Flawed Assumptions about the Credit Crisis: A Critical Examination of US Policymakers

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Fraudulent “Credit Crisis” Paves Way for Economic Disaster
By Cliff Kincaid Tuesday, December 16, 2008

Doing the kind of investigative reporting we should expect from the major media, a financial research and consulting firm has released a major analysis of the “credit crisis” that concludes that the claims made by Treasury Department Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke to justify a socialist takeover of the financial industry were demonstrably false.

The analysis, Flawed Assumptions about the Credit Crisis: A Critical Examination of US Policymakers, concludes that the result of the unjustified massive federal intervention in the economy could be similar to the economic crisis in the Weimar Republic of 1922, where disastrous hyperinflation made the currency worthless and threatened the nation’s political system and stability.

The analysis was released by Celent, a Boston-based firm that provides independent information and advice to financial services companies. The 30-page report, made available to Accuracy in Media, does not accuse Paulson and Bernanke of lying about the “credit crisis.” But it does say that “It is startling that many of Chairman Bernanke’s and Secretary Paulson’s remarks are not supported or are flatly contradicted by the data provided by the very organizations they lead.”

Using charts and graphs of data from the Federal Reserve and other agencies, the Celent study says that statements from Paulson and Bernanke about a “credit crisis” affecting businesses, real estate, banks, and state and local governments were just not true.

The report says there is “a contradiction” between what Paulson and Bernanke have said and the reality of the situation, as demonstrated in the official data. It calls these “discrepancies” and says that some of their remarks are “puzzling.”

Asked for comment on why he was able to uncover this information while the major media have not, Octavio Marenzi, founder and CEO of Celent, told AIM, “What we need from the media is more skepticism and more engagement. Too frequently statements are taken at face value. Also, most journalists are under such tight time pressure that they do not have the time to reflect and to dig deeper. They are on a conveyor belt and just trying to keep up with the required level of output.”

Paulson had claimed that, by mid-September, when he persuaded President Bush to go public with demands for Congress to approve a $700-billion bailout plan, the financial system had “seized up,” credit markets had “froze,” and interbank lending had been “substantially reduced.”

But none of this was true. “The freezing of the credit markets that Secretary Paulson cites is not visible” in the data, the Celent report shows.

Paulson also made the claim that blue chip industrial companies could not issue longer-term commercial paper. But this claim “finds no support” in the data, the report says.

Bernanke had claimed that businesses were “confronting diminished access to credit” when in fact “the opposite” was true, the study demonstrates.

The suggestion is made that Bernanke and Paulson were acting on behalf of “a particular set of businesses and financial institutions” and exaggerated the problem in order to justify “unprecedented levels of government intervention in the markets.”

It is implied that these firms were certain big banks and companies. But while they may have been having problems raising funds, the credit market in general was “working well,” the report said.

It declares, “Doubtlessly, a number of the leading financial institutions in the US are in serious trouble, as are a number of the leading industrial firms. However, credit difficulties surrounding a specific set of firms is not the same as a problem in the credit markets in the aggregate.”

The study says that, “A clear and cogent analysis of the credit crisis has not been presented by policymakers, despite the fact that unprecedented levels of public funds are being deployed.” As a result, the “massive injection of funds could well exacerbate the problem rather than help.”

The report says the money supply “has recently increased at a pace never seen before in US history” and could signal a pending bout of hyperinflation. It says the increase is “a staggering 74% in only 84 days” and explains, “Previously, this kind of jump would be seen over the course of a decade or more.”

It then concludes by suggesting that the real danger to the U.S. is not a great depression like that of 1929 but a hyperinflationary period comparable to the Weimar Republic in 1922.

While it is possible that Paulson and Bernanke have additional data supporting their hypothesis that there has been a general breakdown in credit markets, Celent says they have not shared this data with the public and there would have to be an explanation of why the data being released to the public is incorrect. Celent is skeptical that any kind of additional and therefore secret data exist.

The Celent study has gotten limited media attention, including a Reuters news agency report, and CEO Marenzi was interviewed on CNBC for about three-and-a-half minutes by a somewhat skeptical Larry Kudlow.

The minimal coverage is troubling because the Celent study suggests that the Bush Administration and Congress were panicked and stampeded into approving unprecedented socialist measures for the economy that were not justified by the evidence.

The “seizing up” of the credit markets, as reported by the media at the time, has so far resulted in promises of more than $7.76 trillion of taxpayer money in order to “rescue” the financial system, according to the latest Bloomberg News estimate. The money amounts to half the value of everything produced in the nation last year, Bloomberg reported.

Last week 83 members of Congress sent a letter to House Speaker Nancy Pelosi and Rep. Barney Frank, chairman of the House Committee on Financial Services, asking for the CEOs of institutions receiving some of the Paulson bailout money to testify about what has happened to the funds.

Meanwhile, the Washington Times on Monday reported that Bush has nearly doubled the national debt during his eight years in the White House. Reporter David M. Dickson reports that “the number was $10.66 trillion at the end of November, and it has been rising at an astronomical rate.” Today, foreigners hold more than 50 percent of U.S. publicly held debt, the story adds.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, is quoted in the article as saying that the “next big bubble” to affect the economy could very well be a “government debt bubble.”

Some observations:

1. The article seems to suggest that the media would have been more
discerning had they had the time to do so. Utter nonsense. They stoked the fire for the sake of greater sensationalism. They are truly the enemy of free enterprise, and are loving every minute of this.

2. Did Henry Paulson intend to promote state ownership and its resultant socialization of the banks and other industry? I don’t think so, I think he is just a putz.

3. Credit Crisis. What is actually happening is simply a return to normal lending practices. Isn’t it amazing that the resumption of responsible behaviour is now regarded as radical and generating a “crisis”?

4. Why are the auto companies whining to the government for money? The government gave truckloads of dough to the banks for the sole purpose of lending it! Why aren’t the big 3 seeking bank not government monies? Because they know that they are not creditworthy, and are unlikely to ever repay it, so hit up the taxpayers instead.

5. I’ve also been concerned about the prospect of hyper inflation in recent weeks as a result of government actions. This bears watching but until the demand side of the monetary equation picks up, this is not really a threat yet. The output gap which measures the economy’s actual production vs. its production capacity is very wide. If inflation is going to be a problem it won’t be for a couple of years until wage and demand pressures are much higher than they are today. The other thing of course is that there is no longer any really accurate way to measure money supply until all the derivatives and leverage are unwound. Bottom line, no inflation for a while yet.

Richard Scott. December 16, 2008.