Foreclosure Stokes Debates on Capitalism and Socialism

Keynes had said that the best way for destruction of capitalism was the debauching of the currency. However Ben Bernanke does not agree. He is far more concerned about deflation – an unbroken cycle of dropping prices, defaulting debts, foreclosures of homes and increasing unemployment. In the 1930’s America experienced deflation. Milton Friedman won the Nobel Prize for his thesis that it was the Federal Reserve and the bursting of the bubble that it had created ultimately led to the Great Depression.

Friedman noted, “For every $100 in paper money, in deposits, in cash, in currency, in existence in 1929, by the time you got to 1933 there was only about $65, $66 left. And that extraordinary collapse in the banking system, with about a third of the banks failing … with millions of people having their savings essentially washed out, that decline was utterly unnecessary. The Federal Reserve had the power and the knowledge to have stopped that. And there were people at the time who were … urging them to do that. So it was … clearly a mistake of policy that led to the Great Depression.”

It seems Bernanke is battling the war of 1929 in the year 2009. With the explosion in M1 – it being the basic supply of money, there is no dearth of dollars even if circulation of it is slow. To end the recession Bernanke is courting a bigger risk known as hyperinflation. This phenomenon has destroyed more countries than either depression or deflation. Ernest Hemingway had said, “The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”

The past came alive in the shock of last week when the Fed suggested purchasing of $300 billion long-term Treasury bonds. $750 billion would be used for purchasing sub-prime mortgages to help the banks remove them from their account books. It is hoped that by doing so the banks would be able to start lending again. To do all this Bernanke will get busy printing dollars.

This new gushing gesture from the Fed following the $700 billion TARP help line is following a Congressional budget estimate of a deficit of $1.85 trillion this year. It is 13.1% of the gross domestic product and double the share of the economy of USA of the largest deficit it has encountered since the close of the last Great War.

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