Monday, October 13, 2008
The AP headline blares "European governments offer $2 trillion for banks", making U.S. efforts to cure what ails credit and financial markets look wimpy by comparison.
Will it work? Who knows? So far, so good.
Stock markets are soaring all around the world, a discernible easing is now being seen in credit markets, and some small level of confidence is returning.
European governments say they are putting nearly $2 trillion on the line to protect the continent's banks through guarantees and other emergency measures.It is as if there is an infinite supply of money and credit on which to draw.
Pledges by Britain, Germany, France, Spain, Austria and Portugal in recent days have reached a total of $1.96 trillion. The sums are considered a maximum, and might not all be spent if the financial crisis eases.
Many of the pledges came Monday, a day after the 15 nations that use the euro currency agreed on an unprecedented bank rescue plan.
Well, actually, there is no upper limit on the amount of money and credit that the world's central bankers and politicians can summon to help make things better.
Ludwig von Mises must be turning in his grave.
Some excerpts from The Theory of Money and Credit:
"The essence of a credit-expansion boom is not overinvestment, but investment in wrong lines, i.e., malinvestment."Obviously, the world's firefighters are now much too busy putting out the raging fires to worry about any water damage that might result.
"What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit boom is built on the sands of banknotes and deposits. It must collapse."
"If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders."
"Credit expansion is the governments’ foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous."
"The final outcome of the credit expansion is general impoverishment."