There’s No Such Thing as a Free Lunch

By all accounts the sky was falling on December 5, 2008.  Several months before, credit market liquidity had glazed over like cold winter molasses and, after over 150-years of business, Lehman Brothers had ignominiously vanished from the face of the earth.  What’s more, just eleven days after Lehman Brothers went bust, Washington Mutual kicked the bucket too.

The demise of Lehman Brothers ($691 billion) and Washington Mutual ($327 billion) marked the two largest American bankruptcies in history.  But that wasn’t all that was going wrong at the time.  Stocks had fallen off a cliff – the DOW had dropped 23 percent over the past three months – and the economy was in shambles too.

On that Friday, the Labor Department reported the economy had lost over a half million jobs in November and over 1.3 million jobs since August of that year.  Terror and panic had spread from Wall Street and Main Street to Washington, and the Fed was determined to prevent an economic depression no matter what the cost.

No one knew it at the time.  In fact, it wasn’t public news until last week.  But thanks to the work of Bloomberg, it has been documented that on December 5, 2008, the Fed loaned out a single-day peak of $1.2 trillion to banks and financial companies through the various lending facilities it set up in fall of 2008 to backstop financial markets.

Freedom and Responsibility

To put this number in perspective, the federal government’s fiscal budget for 2008 was $2.9 trillion.  What this means is that, on a single day, the Federal Reserve loaned out what amounted to over 40 percent of the federal government’s budget.

Anyone that pays taxes knows where the federal government gets their money.  Since the 2008 financial crisis more and more people have discovered where the Federal Reserve gets their money…they borrow it into existence.

We don’t recount the events of December 5, 2008, and rehash the panic that occurred over three years ago, to pour salt on old wounds.  Rather we do so because we are entirely agape by the new knowledge of the Fed’s vast intervention into markets and, as always, we look for instruction.

Perhaps the Fed saved the economy from entering a severe depression.  But if you believe in freedom you likely take exception with the practice of intruding in markets to bailout certain, preferred, institutions who deserve to fail.  By doing so, not only did the Fed overrule the responsibility that is incumbent by freedom, they removed the consequences from the actions of the risk takers.

Additionally, they turned the hard earned money in your savings account into an abstraction.  What to make of it…

There’s No Such Thing as a Free Lunch

Back in 2008 it was largely private banks and financial corporations that were ground zero for the credit crisis.  They’d overloaded their balance sheets with an abundance of bad debt and painfully discovered the perils of leverage.  Since then, however, it has been the federal government that has escalated its reliance on debt to fund its operations.

In 2008, the national debt was roughly $10.8 trillion.  Today it stands at a mindboggling $15.2 trillion.  As you can see, the national debt has increased by over 40 percent in just three years…and is now nearly equal to gross domestic product.

Obviously, the rapid rise in government debt will produce its own financial and economic crisis like the one currently manifesting in Europe.  Politicians have made promises they cannot keep.  Sooner or later interest rates on government debt will rise as lenders discover U.S. government debt is not the safest investment in the world.

In the meantime, the Fed will be able to suppress the rate of interest when needed through further quantitative easing and zero interest rate policy targets for the federal funds rate.  But the policy of regulating prices – including the price of money – for the benefit of the few will not be condoned forever.

There are consequences for artificially suppressing the price of money.  Contrary to today’s popular delusion, there’s no such thing as a free lunch.  The score must always be settled up one way or another.

At this point in the charade, government debt has been racked up well beyond what the economy can support outright.  Consequently, payment will be made through a legacy of moral and material desolation and distress.  There’s no avoiding it.

Sincerely,

MN Gordon
for Economic Prism

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