Americanly Yours

I recently read Peter and Andrew Schiff’s new book, .”  I am a big fan of Peter Schiff and was excited about reading this book.  Peter Schiff is an economist who is famous for predicting the financial meltdown in advance.  Here is a great video of him making predictions in advance of the meltdown.  He is even laughed at by the other commentators on CNBC and FOX for implying that there was a housing bubble only months before the market crashed.  Well known economists including Ben Stein and Arthur Laffer were among those mocking Schiff.  Interestingly enough, the people laughing at him selected Washington Mutual, Bear Stearns, and Merrill Lynch as great stock picks (all of those companies are now out of business).

This book is a simply written, illustrated allegory which details how economies grow and what can cause economic collapse.  The book begins with three men who are stranded on an isolated island.  The men spend all day fishing just to catch enough fish to barely survive.  After a time, one of the men underconsumes and is able to use his savings to increase the number of fish that he catches.  From this action, an island economy is born.

The story continues for generations and generations (immigrants eventually come to the island) as the island’s economy continues to develop.  I will refrain from giving specific details about the economic expansion so as not to ruin this book.

The chapters contain “Reality Checks” which simply relate the material in the chapter to real life by defining the concepts which are outlined.  In these short sections, the Schiffs explain things like underconsumption, productivity, savings, risk, and so on.  The “Reality Checks” help readers who may have little or no understanding of economics understand basic economics principles.

At the end of each section is a much more detailed (but still simple and easy to understand) section called “Takeaway.”  These sections elaborate on the lessons from the chapter and give further explanation of the underlying economic principles.  They greatly enhance the book by providing the reader with a nice overview as well as a great segue to the next chapter.  The “Reality Check” and “Takeaway” sections both help move the story along and are features which would be great in other books on economics.

The first 5 chapters of this book are absolutely amazing.  The Schiffs do an excellent job of using humor to make reading about economics fun and easy to follow.  They explain the causes of a growing economy (and the effects of a growing economy on society) in a manner that is easy for anyone to understand, regardless of their economic background.

In chapter 6, however, things took a slight turn for the worst.  In this chapter, the Schiffs explain the foundation of a banking system.  I have heard Peter Schiff give speeches on this in the past–his speeches are great and include detailed information on the historical evolution of banking.  It is always interesting to hear Schiff speak about this and I wish that he had included more of this information in his book.  For some reason or another, the Schiffs do not tell the full story of the evolution of the banking system.  This is somewhat perplexing, as he wrote about this quite nicely in his bestselling (and highly recommended by me) book, Crash Proof.  I have also seen him give numerous speeches on this subject, all of which were great speeches which gave this full history.  The failure to include this can certainly be excused, as the Schiffs’ book was surely intended to be a brief, simple overview of how an economy works.

The “Takeaway” section of chapter 6 was also somewhat perplexing.  There was a disconnect between the material in the chapter and the “Takeaway” section which is likely to confuse some readers.  In this section, the Schiffs launch an attack on the Federal Reserve system without explaining to the reader exactly how this ties in with the information in the early part of the chapter.  While I fully agree with the Schiffs on the Federal Reserve, an uninformed reader might have a little trouble understanding the Schiffs’ early critiques of the Federal Reserve System.  To their credit, however, the Schiffs do properly explain this later.

I do want to point out to my reader that this chapter is my only real criticism of the book and that while it is worth pointing out, it does not take much away from what is truly an excellent book.

Following this section, the Schiffs continue to brilliantly explain the evolution of a developing economy into a major economic player.  While the time line is a little off (something that the Schiffs warn the readers of in the introduction), the Schiffs paint a largely accurate picture of the history of the American economy and the growth of the American government (especially with regards to its intervention in the economy).

I wont give away the ending, but the economy in the book suffers a fate similar to that of the American economy during the current economic crisis–the title promises to explain how an economy crashes, so I dont think that Im giving anything away.  However, the Schiffs looks into the future and offers a glimpse of what the future of the American economy might look like if we do not quickly enact sound monetary policies.  Given Peter Schiff’s history of correctly predicting the course of the economy, his prediction is certainly worth taking into account.

My rating:

Strongly recommend:  9/10

Americanly Yours,

Phred Barnet

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How exactly did we get to the point where government owned banks started charging credit card holders fees for paying off their balances every month?

The government passed laws like the Community Reinvestment Act which essentially mandated banks to loan to people who would not have been able to obtain loans otherwise.  Then, the government and the Federal Reserve created money out of thin air and lent it to banks at absurdly low rates.  Flush with new and cheap money, these banks massively increased their lending to “sub-prime” borrowers (begin bubble).  With the money supply growing at unprecedented rates in the 1990’s and this decade, there was always enough money for banks to make loans.  Borrowers were able to take out second mortgages at very low rates.  Home builders rapidly built houses to meet soaring (bubble-induced) demand.

