By Floyd Brown, Chief Political Analyst, Wall Street Daily
As we exited 2014, Americans were (and still are) optimistic. According to Gallup, they’re more optimistic than at any other time since the Great Recession of 2008, which brought Obama to office.
And I predict that 2015 is going to be rough on Americans.
Now, before you tune out and call me another Cassandra preaching doom and gloom, give me a moment to explain…
A Reoccurring Issue
America is immensely wealthy, and our current problems could be easily fixed with good leadership, and I’m optimistic about our long-term future. But we have a very dangerous economic team currently pursuing polices that exaggerate the risks.
Fundamentally, the economic elites who own our banking system have held power since Ronald Reagan left office. During Bill Clinton’s term, the Glass-Steagall Act of 1933 was essentially dumped with the passage of the Gramm-Leach-Bliley Act.
Glass-Steagall had prohibited financial firms from being either investment or securities firms, while at the same time being a commercial bank with FDIC-insured deposits. Once this rule was broken down, you had a situation in which the government was essentially backstopping all of the gambling in the Wall Street casino.
Dodd-Frank – passed during the wake of the bust following the latest round of out-of-control gambling (a.k.a. the 2008 recession) – was supposed to fix the problem. But it hasn’t.
The major banks that should’ve gone out of business in 2008 were rescued by TARP and the Federal Reserve. The proper solution would have been reorganizing the banks in bankruptcy court.
Even until this day, many of the bad bets made before 2008 are still on the books as “derivatives” that have just been rolled over and extended.
A Modern-Day Atrocity
Austrian economists have a concept called “malinvestment.” This is the result of artificially low interest rates. The low rates cause otherwise “wise businessmen” to make bad decisions. A prime example would be a firm buying back overvalued shares using money borrowed at unnaturally low rates.
In 1940, Ludwig von Mises wrote, “The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period, and that such an artificially induced boom is doomed. They’re looking for the philosopher’s stone to make it last.”
Meanwhile, the elites have been reaping the benefits of this terrible investment strategy because the taxpayers are on the hook through FDIC insurance.
Now, I have no problem with people speculating with their own money. But the problem with the modern banking system is that they do it with the U.S. Treasury by proxy of the backstops the government provides these banks.
2015 is the year this system supported by the Obama Treasury Department, the Janet Yellen Federal Reserve, and The New York Times editorial page collides into a huge ball of fire known as contagion.
This entire Ponzi scheme known as modern finance rests on a rock bed of confidence. Once the confidence is lost, there is nothing to stop the fall.
Expect both Obama and the Republican Congress to watch like a deer caught in the headlights once it begins to unfold.EconMatters.
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