Best of DOUG NOLAND

BEST OF DOUG NOLAND

May 18, 2005

I have been thinking a lot about the late-twenties financial and economic environment lately. I thought I would share a few excerpts I ponder from The Memoirs of Herbert Hoover – 1929 to 1941 that capture the essence of major systemic Credit Bubble dynamics.

"The ‘New Era’ economic philosophy was due for a jolt." (page 15)

"One trouble with every inflationary creation of credit is that it acts like a delayed time bomb. There is an interval of indefinite and sometimes considerable length between the injection of the stimulant and the resulting speculation. Likewise, there is an interval of a similarly indefinite length of time between the injection of the remedial serum and the lowering of the speculative fever. Once the fever gets under way it generates its own toxics." (page 11)

"Nor was our financial system weakness solely in the banks. Throughout the whole business of providing capital for our economic life there ran a pollution – the habit of making money by manipulation and promotion of securities. And that promotion too often disregarded the merits of the goods it sold. In addition, the financial world, instead of providing merely the lubricants of commerce and industry, had often set itself up to milk the system. Worse still, instead of being financial advisers to commerce and industry, the financiers had, in many ways, set themselves up to dictate the management of it." (page 23)

"The credit system in all its phases should be merely a lubricant to the systems of production and distribution. It is not its function to control these systems. That it should be so badly organized, that the volume of currency and credit, whether long or short term, should expand and shrink irrespective of the needs of production and distribution; that it should be the particular creature of emotional fear or optimism; that it should dominate and not be subordinate to production and distribution – all this is intolerable if we are to maintain our civilization." (page 25/26)

"It was difficult for the public to believe that such griefs and tragedies lay hidden in so obscure a process as credit inflation when forced on an already optimistic people." (page 14)

The bottom line is that I cannot look at today’s financial environment and rant about system illiquidity. But I can look to the U.S. Bubble economy and warn that the Financial Sphere is going to have an increasingly onerous task in both providing sufficient finance and intermediating risk. And lower mortgage rates and higher home prices might very well sustain the Credit Bubble blow off for a little while longer. Yet prolonging the Mortgage Finance Bubble is terrible news. Nothing imparts greater distortions or liquidity dependency upon the Economic Sphere than mortgage excesses. And, in the end, it is the risk of today and tomorrow’s home loans (inflated prices, stretched buyers, and ill-conceived mortgage terms) that will prove the most damaging to the system. All eyes on mortgage spreads. The Mortgage Credit Bubble makes the GM risk Bubble look awfully teeny-weeny.