As with all bubbles, this one burst, leaving home builders unable to sell newly built houses and borrowers unable to meet their obligations.  Banks had sold off the rights to their lender’s payments so they would have more money to make new loans.  This left the banks in the same boat as homeowners who could not make their payments.  But, while homeowners and home builders had to file for bankruptcy and sell off their assets to pay their debts, the banks used their lobbyists, fear, and their ownership of the Federal Reserve to convince our government to bal them out.

The government and the Federal Reserve then printed up a bunch of money–they simply created it out of thin air–and gave it to the banks in exchange for ownership.

This happened on October 3rd, 2008.  I can understand the government’s perverse rationale that led it to bail out these banks.  What I can not understand is why, over a year later, the government continues to own large stakes in these banks.

The government has now taken to regulating the salaries of banking officials, as well as the actions and practices of these banks.

So, it comes as no surprise to the observant that the government would use its power and control to create perverse incentives.

Bank of America and Citigroup–two firms now under the ownership of the federal government have begun implementing new fees.  These fees are not on late payments, gong over one’s credit limit, or cash advances.  Instead, these government owned banks have announced fees for customers who regularly pay off their balances.  Customers who leave monthly balances on their cards will not be charged the fees.

A fee is similar to a tax (especially if t is levied by a government owned entity).  Both taxes and fees use pricing to create incentives to change behavior.

Because Bank of America and Citigroup are owned by the government, a fee on those who pay off their balances regularly can be viewed as a tax on them.  Because those who leave monthly balances on their cards are exempt from these fees, this can be viewed as a subsidy for those who leave balances.

Our government is creating perverse and dangerous incentives: they are incentivizing debt and discouraging good and proper financial habits.

But, you cant hardly be surprised by this.  After all:  our perverse government’s perverse actions do tend to lead to perverse incentives.

Americanly Yours,

Phred Barnet

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I have already mentioned that on April 15th, there will be “Tea Parties” across the country to protest things like the bailouts and so-called stimulus packages.  Other people will be protesting federal income taxes and the federal governments intrusion of States rights.

I will be attending the protest at the Georgia State Capitol Building.  There are hundreds of such protests across the country.  As I said earlier, organizers are expecting to have at least 5,000-10,000 people at the Atlanta protest meaning that there could be hundreds of thousands–if not more people attending these protests nationwide.

Some people may not be able to attend the protests for whatever reason.  I have come up with an idea that will still allow you to participate.  My idea is simple:  I urge everyone who banks at a government owned bank to remove your money from that bank–ask for cash–on or slightly before April 15th.  The banks owned by our government are listed here.

Withdrawing money from these banks, at least temporarily, will show the government how powerful the anti-socialism movement is.  No, this wont collapse the banking system, but it will send a strong message.  For each dollar taken out of banks, roughly 12 dollars is removed from the system.  According to FDIC guidelines, a bank is considered to be “adequately capitalized” if it has only 8% of its deposits on hand.  A massive withdrawal of money from government owned banks could cause many of these government owned banks to fall below this 8% threshold, causing great embarrassment to the administration, while demonstrating our power to those in charge.

Its just an idea, but I hope that you’ll pass it on.

It is time that we stand up and take our country back.

Americanly Yours,

Phred Barnet

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By effectively nationalizing the banking industry, our government has made a giant leap away from Capitalism and towards socialism.  Our government now owns large stakes in most of the Nation’s largest banks.  The government has already invested $271 billion of the $700 billion that it budgeted for “stimulating” private banks.  The have committed to funding another $30 billion.  The rest of the $700 billion will follow soon.  Additionally, some members of Congress are already saying that because the first half of the $700 billion isnt being spent “correctly,” more money may be “needed.”

Here is a really cool chart that lists how much each bank has received from the TARP program.  It is updated daily.

I absolutely refuse to put my money in a government owned bank.  I will not allow the government to take the profits it earns off of my deposits to fund any further bailouts.  By banking at a government run bank, you are encouraging these bailouts.  If you are against further (or existing) government bailouts, then it is your duty to remove your money from this bank and place it in an independent bank.  I used to bank at Washington Mutual which is now owned by JPMorgan Chase (which has received $25 billion from the government in exchange for ownership rights).  I removed my money from this bank as soon as I was able to identify a local bank that had not sold part of itself to our government.

I now bank at United America’s Bank in Chamblee.  This is a small bank with only a few locations in Atlanta, Chamblee, and Roswell, but it is a bank that is independent from government ownership.  Plus, it has the added convenience of being the closest bank to my house.  Whether you live in my area or somewhere else, if you oppose government bailouts and government ownership of businesses, you should consider putting your money in a small bank that is not owned by the government.  I would be glad to help you find a non-government owned bank in your area.

Americanly Yours,

Phred Barnet