Sep

28

U S GrantWill the Treasury's plan be successful? The future "price" of MBS will be higher than any current estimate, but real estate lending will not resume until prices and the incomes of the borrowers become reasonable, even if the Treasury spends trillions. The single family home prices are coming close to the point of reasonable equilibrium now here in California, but I doubt they are anywhere close to that in the parts of the country where things were OK until this spring (NYC, for example).

What is fascinating to me as an outsider is that the question that Ulysses Grant successfully resolved by resumption of the unitary gold standard (1875) — the financial safety and assured purchasing power of savings — is not seen as of the key problem to be resolved. Everyone is worrying about the borrowers; but it is the savers who need to be reassured first. Some of my friends have wisely pointed out that the actual value of cash savings has been viciously eroded over the past few years by the rise in the price of everything from gasoline to boiled ham. If the Secretary of the Treasury were to announce a consumer TIPs plan, one that would guarantee consumer savings and demand deposits against institutional default and erosion of purchasing power, there would be a flood of deposits to banks that would be more than enough to save the banks.

What Grant understood was that the assurance that their money was as good as gold would allow individuals to "save and do better" and get on with their ordinary (sic) lives without having to pretend to be speculators. He was not a snob, but he knew, from a lifetime of family commercial experience, that most people were better at working than they were at trading and that the promise of liberty for American citizens had to include their right to have money that was permanently sound. What he also understood was that speculation involved the risk of catastrophic loss, and there must not be any government protections against that possibility. This is why he was able to accept the collapse of his fortune from the fraud of a partner with such equanimity; it was a risk he had already accepted when he made the bet. He would have been saddened but not surprised to see very rich people demand that bad credits be made good in the name of "the financial system"; that was what they had done throughout his tenure as President in demanding that the currency be expanded perpetually so that there was never a scarcity of credit.

If you are curious about the panic of 1873, you might look into the career of Bethel Henry Strousberg — a now-forgotten figure whose frauds were the ignition point for bringing down the credit house of cards, which was built, like the present one, on a fantasy of real asset prices' (in that case, railroads rather than houses) rising to the sky.

Kim Zussman sees a different analogy:

Recently here there have been discussions of what happened to Russians who bought property as the Tsarist empire collapsed c.a. 1917, and no doubt Putin's thugocracy is hoping the same for US.

Stefan Jovanovich replies:

W'steinThe biggest losers in that case were the French investors who had bought Russian railway bonds and government bonds during the pre-War boom. It had seemed to them a reasonable investment since Russia was the fastest-growing economy in the world in the decade leading up to 1914.

A side note: The philosopher Ludwig Wittgenstein's father Karl was considered an oddball for buying American rail bonds after the Panic of 1907 when "everyone knew" that America's best days were behind it. At that time his peers in Austria were buying German paper instead. Twenty plus years later his children were able to escape the Nazis by buying their way out of Austria using the proceeds from those same bonds which they had dutifully held to maturity. The German paper that so many of their friends had owned evaporated during the post-war currency hyperinflation.

Steve Leslie muses:

My experience as a financial advisor and broker for over 25 years tell me this about people and their reactionary practices. The next shoe to fall will be in October when retail investors get their monthly brokerage account reports and mutual funds statements and see how much money they have lost. Impulse will take over and they will issue across the board liquidations of mutual funds, annuities & etc. I just see so much pressure on the system in the short term technically that we are far from a resolution of this going forward.


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