Icarus Forgotten

“Daedalus told his son, ‘Escape may be checked by water and land, but the air and the sky are free,’ and he made two pairs of wings for them. They put them on and just before they took flight Daedalus warned Icarus to keep a middle course over the sea.” (Mythology by Edith Hamilton, 1942, p. 193) Most of us know this story. It is often used to “show what elders say youth disregards.” (Hamilton, p. 193) Once upon a time in the United States of America, elders said things like:
· A penny saved is a penny earned.
· Working hard is its own reward.
· An honest man’s pillow is his peace of mind.

Then something changed in our Nation. The first time it reared its head, we called it the “Roaring 20’s”. It was followed by the “Great Depression”. The next time it showed up, we called it the “Season of Love” or just “The 60’s”. Of course, this was followed by the stagflation of the 70’s. The latest incarnation was the “irrational exuberance” of the 90’s and first part of the 21st Century. The economic correction that must follow an economic boom has begun. It seems the bear has begun clawing his way through the Stock Market. (As of today’s writing I see the deceptive “bear bounce” has begun. I firmly believe this won’t last more than 1 week, 2 at the most. By the end of October, it will be evident that we are in a bear market, or worse.)
“As the two flew lightly and without effort away from Crete the delight of this new and wonderful power went to the boy’s head. He soared exultingly up and up, paying no heed to his father’s anguished commands.” (Hamilton, p.193) (emphasis mine)
Economically, the USA has played the part of Icarus – perfectly. It is almost like no one had ever heard this story. The advice of our elders – especially the principles and ideals of our founding fathers - was disregarded. During the Clinton Presidency, we were told that we had ‘entered a new era’; told that new technology was the “driving force” behind the new market growth. Then a peculiar thing happened. In preparation for the “impending disaster” of Y2K, the Federal Reserve, under Alan Greenspan, printed lots and lots of currency. Then a short time later, the technology bubble burst. The printing presses started again. The markets improved and suddenly housing became extremely affordable. Strangely, Mr. Greenspan resigned at the high point of his career, or so it seemed at the time.
“Then he fell. The wings had come off. He dropped into the sea and the waters closed over him. The afflicted father flew safely to Sicily, where he was received kindly by the King.” (Hamilton, p.193)
Mr. Greenspan played the part of Daedalus. He gave the American people the wings, and the proper instruction. Then he watched as the markets flew, then the prices of homes began to rise. Then he resigned from the position that he had used to shape the wings. You may point a finger at the bureaucrats for not enforcing the regulations. You may point a finger at legislators for relaxing the “rules” for lending. You can point a finger at “greedy” mortgage lenders, hedge and other fund managers, and CEO’s for their short sighted actions. I believe legislators and bureaucrats get extra blame for essentially forcing lenders to relax their standards for loan approval. However, I am pointing all my fingers at Alan Greenspan, Ben “Helicopter” Bernanke, and the whole institution of the Federal Reserve.

The others do bear some responsibility for what they did or did not do during this period of time. However, with credit being passed out like candy at Halloween, Our Nations President evading direct questions with answers like, “well that depends on what the meaning of the word ‘is’ is” and a new millionaire on every street corner. What was happening during this period of time was not just economic. It was the Roaring 20’s Part 2. The relaxed moral standards of the society, easy money and easy everything else matched up perfectly with the 1920’s and 1960’s. What is happening today is not just an economic contraction. Hopefully this time we will pay attention to what got us here. Hopefully individual people will look at their actions, take responsibility for their choices and stop trying to blame others for the consequences of their actions. I’m not holding my breath.

Update:
This article was published today, Oct.16th at Mises.org.
Good and Bad Credit by Frank Shostak
http://mises.org/story/3151

It provides information that explains why I believe that the Federal Reserve is primarily responsible for our current economic correction. From the article;
There are two kinds of credit: that which would be offered in a market economy with sound money and banking (good credit); and that which is made possible only through a system of central banking, artificially low interest rates, and fractional reserves (bad credit).

Mr. Shostak then provides a very good explination of this process. Again from the article;
Consider the case of a baker who bakes ten loaves of bread. Out of his stock of real wealth (ten loaves of bread), the baker consumes two loaves and saves eight. He lends his eight remaining loaves to the shoemaker in return for a pair of shoes in one week's time. Note that credit here is the transfer of "real stuff," i.e., eight saved loaves of bread from the baker to the shoemaker in exchange for a future pair of shoes.
Also, observe that the amount of real savings determines the amount of available credit. If the baker had saved only four loaves of bread, the amount of credit would have only been four loaves instead of eight.
Note that the saved loaves of bread provide support to the shoemaker, i.e., they sustain him while he is busy making shoes. This means that credit, by sustaining the shoemaker, gives rise to the production of shoes and therefore to the formation of more real wealth. This is a path to real economic growth.

Since we no longer live in a "barter economy," we use money not food or shoes to get what we want, so Mr. Shostak provides this explination;
Observe that money fulfills the role of a medium of exchange. Hence, when the baker exchanges his eight loaves for eight dollars, he retains his real savings by means of the eight dollars. The money in his possession will enable him, when he deems it necessary, to reclaim his eight loaves of bread or to secure any other goods and services. There is one provision here: that the flow of production of goods continues; without the existence of goods, the money in the baker's possession will be useless.

I have only gleaned a small amount of information from this article. If you are not familiar with these ideas regarding money and the role of the Federal Reserve, I highly recommend that you take the time to read the entire article. Then spend some time reading other information at Mises.org. It is a great resource for Austrian Economic ideas.