The Truth and Financial Meltdown-J.R. Nyquist

Monday, October 17, 2011
By Paul Martin

Today’s anti-Wall Street protests show that many citizens are blaming Wall Street for the country’s economic difficulties. Even the President of the United States has expressed sympathy for the protestors. In recent days police and protestors have battled in Manhattan – with protestors shouting “Hell no! We won’t go!” These children of America apparently feel that the traditional wellspring of American prosperity is den of iniquity. This view was summarized in a 2010 documentary film titled Inside Job. The film outlines “the systemic corruption of the United States by the financial services industry….” Most critics gave the film high ratings. But Barrons economics editor Gene Epstein warned readers in an Oct. 2010 review that the documentary’s outrage was “misdirected.” Those who watch the film, wrote Epstein, “will still be left with a dim understanding of the root causes of what happened, and thus a dim grasp of what should be done to prevent it from happening again.” The people who made the film were not financial experts.

In 2009 Carmen M. Reinhart and Kenneth S. Rogoff came out with a book titled This Time is Different: Eight Centuries of Financial Folly. According to Reinhart and Rogoff, “…financial crises follow a rhythm of boom and bust through the ages.” Our time is not different from other times. We are subject to error, like our forebears. We saw the warning signs and ignored them. Asset price inflation and rising leverage mean something. Too much credit makes a bubble, and signifies a mountain of debt. A government that cannot live within its means during prosperous times is going to fall off a cliff in bad times. “On average,” noted Reinhart and Rogoff, “government debt rises by 86 percent during the three years following a bank crisis.”

When bubbles burst wealth is lost and society suffers a large-scale setback. As Reinhart and Rogoff noted, “The aftermath of systemic banking crises involves a protracted and pronounced contraction in economic activity and puts significant strains on government resources.” In the process of balancing the system, huge public debts are accumulated. In the end, these debts cannot be paid off. Default becomes inevitable.

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