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Opinion
Mar. 24, 2008
Copyright © Las Vegas Review-Journal

EDITORIAL: Inflation -- the hidden tax

Every breath you take, every move you make, they'll be taxing you

Prompted in part by government interventions including the Community Reinvestment Act of 1977 -- which required banks to make riskier loans to less credit-worthy borrowers to avoid charges of racist "red-lining" -- America's banks and mortgage companies created new sources of investment return in recent decades. Home mortgages -- both the secure and the less secure -- were bundled up, sliced and re-sold like baloney.

It reached the point where nearly everyone seemed to have a child or spouse or girlfriend -- charming, yes, but not someone you'd expect to become a millionaire based on business acumen or educational attainment -- driving around dressed to the nines, operating a real estate business out of a couple of file drawers in the back of a fancy new sports car, expressing amazement that you, too, weren't getting rich flipping homes and condos, many before they'd even been built.

Even when the run came to an end, there was still a time when it appeared the problems could be contained to that part of the financial world that specialized in "sub-prime loans."

Then, on March 14, the Federal Reserve Board agreed to let JP Morgan Chase secure emergency financing from the central bank to rescue from collapse the venerable Wall Street firm Bear Stearns. Two days later, the Fed agreed to make cash and credit available for JP Morgan to actually take over Bear Stearns.

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    • Also, on March 16, the Fed, in what The Associated Press called "a bold move," agreed for the first time to let big investment houses get emergency loans directly from the central bank. This is "the broadest use of the Fed's lending authority since the 1930s," The AP reported.

    By Thursday, the central bank reported other big Wall Street investment companies -- that means Goldman Sachs, Lehman Brothers and Morgan Stanley -- were taking advantage of the Federal Reserve's unprecedented offer to secure emergency loans.

    On Wednesday alone, lending reached $28.8 billion, according to the Fed report.

    Separately, the Fed said it would make $75 billion of Treasury securities available to big investment firms this week. The Fed will allow investment firms to borrow up to $200 billion in safe Treasury securities by using some of their more risky investments as collateral.

    Did you catch that last bit? It's like saying you're not really handing your no-good brother-in-law $10,000 to cover his bad debts -- instead, you're "loaning" him the ten grand, allowing him to put up as collateral 10,000 dollars in Parker Brothers Monopoly board-game money.

    What is under way is a mad scramble to keep afloat both borrowers who hold title to homes they can't afford, and lenders that would likely fail if they simply called all those bad loans and found themselves the proud owners of thousands of boarded-up homes now worth half what everyone thought.

    That will leave many homes misallocated to those who cannot afford to maintain them, whereas a tumble of prices to sustainable levels would make those houses affordable to young couples who actually have jobs and savings for down payments.

    But whether the plan works or not, there is one other price to be paid.

    Where is the Federal Reserve getting all these new billions of dollars? They're printing them. Or -- this being the modern age -- tapping them into existence as electronic data entries.

    Now things get interesting. The Fed's policymaking committee said in an official statement March 18 that "uncertainty about the inflation outlook has increased."

    "Fed Chairman Ban Bernanke and his colleagues have said there is almost no home-grown inflation -- the kind driven by a too-tight job market, for example -- in the economy," The Washington Post reported March 18. "Rather, they view the increases as coming from rising prices for food and energy on global commodity markets. Bernanke has said he expects prices for food and energy to level out this year. ... If that proves correct, it would dampen inflation."

    What nonsense.

    The managers of the Fed pretend inflation cannot be accurately predicted -- they must wait to see what happens to food and energy prices.

    But inflation is not caused by rising prices. Rising prices are caused by inflation.

    Inflation refers to an increase in the money supply. Inflation is caused by those who print more money -- which is why the nation had effectively no inflation from 1791 to 1932, when the supply of dollars was sharply limited by pegging the currency's value at fixed weights of gold and silver.

    Mr. Bernanke knows precisely the current rate of inflation in the U.S. dollar -- unless we're to assume he doesn't know how many more dollars his outfit is ginning up every month (one checks something called the "M3,"), which would be gross negligence.

    Those who follow such things report that -- before last week's decision to loan the investment banks all the new billions they need -- the Fed was creating new dollars at an annualized rate of 16 to 18 percent per year.

    Unless you expect to get a 16 to 18 percent raise this year, it's no mystery who'll really finance the investment-bank bailout.

    You will.

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    Don Evans wrote on March 26, 2008 12:08 AM: Mr. "F",

    Of course there's a difference. Loan processing is a function of operations, whereas the securities created with the loans is a function of the finance department..lol.

    I'm glad you see part of the argument I was trying to make. The fact is, every loan applied for by someone with either poor credit or no income history was viewed, and approved, at the discretion of the various banks. This is poor risk management, which ultimately cost taxpayers; both in the costs of bailing out the banks, and the costs of the inflation that has resulted as a repercussion of the ensuing interest rate cuts.

    The bad loans that were extended were entirely avoidable; had the banks used restraint in the days of free money. They didn't. They figured they could charge higher risk customers higher rates (ala the ARM's), and make a larger profit. They figured they could mitigate the resulting risk by creating CDO's with the bad paper, ostensibly mixed with the good paper. They were wrong on both counts.

    In sum, "Caveat emptor" is not a suitable excuse for usury. Would you sell a gun to a person who was obviously suicidal?

