The central banks are a new rung. They prolong the agony.

This is very, very good. Showing how central banks and government can gum everything up. Written in a manner that is easy to follow!

The Panic of 2008 and Financial Socialization
by Michael S. Rozeff

….In a boom, all the main businesses involved in the boom are making handsome profits. Homebuilders, home suppliers, mortgage bankers, banks, and investment bankers, among others, all did well in the housing boom. Many investors along for the ride got above-average returns. They were anxious to supply even more capital. The boom by definition is a period of above-average business activity enabled by financial credits.

Production and finance are both stimulated. Both receive the abnormal stimulation of government regulatory and monetary policies. The boom of 1869–1873 involved a banking system that created money backed by government bonds. The Fed does the same today. In both cases, it also involved Congressional stimulus. In the 1860s, it was railroad subsidies. In this century, it was a variety of measures to stimulate house construction and to absorb the mortgage credits via government-sponsored institutions like Fannie Mae and Freddie Mac.Government leads the boom, business follows. Government prepares the boom. Wall Street commits it. The government’s tracks are hidden. Wall Street’s are not. Few blame government for the inevitable bust. Many blame Wall Street. Government investigates Wall Street and makes sure of that.

Invariably, some firms go at it with a vengeance. By being first or most adept or best-situated at exploiting the opportunities, they grow the fastest, make the most money, and become the largest and best-known. The reputations of these firms for making good decisions and money grow. This attracts capital, and they grow even larger. Thus we get investment bankers like Jay Cooke, Bear Stearns, and Lehman. In Great Britain, we got Northern Rock. In Germany we got several German Landesbanken using short-term financing to buy American mortgages. Likewise, in 1870 German and Austrian governments supported banks in their lending activities, causing a building boom…..

An especially risky procedure is when firms borrow using short-term loans (such as three-month or even shorter loans) while buying risky long-term assets. The inducement to do this is that short-term interest rates are usually lower than long-term interest rates. The problem is that the borrower has to re-finance the loan frequently. If that financing is not available or its costs suddenly rise, the borrower faces bankruptcy….

The central banks are a new rung. They prolong the agony. They have been prolonging the agony overseas and here for months now by lending to failed institutions.

These measures do not and cannot restore credit because they are based on a misconception of credit. The Fed acts as if credit can be injected into a market. It refers to it as liquidity. It acts as if it is passing liquid refreshment to a parched athlete…..