This post is a continuation of Dangerous Virus Rapidly Spreading The Globe (Part 1).



If you have not yet done so, please read part 1. The symptoms of the FIV disease are complex. Part 1 addresses the symptoms and part 2 below continues with more symptoms and a discussion about preventative measures and cures.



Part 2:



Most In Congress Infected With FIV



Most Congressional member are afflicted with FIV, as is Paulson and president Bush, otherwise the reckless $700 billion bailout package would never have passed. True to form, those in the highest positions of authority, notably Speaker of the House Nancy Pelosi and Finance Chairman Barney Frank, show the most severe symptoms. President elect Obama shows signs of being in the late stages of FIV already.



Hair samples are not even required to make this determination, one can now reliably identify those afflicted with FIV by the symptoms alone.



Interesting enough, Congress is calling for more regulation of Fannie Mae and Freddie Mac, yet the first thing a regulator in his right mind would do would be to shut them down. Instead, Congress wants Fannie and Freddie to lend more.



Calls from Krugman and others scream for more regulation even though it is perfectly clear regulation in and of itself always fails.



Power Grab By Those Infected



Another distinguishing characteristic of FIV is those afflicted have a marked propensity to usurp power not caring whether it is legal or not.



I discussed this phenomenon in the Fed Uncertainty Principle.



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Corollary Number Two : The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.



Corollary Number Three :

Don't expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.



Corollary Number Four :

The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it's easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.



Academic Wonkishness

I’ve been on the warpath over Germany’s refusal to play a constructive role in European fiscal stimulus. But what does the math look like? Here’s a simple analysis — well, simple by economists’ standards — of the reason coordination is so important for the EU. ....



Consider the effects of an increase in government purchases dG. This will raise GDP directly, to the extent that it falls on domestic goods and services, and indirectly, as the rise in GDP induces a rise in consumer spending. We have:



dY = (1-m)dG + (1-m)(1-t)c dY



or dY/dG = (1-m)/[1 - (1-m)(1-t)c]



Since governments are worried about debt, it’s also important to ask how much the budget deficit is increased by an increase in government spending. It’s not one-for-one, because higher spending leads to higher GDP and hence higher tax revenue. We have



dD = dG - tdY



A crucial number is “bang for euro”: the ratio of the increase in GDP to the increase in the deficit. After a bit of grinding, it can be shown to be



dY/dD = (1-m)/[1 - (1-t)(1-m)c - t(1-m)]

Non-Wonkish Rebuttal

The average 8th grader understands that one cannot continually spend more money than he has.

The average homeowner who has been foreclosed on understands that buying more house than he could afford vs. wages earned was a very bad idea.

The average economics professor afflicted with the K-Virus thinks that it is possible to spend one's way out of a fiscal crisis.

The average economics professor afflicted with the M-Virus thinks that it is possible to inflate one's way out of a fiscal crisis by destroying the currency.

The average congressional representative believes in the free lunch theory of spending many multiples of what is collected in taxes.



The Economic Free Lunch

Japan Model Revisited

Mish: Would you say that consumer debt in the US as opposed to the lack of consumer debt in Japan increases the deflationary pressures on the US economy?

Kasriel: Yes, absolutely. The latest figures that I have show that banks' exposure to the mortgage market is at 62% of their total earnings assets, an all time high. If a prolonged housing bust ensues, banks could be in big trouble.



Mish: What if Bernanke cuts interest rates to 1 percent?

Kasriel: In a sustained housing bust that causes banks to take a big hit to their capital it simply will not matter. This is essentially what happened recently in Japan and also in the US during the great depression.



Mish: Can you elaborate?

Kasriel: Most people are not aware of actions the Fed took during the great depression. Bernanke claims that the Fed did not act strong enough during the great depression. This is simply not true. The Fed slashed interest rates and injected huge sums of base money but it did no good. More recently, Japan did the same thing. It also did no good. If default rates get high enough, banks will simply be unwilling to lend which will severely limit money and credit creation.

The Debt Bubble And Its Root Cause

I’m also with Barry Ritholtz that Bush’s emphasis on homeownership was not the problem. Bush favored homeownership; I’m sure he also favored marital fidelity; his influence on homeownership and his influence on adultery were probably comparable. It’s Bush’s opposition to financial regulation that did the evil deed.

Time and time again Krugman, Mankiw, and others, even Ritholtz fail to take the problem back to the root cause: Government Regulation, Fractional Reserve Lending, and the Fed.

Let's Play A Non-Wonkish Game Of Q&A

"In my view, issuing promises to pay on demand in excess of the amount of the goods on hand is simply fraud, and should be so considered by the legal system. For this means that a bank issues "fake" warehouse receipts — warehouse receipts, for example, for ounces of gold that do not actually exist in the vaults. This is legalized counterfeiting; this is the creation of money without the necessity of production, to compete for resources against those who have produced. In short, I believe that fractional-reserve banking is disastrous both for the morality and for the fundamental bases and institutions of the market economy...."

The Austrians Were Right

Before the U.S. House of Representatives, November 20, 2008



Madame Speaker, many Americans are hoping the new administration will solve the economic problems we face. That’s not likely to happen, because the economic advisors to the new President have no more understanding of how to get us out of this mess than previous administrations and Congresses understood how the crisis was brought about in the first place.



Today, a major economic crisis is unfolding. New government programs are started daily, and future plans are being made for even more. All are based on the belief that we’re in this mess because free-market capitalism and sound money failed. The obsession is with more spending, bailouts of bad investments, more debt, and further dollar debasement. Many are saying we need an international answer to our problems with the establishment of a world central bank and a single fiat reserve currency. These suggestions are merely more of the same policies that created our mess and are doomed to fail.



At least 90% of the cause for the financial crisis can be laid at the doorstep of the Federal Reserve. It is the manipulation of credit, the money supply, and interest rates that caused the various bubbles to form. Congress added fuel to the fire by various programs and institutions like the Community Reinvestment Act, Fannie Mae and Freddie Mac, FDIC, and HUD mandates, which were all backed up by aggressive court rulings.



The Federal Reserve created our problem, yet it manages to gain even more power in the socialization of the entire financial system. The whole bailout process this past year was characterized by no oversight, no limits, no concerns, no understanding, and no common sense.



Similar mistakes were made in the 1930s and ushered in the age of the New Deal, the Fair Deal, the Great Society and the supply-siders who convinced conservatives that deficits didn’t really matter after all, since they were anxious to finance a very expensive deficit-financed American empire.



All the programs since the Depression were meant to prevent recessions and depressions. Yet all that was done was to plant the seeds of the greatest financial bubble in all history. Because of this lack of understanding, the stage is now set for massive nationalization of the financial system and quite likely the means of production.



Although it is obvious that the Keynesians were all wrong and interventionism and central economic planning don’t work, whom are we listening to for advice on getting us out of this mess? Unfortunately, it’s the Keynesians, the socialists, and big-government proponents.



Who’s being ignored? The Austrian free-market economists – the very ones who predicted not only the Great Depression, but the calamity we’re dealing with today.



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FIV Prevention

Buy two ounces and call me in the morning

FIV

Cures