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Uncle Billy, Starring Ben Bernanke

Gary North
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Dec. 25, 2009

Back in 2002, I wrote a review of It's a Wonderful Life. In that review -- written in the midst of the housing bubble -- I offered this analysis of the savings & loan industry and its effects.

In Anno Domini 2002, we have been told that what has saved the American economy, and hence the world's economy, from the miseries of a deep recession is the housing market. There is cheap mortgage money available, and Americans are now re-financing their homes. Fannie Mae and Freddy Mac are merely the Bedford Falls Building & Loan Society gone national and federalized through presumed loan guarantees for investors. Odd as it may sound, in this recent real-life remake of "It's a Wonderful Life," George Bailey is played by Alan Greenspan. He has received generally favorable reviews. . . .

The message: George Bailey made a difference because he helped depositors make loans to each other that were secured by real estate. That was the mode of national redemption in 1946, after a decade of depression and half a decade of war: "Own your own home!" On this theological foundation was built Levittown and the other post-War tracts. Exactly how Bailey did this during the Great Depression, the movie never says.

In the real world, building and loan associations did it because the U.S. government changed the laws under Roosevelt's Administration regarding fractional reserve banking. There would be no more bank runs. The government would insure against this. It would make safer what fractional reserve bankers had feared most: borrowing short (accepting deposits that were redeemable on demand) and lending long (30-year loans at a fixed rate on real estate).

Then the government inflated the currency, raising interest rates, but also raising people's dollar-denominated net worth through rising prices on their homes. Lenders then made additional loans based on rising property values: more valuable collateral. And so it goes, even today: the Federal Reserve System's policy of depreciating the dollar in order to keep home owners happy. Mortgage investors are now locked into investments that will plummet in value if price inflation raises long-term interest rates. The system will either implode in deflation in one long bank run that will not end after one day at 6 p.m., or else the creditors who extended the mortgage loans will see their investments wiped out through mass inflation.

This is why, in a future remake of "It's a Wonderful Life," Alan Greenspan will star as Uncle Billy.

In 2002, I thought that Alan Greenspan should star as Uncle Billy. Now I know that Ben Bernanke was made for this role.

In 2008, we saw the results of Greenspan's inflation, which was followed by the reduction of monetary inflation by Bernanke, beginning as soon as he came into office in February 2006. That change in policy guaranteed a recession, as I said at the time. It guaranteed the popping of the housing bubble, which I also said at the time.

Today, Bernanke's FED is expanding the money supply at rates that dwarf Greenspan's. The FED is keeping the federal funds interest rate close to zero, not Greenspan's measly 1%.

The FED is creating fiat money to buy the bonds of Fannie Mae and Freddie Mac. It has promised to stop doing this by the end of March 2010. If it does, mortgage rates will rose, and the housing market will resume its decline into the depths, as it was before the FED began intervening.

The central bank does not learn. All those bright FED staffers with Ph.D's in economics are proving that they never believed a word about market-clearing prices, or capital theory, or the interest rate as a clearing price for capital. They are all bit-part players. They are all trying to get the role of Jimmy Stewart, but they will settle for playing his father. To do this, they provide support for the subsidized housing market.

There has been no free market in housing since the creation of the FDIC and its sister institution, the FSLIC in 1934 as part of the National Housing Act. The two were merged in 1989 after the S&L collapse in the mid-1980s. There has been a government-subsidized, FED-subsidized housing market. This is not going to change. It is now far more subsidized than ever before.

Nobody is going to fire Uncle Billy. Uncle Billy was the 2009 Person of the Year for Time.

It is worth noting that Time is known these days only for its Person of the Year award. It has no real influence. It is just another news magazine whose business model is pre-Internet and therefore producing of red ink -- rather like the Federal government. This is from Wikipedia.

Let us not forget that the joy of subsidized home ownership after 1935 became the agony of foreclosures and upside down mortgages in 2007-the present. What looked like an angelic invention in 1935 turned out to be demonic for the losers of 2008.

The housing market ripped off Clarence's wings in 2008. Bernanke is trying to glue them back on. It will not work. Clarence will not fly. There will not be another housing bubble in the next wave of price inflation. The public will not get suckered again. Not enough buyers will qualify for loans. Mortgage rates will rise. Those investors who buy at high discounts from desperate sellers will do well, but there will be no more house-flipping mania.

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