    I'm not adverse to profit, and I'm not a business hater. Indeed, I have a graduate education in business, and aspire to wealth the same as most. But I also know there is some responsibility to those business reports to serve. We (the taxpayers) only ask that business show restraint, and basic ethics. We seem to be learning the same lessons over and over again. In short, we didn't need to have another 1980's style savings and loan crisis, Enron, Worldcom, etc.


    John F wrote on March 25, 2008 12:09 PM: Mr. Evans,

    There is a difference between the selling of loans to people with no income and then bundling those loans and selling them to investors.

    In the first case, the person sigining the loan probably knew he didn't have the money to make payments without any verifiable income. If so, then repossession is his lot, and justifiably so. If he did have the income, then all he had to do to safeguard himself was spend two or three hundred dollars for an hour of some lawyer's time to explain everything the borrower would be asked to sign on the closing date. Anyone sigining a contract should know not to take the word of the other party as to what the contract actually says.

    The second half of your argument has a lot of merit. The way these loans were packaged and marketed smacks of fraud, and it wasn't just investors who were defrauded. The taxpayers who are being called upon to finance the bail-out are being victimized as well. I hope the people responsible for this spend a lot of time in jail, but I'm not holding my breath.

    Douglas,

    Your slot machine analogy is apt. Those who bought into these packaged funds have recourse through the courts. If you were mugged should the taxpayers compensate you for your loss? Then why should we compensate the people who were defrauded by unscrupulous financial firms? It stinks for them, but giving these people taxpayer money would only encourage more reckless behavior.


    Don Evans wrote on March 25, 2008 09:19 AM: "Beamer" must drive one...paid for by a career in the lending industry. Are you a pay day loan business operator, by chance? Deceptive can include other practices beyond simply illegal contracts.

    How about fraud in the inducement? What about pre-contractual misrepresentation? WHAT ABOUT THE PRACTICE OF KNOWINGLY SELLING LOANS TO PEOPLE THAT HAD NO VERIFIABLE INCOME AND/OR POOR CREDIT, PARCELING THOSE LOANS, THEN SELLING THEM TO UNSUSPECTING INVESTORS? But I guess, given what you're saying, that those investors should have known better; after all, they read the prospectus. Can you say Enron, or Worldcom?

    If you think that a contract is all you have to worry about, with regards to financial transactions, "Beamer", I have some Enron stock I'd like to sell you.


    beamer wrote on March 25, 2008 08:40 AM: Oh PLEASE! Deceptive lending practices would include a "sign here" line and NO OTHER PRINT. If the borrower FAILED TO READ THE FINE PRINT, there's NOTHING deceptive about it. PERIOD.

    If the borrower can produce an ILLEGAL contract, I'm sure they will follow through with the proper recourse. If they were just ignorant...I guess it would be deceptive BORROWING practice.


    Syed wrote on March 25, 2008 06:43 AM: Should the new dollar supply cover for the new goods and services added into the economy or is it that just another bunch of notes spread into the market.
    Goods and services should be measured in terms of standard work units which is the total of the goods and services produced by the economy.It should also take care of appreciation ,depreciation and elimination of goods and services?


    Don Evans wrote on March 24, 2008 11:48 PM: "Douglas",

    The next time a doctor knowingly injects you with HIV or Hepatitis C, you should just accept it; after all, you're an intelligent adult and you should have known better.

    Does this argument sound at all familiar?


    Don Evans wrote on March 24, 2008 11:41 PM: I'm simply placing the blame where you apparently don't want it to fall; on deceptive lending practices. If you feel that anyone should have been able to have seen through such practices, to the "truth" of finance, then perhaps you also agree that those who invested in Enron and Worldcom were nothing more than chumps either. Libertarians amaze me.


    douglas wrote on March 24, 2008 11:09 PM: then the slot machine is the reason the player lost not the who player wagered money he couldn't afford.

    those who speculate, who rely on some "past performance" when making an investment [or home purchase] cannot slip the responsibility punch. if the issue reduces to excess buyer enthusiasm, that's not the burden of others who saved larger downstrokes so as to have equity throughout the mortgage contract.

    to even suggest that the borrower should expect others to cover his losses is dishonest. should the little pig who wisely spent money on bricks, reimburse the other two who *chose* to build with straw and wood ? should the tortoise give the winner's trophy to the rabbit ?

    blaming the "village", the world, the gubmit, the neighbors, for a losing wager is less than honorable.


    Don Evans wrote on March 24, 2008 09:24 PM: "Douglas",

    It isn't entirely the fault of the borrowers, as you seem to imply. If I were a surgeon, or other technically proficient professional, would you doubt my expertise, given no reason to doubt my authority? Not likely. Most don't.

    The difference between the admittedly ignorant borrower and the lender, is that the lender is knowledgeable in finance. Put another way, would you challenge a grand master in chess with your house on the line? The knowledge of most consumers, with regards to finance and contract law, is the functional equivalent.

    Make no mistake. We're bailing out greedy bankers and developers, as well as ignorant consumers; but one group deserves more blame than the other.


    John F wrote on March 24, 2008 12:30 PM: I took another look at the editorial from yesterday and I think I goofed in one respect.

    When the editors spoke of earners below the median oncome level they were talking of people, not dollars. They did not have it confused. My mistake. Sorry, editors.

    The other stuff sticks, though. :-)


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