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Real estate prices fell by 50 percent by 1349 in Florence when boom became bust. That boom was fed by bank money creation.
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This Link is located in the Public Channel Housing Bubble and Bear Links.
Posted by ian 1 year 213 days ago (lewrockwell.com). Views: 500
Tags: federal reserve |
| Related Tags: credit crisis inflation gold housing bubble bailout dollar economics |
by Michael S. Rozeff
The proponents of greater government power are busily absolving government of any blame in the subprime crisis, deflecting criticism from government, and taking the opportunity to propose that greater government will prevent future such crises. And in doing all of this, they are busy blaming as culprits the greed of market participants, lenders, the market, the free market (even though it is heavily regulated), the capital markets, securitization, market instability, capitalism, illiquidity, bond raters, state regulation, and insufficient federal regulation.
It is rather easy to spread the blame and confusion around because the financial structures involved are novel and complex. There are many targets.
But we should place the blame squarely where it belongs, which is on government failure, that failure being in the fiat money inflation brought about by the Federal Reserve.
How are we to explain and understand the details of the subprime crisis? Is it a sudden outcropping of market madness? Is this an instance of a free market gone haywire? Is it a case of mass lender stupidity? Is it a case of greed and corruption? Is it a case of inefficient regulation by the states?
The subprime crisis is none of these. Its origin lies in a housing price bubble brought about by excessive central bank money creation and the subsequent puncturing of this bubble. The price declines in housing then induced the large rise in foreclosures of the recent past and present.
Fiat money inflations often bring on real estate booms followed by busts. These inflations are the common element in real estate cycles that span many countries and many centuries, and they put the lie to the hypothesis that bad lending practices are the culprit. Fraudulent money creation is the culprit, not faulty evaluation of the credit risks of borrowers.
Jesús Huerta De Soto’s book Money, Bank Credit, and Economic Cycles provides documentation of cases. For example, real estate prices fell by 50 percent by 1349 in Florence when boom became bust. That boom was fed by bank money creation:
"Evidence shows that from the beginning of the fourteenth century bankers gradually began to make fraudulent use of a portion of the money on demand deposit, creating out of nowhere a significant amount of expansionary credit. Therefore, it is not surprising that an increase in the money supply (in the form of credit expansion) caused an artificial economic boom followed by a profound, inevitable recession."
In the face of excessive money, lenders tend to adopt laxer standards for making loans. Borrowers and investors tend to use higher amounts of leverage. Asset prices rise. When the rate of money creation slows or halts and asset prices begin to decline, those who have bought houses at high prices, perhaps with little or no equity of their own, quickly find themselves in a position of negative equity, with their promised loan payments exceeding their house values. This induces default and foreclosures.
That is how the subprime crisis began. It then spread to other sorts of securitized loans and to capital losses of investors, including major banks, in all sorts of loans.
It is impossible for regulation of loans and lending to prevent future crises of the same sort from happening if central banks create excessive money. If loans are shut down, that is tantamount to not creating excess money, contrary to the premise. That will not happen. Instead, increased regulation will divert loans into channels that the authorities think will be safe from price decline. That will involve increased centralized control over the economy, which will stifle growth. And it will only shift the price pressures into some other markets. The crisis brought about by excess money will simply take on new forms if loan regulations are multiplied and made effective.
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ian said |
| 1 year 213 days ago |
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excerpt from Money, Bank Credit, and Economic Cycles by Jesús Huerta De Soto
full text: http://www.mises.org/books/desoto.pdf
BANKING IN FLORENCE IN THE FOURTEENTH CENTURY
Around the end of the twelfth and beginning of the thirteenth
centuries, Florence was the site of an incipient banking
industry which gained great importance in the fourteenth century.
The following families owned many of the most important
banks: The Acciaiuolis, the Bonaccorsis, the Cocchis, the
Antellesis, the Corsinis, the Uzzanos, the Perendolis, the
Peruzzis, and the Bardis. Evidence shows that from the beginning
of the fourteenth century bankers gradually began to
make fraudulent use of a portion of the money on demand
deposit, creating out of nowhere a significant amount of
expansionary credit. Therefore, it is not surprising that an
increase in the money supply (in the form of credit expansion)
caused an artificial economic boom followed by a profound,
inevitable recession. This recession was triggered not only by
Neapolitan princes’ massive withdrawal of funds, but also by
England’s inability to repay its loans and the drastic fall in the
price of Florentine government bonds. In Florence, public
debt had been financed by speculative new loans created out
of nowhere by Florentine banks. Ageneral crisis of confidence
occurred, causing all of the above banks to fail between 1341
and 1346. As could be expected, these bank failures were
detrimental to all deposit-holders, who, after a prolonged
period, received half, a third, or even a fifth of their deposits
at most. Fortunately, Villani recorded the economic and
financial events of this period in a chronicle that Carlo M.
Cipolla has resurrected. According to Villani, the recession
was accompanied by a tremendous tightening of credit
(referred to descriptively as a mancamento della credenza, or
“credit shortage”), which further worsened economic conditions
and brought about a deluge of industry, workshop, and
business failures. Cipolla has studied this economic recession
in depth and graphically describes the transition from economic
boom to crisis and recession in this way: “The age of
‘The Canticle of the Sun’ gave way to the age of the Danse
macabre.” In fact, according to Cipolla, the recession lasted
until, “thanks” to the devastating effects of the plague, which
radically diminished the population, the supply of cash and
credit money per capita approached its pre-crisis level and
laid the foundation for a subsequent recovery.
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