From The Institutional Risk Analyst January 8 (also on blogroll at right):
Sometime during the summer of 2016, the worst of the post 2008 asset price deflation arguably bottomed out. During that summer, Cumberland Advisors chief-investment officer David Kotok approached us during lunch on the shores of the Big Lake in Downeast Maine.
“Write the book,” said Kotok. He had a glass of white wine in one hand and a large chain pickerel on a stringer in the other. “Write the book.” Kotok then turned and went off to consult with Ray Sockabasin about the steaming of the pickerel.*****After returning from Maine, we next heard from the folks at John Wiley & Sons. “We hear you are writing a book,” they exclaimed. We said yes. Soon a contract appeared. We then realized that a book need be written. And it was.*****In the intervening 15 years, we have discovered an awful lot more about the financial history of the US that makes us think about reissuing "Inflated," especially now that the US public debt has reached $35 trillion. In 2010, the US public debt was under $15 trillion, but today post-COVID we are at just shy of $35 trillion and counting.
Notice in the chart below showing the national debt that the relative increase in debt accumulation during COVID was minor, but the baseline of increase in indebtedness has been steady. Growing fiscal deficits reflect a national flight from reality that has occurred during and after the 2008 financial crisis. Nobody in Washington or on Wall Street seems to know or care. The growth in debt suggests that the psychic damage caused by 2008 may be more enduring than the COVID lockdown event.*****In the book "Inflated," we argued that understanding the development of the US financial evolution since colonial times is about layers of leverage. In the earliest days, Americans used gold and silver coins, and obligations drawn upon UK and Dutch banks. Later state chartered banks added to the money stock, issuing private paper IOUs against vault cash measured in precious metals. Money in those days was metal.By the Civil War, the government of Abraham Lincoln borrowed all of the available gold coin and then turned to issuing unbacked paper greenbacks to finance the war to end slavery. The creation of national banks to buy Lincoln’s debt was a major addition of leverage in the American system and one that remained even after the Civil War era greenbacks were redeemed. The legal and financial expedients used to finance the civil war enshrined the special role of the dollar in the US economy.
The creation of the Federal Reserve System on the eve of WWI represented yet another new layer of leverage, this to feed the demand for financing during and after the war. The Fed took the ball from JPMorgan and other US banks to finance the wartime trade needs of the Allied governments. After the 1929 market collapse a decade later, market capitalism in the US truly died.
More publicly-backed parastatal entities led by the Reconstruction Finance Corporation and the Federal Deposit Insurance Corporation were created by Washington to restructure and finance housing, banks and many other parts of the economy. We wrote in "Inflated" in 2010:
"It is often overlooked by popular accounts of the Great Depression that President Hoover, and not FDR, created the Reconstruction Finance Corporation (RFC) and the Federal Home Loan Banks, two of the most significant and interventionist initiatives ever taken by Washington up to that time. The RFC, operating under Jesse Jones, was empowered to make loans to banks, insurers, and industrial companies almost without limit. The RFC was initially set up with the idea of repaying the government and then some on its investment, and would serve as an important part of the government’s response to the Depression during the 1930s."In the 1970s Ginnie Mae and then the GSEs became issuers of securities, adding yet another layer of leverage. Nonbank finance blossomed in the 1990s, driving decades of economic growth despite the best efforts of prudential regulators to kill this key American phenomenon. In the most recent Fed proposal in Basel III Endgame (see our comments here), the regulatory attack on residential mortgage finance has reached a hysterical frenzy.
Last week we reminded our readers on X to read a couple of important research papers coming from the economic community talking about the true reasons behind the Fed’s open market operations in 2008 and 2020. In both cases, the narrative tells us that the central bank rode to the rescue of the US economy. In fact, the Federal Reserve Board rescued the US Treasury and, indirectly, the national Congress.
.....MUCH MORE
