Chain Reaction I

From Peter Schiff: "The mistake made by the Fed during the 1920's was expanding the supply of money and credit too rapidly. However, as increasing productivity prevented consumer prices from rising, the Fed was unconcerned about the inflation it was creating. Instead, the excess money and credit that spilled into financial and real estate markets caused asset prices to rise, which resulted in claims of a 'new era' (sound familiar?). The bust of 1929 led to the Great Depression of the 1930's not as a result of Fed tightening, as Bernanke claims, but due to the misguided economic policies of the Hoover and Roosevelt administrations. "

Melchior Palyi in "Twilight of Gold, Myths and Realities." writes, "The chief reason for the financial confusion in the late 1920s, as in similar eras of the past, was the credit inflation. Combined with stable price levels, it generated a sense of security and an overestimation of the expansionary potential. This misled a dynamic society into reckless speculative ventures on an unprecedented scale. Believers in monetary stability were carried away by their wishful thinking."

In Q2 2005, 61.7% of US bank total earning assets consisted of mortgage related holdings. Ten years ago, that share was 48%; in 1987, it was just 33%.

More to come in Chain Reaction II