

States and city governments are beginning to have SERIOUS financial trouble. What sort of impact do you think this will have, particularly in “rust belt” — or future “rust belt” cities?

The quest for wealth and riches many years ago produced this feeding frenzy within the financial markets. The promise of large gains and wealth drew everyone into it’s web. Speculations drove the markets beyond reality. It sucked everyone in. There is nothing wrong with smart investing,but when people and nations extend beyond their reach, they usually fall, as our economy has done. We will recover,but it will hurt. It could have been avoided if common sense had ruled our lifes instead of greed. This calamity was predicted over 25 years ago by Larry Burkett,who wrote a book called The Coming Economic Earthquake. If anyone had read this book and followed his advice, they would be in good financial shape today.

I believe the root of our current economic situation is due to the failure of the global monetary system. The key issue is the fact that the USDollar is both our domestic currency and THE global currency. This issue has been highlighted in the past month as the value of the USDollar has increased because the USDollar has become a safe haven as global investors demand US Treasury debt.

This issue is the basic fault of the current crisis. The dollar has been overvalued for years due to its role as THE global currency. But similarly, other currencies have been undervalued. The major impact of this can be seen in both Asian producer countries like Chinese and Oil producing countries. In the case of China, it has purposely and artificially kept its currency cheap, copying the example set by Japan’s export economy.

The international monetary inequality created by the currency manipulation of Asian producer countries like China and oil rich countries enabled these rich countries to hoard an inordinate amount of wealth. The US stood by and took advantage of the artificial inflation of the USDollar because the higher currency enabled the maintenance of the current standard of living. The true Bretton Woods model would have the strong producer nations currencies rise and the weaker consumer currencies fall. This has not happened however. The developed world like the US simply borrowed to maintain it’s lifestyle.

Investors in wealthy countries needed to find ways to re-invest their dollars. This need to reinvest dollars, in a convoluted and perverted way, set in motion the search for investment vehicles which the investment banks profited from in the form of relatively unregulated subprime mortgages, CDO’s, and CDS’s. The perfect storm. Money looking for a home and no one minding the chicken coup.

If my premise is correct that the root cause of this financial crisis is the currency imbalance, supply and demand currency inequality between producer nations (Oil countries and China) and consuming economies (the so called developed world), then the obvious solution is currency realignment. If oil were priced higher, it would spur alternatives and conservation. If Chinese products cost more, fewer would be sold. The problem is that it is in the selfish interest of all parties to maintain the status quo, otherwise, we would all be poorer in the short term.

Our current international monetary system is a mix of Bretton Woods, distorted by country currency manipulation. If the USDollar continues to be THE global currency and our domestic financial environment is not strong enough to support the rest of the world, the current crisis will linger.

If the US were to tack on a fee on imported products to compensate for the lack of regulation in some producing countries, this would be deemed protectionist and would result in a 1929-32 collapse, similar to the wrong policies enacted in the 1929-32 era.

However, if currencies were allowed to float freely as they should, a similar impact would be achieved that would not be deemed protectionist. Theoretically, oil country currencies and Asian producer countries like China’s currency would rise.

Currently we have is a symbiotic dependency where the new producing nations are addicted to selling, and the developed world is addicted to buying. The trade imbalance is larger than it has ever been. The solution is a new global currency that will free the dollar from it’s global role. My only suggestion for this is a theoretical market basket currency that will be the currency of the IMF.a domestic currency.

If currencies were allowed to realign as I am suggesting, we would be paying back our debt with cheaper dollars. We would be poorer, and the world economy will need time to adjust.

[...] he doesn’t fully agree with himself. But his perspective is intelligent and informed, and the conversation with Ashbrook about the depth of the financial crisis, the efforts to shore up the economy, and the impact on the [...]

Responding to Tyler about splitting the difference between the bank and the borrower on underwater mortgages, part of the problem is that so many of the mortgages are packaged into CDOs, so there isn’t a bank on the other end to negotiate with. Yes, a bank may administer the mortgage, as in collecting payments and pays the interest due to the holders of the CDOs, but renegotiating the terms of the mortgage agreement is not easy to do because the “lender” is whoever bought the CDOs and in many cases, changing the terms is barred under the contract. One plan I heard floated was for congress to pass a law that would force the lenders to allow the borrower to default but stay in the house and pay rent at the market rate, which is a little easier to determine, and also give them the option to buy the house at a market price after five years. It also seeks to split the difference between lender and borrower.

This economic crisis has been engineered by the world’s elites. They’re using derivatives trading and government guarantees of bank deposits to create massive liabilities for the world’s governments. Big money center banks like Citigroup gambled in derivatives and lost to them. The world’s peoples will be forced to pay the elites’ winnings through ruinous taxation.

The elites’ hope is that they can depopulate the planet via this mechanism, leaving their heirs its sole possessors.

All that money disappearing and no Senate hearings? Is it because the system failed or just those in Washington? Apparrently, the “smartest people in the room, i.e. Senators…blew it.