Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips

Author:Kevin Phillips [Phillips, Kevin]
Language: eng
Format: epub
Tags: General, United States, Political Science, Business & Economics, Economic history, Economic Conditions, Economic Policy, Public Policy, United States - Economic policy - 20th century, United States - Economic conditions - 2001, United States - Economic policy - 2001, United States - Economic conditions - 20th century
ISBN: 9780143114802
Publisher: Penguin Group
Published: 2009-11-15T05:00:00+00:00

These pseudomonetary products fit neither of the two current definitions of money employed by Washington—the narrow M1 (essentially cash, traveler’s checks, and checking accounts) and the slightly broader M2 ( M1 plus most savings accounts, retail money market fund balances, and time deposits under $100,000). However, some think that the new moneylike debt instruments overlap with the definition of M3, the broader money supply that formerly reached measurement into the innards of the financial sector. By definition, M3 includes all of M2 plus large time deposits, institutional money market funds, bank repo agreements, and some overseas Eurodollars. This is the money-supply data that the Federal Reserve decided to stop reporting in early 2006. Let me stipulate: this nomenclature is nerdspeak. The average American would take M1 to mean the standard U.S. Army carbine of World War II, while the average Briton would think of M2 as a major English motorway. And for all I know, M3 may also be the name of a Toronto rock band. Nevertheless, anything that may be creating a parallel monetary universe, serving finance but having an uncertain, possibly disruptive effect elsewhere in the U.S. economy, is worth a brief comment.

The Federal Reserve Board, committed to the premise that the public regarded inflation as “anchored” and under control, doubtless found the earlier U.S. M3 measurement pesky. Given the time frame set out by Harvard’s El-Erian—that the liquidity factories started production back in 2005—ducking that impact may have influenced the Fed’s cutoff timing. According to the ongoing private computations published by ShadowStats.com, the M3 data started diverging from the other two measurements and soaring around the time the Fed decided to drop it. For 2007, the U.S. M3 numbers show runaway inflation in the annual range of 14 percent. In Canada and Australia, M1 measurements for June 2006 to June 2007 were very close to those for M3; in the United States, by contrast, from September 2006 to September 2007, M3 was a full 13 points higher than M1! I will come back to these implications, but for the moment, suffice it to say that (1) something quite unusual has taken place in the U.S. financial sector, and (2) these numbers provide even more support for believing that the U.S. consumer price index understates inflation.

For now, let us return to the crisis in housing and mortgage finance, which appears to have been abetted and deepened by the demand for more and still more mortgages unleashed by of the securitization process in the United States of 2001-6.c

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