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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: CalculatedRisk who wrote (258990)7/7/2010 1:12:41 PM
From: Elroy JetsonRead Replies (1) of 306849
 
So long as you're prepared to accept infinite leverage in your banking and financial system, something Alan Greenspan called "remarkable financial innovation", you have a potentially infinite money supply. An infinite money supply can meet the demand curve for loans at any corresponding price and quantity. This created our credit bubble over the past 30 years.

On the other hand Paul Volcker, who believes the only financial innovation of note during the past 30 years was the ATM, points out that on your way to infinite leverage and infinite money supply:

1.) you have made loans of such dubious credit quality that they will never be repaid;

2.) you have eliminated all stability from your financial system because bank and financial system leverage have expanded beyond prudent banking standards, and will need to be periodically bailed-out by the taxpayer or central bank, or else you face an economic depression;

3) we have reached the point of zero-bound where savings are not relevant because the interest they return is effectively zero;

4) to continue expanding the credit bubble, someone like the government has to borrow money at an artificially high rate to lend money at a loss, or we have to create a financial system where savers earn a negative interest rate and money must have the most recent quarterly monetary-tax stamp imprinted on it in order to enforce negative interest rates;

5) our only alternative to this twilight world is to enforce prudent banking standards - which means reduced leverage, and we must accept the resulting economic depression which liquidates the excess leverage created by the Reagan credit bubble since 1980. During this process all of the "economic growth" we have previously borrowed from the future is "repaid", either by lenders or borrowers, resulting in a large decline in income, bringing us back to the actual size of our economy which can be supported by spending only our income.
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