Obama Tries to Square the Economic Circle

Just a quick and simple example to demonstrate President Obama’s tragic cluelessnes when it comes to grasping our economic problems.

In his speech on the economy on April 14th he said:

IT IS NOT SUSTAINABLE TO HAVE AN ECONOMY WHERE IN ONE YEAR 40% OF OUR CORPORATE PROFITS CAME FROM A FINANCIAL SECTOR THAT WAS BASED ON INFLATED HOME PRICES, MAXED OUT CREDIT CARDS, OVERLEVEREGED BANKS, OVERVALUED ASSETS. IT’S NOT SUSTAINABLE TO HAVE AN ECONOMY WHERE THE INCOMES OF THE TOP 1% HAVE SKYROCKETED WHILE THE TYPICAL WORKING HOUSEHOLD HAS SEEN THEIR INCOMES DECLINE BY NEARLY $2,000. THAT’S JUST NOT A SUSTAINABLE MODEL FOR LONG-TERM PROSPERITY.

Yes. An overleveraged banking system and an overleveraged economy are unsustainable. Overleveraging occurs when a business enters into more obligations than it can provide equity collateral for. Like for example a bank that makes $10 available in credit transactions for every $1 it receives. One would think that he got at least this point.

Unfortunately the teleprompter later on also made him utter the following words in that very same (!!!) speech:

ALTHOUGH THERE ARE A LOT OF AMERICANS WHO UNDERSTANDABLY THINK THAT GOVERNMENT MONEY WOULD BE BETTER SPENT GOING DIRECTLY TO FAMILIES AND BUSINESSES INSTEAD OF TO BANKS, ONE OF MY MOST FREQUENT QUESTIONS IN THE LETTERS THAT I GET FROM CONSTITUENTS IS “WHERE’S MY BAILOUT?” I UNDERSTAND THE SENTIMENT. IT MAKES SENSE INTUITIVELY AND MORALLY, BUT THE TRUTH IS THAT A DOLLAR OF CAPITAL IN A BANK CAN ACTUALLY RESULT IN $8 OR $10 OF LOANS TO FAMILIES AND BUSINESSES. THAT’S A MULTIPLIER EFFECT THAT CAN ULTIMATELY LEAD TO A FASTER PACE OF ECONOMIC GROWTH. THAT’S WHY WE HAVE TO FIX THE BANKS.

This is not a joke. He seriously said these two things in one and the same speech. I could understand if he were to hold different speeches to different interest groups and lie to each of them in a different way by appealing to their particular constituents. After all he is nothing but an average politician who knows no better than to play this game.

But what he is doing here is rooted in a much more tragic circumstance: President Obama has no clue about how precisely this fractional reserve system caused excessive credit expansion and leverage and thus created the business cycle with its inevitable culmination, the credit crunch.

He is lost in a maze of inconsistencies and won’t get out of it until he realizes that he has appointed the wrong man as Secretary Treasury and that the Federal Reserve System is inherently broken precisely because of the concept of fractional reserve banking. Just as we can’t square the circle, we simply can’t borrow, spend, and leverage our way out of too much debt, too much consumption, and too much leverage.

It didn’t work in the Great Depression. It won’t work now.




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