One of my favorite shows to watch after a long day at work is Countdown with Keith Olberman. It is entertaining with its derision of Bill O'Reily on its Worst Persons and its lambasting of the Bush Presidency in its Bushed segment. However, there is one statement made by Keith Olberman with which I must take exception. In one segment he compared the administration's inaction in the face of the current mortgage crisis to what he called "Hoover's let them eat cake" mentality. This statement reveals an ignorance of the actual historical record.

It is a commonly held belief that the Great Depression was brought about by Herbert Hoover's inaction and that the Depression was an example of the failure of laissez faire capitalism. This belief is false. The Great Depression was initially the result of malinvestments caused by the Federal Reserve's rapid inflation of the money supply during the 1920's. Also, under the Hoover administration the federal government created many programs that would lay the foundation for Franklin D. Roosevelt's New Deal, which helped to prolong the Depression. In fact, during his election campaign, Roosevelt portrayed Hoover as a wasteful spender. The belief that Hoover did nothing is false.

The malinvestments that have occurred in the housing market must be liquidated in order to provide a foundation for future prosperity. The knee-jerk reaction for our government "saviors" to do something is short-sighted and reflects a lack of knowledge of past economic crises and their causes.

All of the pundits and politicians are throwing in their two cents as to the cause of the current fiasco in housing and financial markets; however, it is one huge exercise in missing the point. Almost no one in the mainstream is willing to talk about the banking industry's complicity.

First we must understand how the Federal Reserve, the bank of all banks in the U.S., manipulates interest rates by manipulating the money supply. There are several methods that the FED can employ; however, its instrument of choice is its open market operations. When the FED wishes to expand credit and lower interest rates, the FED buys on the open market, usually securities and/or bonds. The FED purchases on the open market from a dealer, say, Goldman-Sachs. Where does the FED get the money to make the purchase? It creates it out of thin air! Goldman-Sachs has the money credited to their account with their commercial bank, say, Chase-Manhattan. So, the the effect is that the amount of "money" has increased by the amount "spent" by the FED; however, the monetary inflation does not end here. Commercial banks are required to keep only a percentage of their accounts in the form of demand deposits with the FED. The rest forms the basis of loans that will be made by commercial banks. As the FED expands credit and banks have more money to lend, interest rates will drop. This monetary inflation, however, will lead to forecasting errors and malinvestment.

Next, we examine the role interest rates would play in coordinating production across time in a free banking system. When consumers would show a general preference to spend less in the present and to save, banks would have more money the lend, and therefore, interest rates would be lower. This serves as a signal to businesses that it would be a good time to undertake costly, time-consuming projects to expand capacity for future production. When consumers showed a general preference to spend in the present rather then save, banks would have less money to lend, and therefore, interest rates would be higher. However, interest rates can only coordinate production across time in such a manner if they are allowed to fluctuate freely in response to consumer demand and preferences.

Enter the central bank. It can be shown historically that the natural tendency of central banks and the state is to inflate the currency or to expand the amount of credit available in a society. When the Federal Reserve artificially forces down interest rates by expanding the money supply, a mismatch of market forces occurs. Interest rates have been lowered when consumers have shown no preference to save in the present and spend in the future. As a result, forecasting errors on the part of businesses and individuals occur. Projects that appear to be profitable at the time are undertaken, driven on by cheap credit. For a time the economy appears to be doing well--new construction is being undertaken, businesses are expanding their production capacity, etc. However, the economy is essentially on a "sugar-high." Many of these projects will turn out to be unsustainable.

Pressure will build for the liquidation of these unsustainable projects and unwise investments. Here we see the bust following the boom. At this point, the Federal Reserve can continue its monetary inflation (as it often does) in an attempt to keep the boom going. Also, the state will often attempt prop up failing markets via emergency loans and bailouts; however, this will only make economic recovery a longer process. At some point the brakes must be applied to the Federal Reserve's monetary inflation; otherwise, runaway price inflation can occur, destroying the value of the monetary unit.

There are two primary culprits in the current housing and financial crisis. The first is the Federal Reserve. Greenspan's policy of cheap credit following 9-11 sent the economy into a period of apparent prosperity; however, it was illusory. Initial growth driven by malinvestment cannot be sustainable. This was most apparent during the rise and collapse of the "housing bubble."

The second culprit is the system of fractional reserve banking itself. The fact that bank runs happen is due to the fact that the entire baking industry is based upon a fraudulent system.

Yes, President Obama is a complete and utter failure when it comes to economics.  Keynsian economics and the New Deal didn't pull us out of the Great Depression; why he thinks it will work this time is beyond me.  Obama's porkulus, i mean stimulus, bill won't work.