I was reading Diana West's article on Obama's bow to King Abdullah, and was impressed when she indicted Bush for his obsequious treatment as well. So, in that same spirit, I think it is time we looked at our financial problems honestly, placing blame without consideration of party. We have heard a lot recently about Clinton's push to liberalize the Community Reinvestment Act, or mentioning the fact that Carter started the CRA, but, to be honest, the CRA, while partly to blame is hardly the entire story behind our financial worries, and the blame belongs to both parties, both now and in decades past.

To begin, as I wrote in my posts "Not Entirely to Blame", "Explaining Past Crashes" and "WSJ Misses the Mark AGAIN", the fact is that the Community Reinvestment Act, Fannie and Freddie, as well as Clinton's policy changes only served to shape the collapse, perhaps slightly exacerbating the problem. The truth is, we are facing a monetary problem, not a financial one, and the monetary problem is continual, rather rapid, inflation of the money supply. And, if we look only at the past three and a half decades, every president from Nixon to Obama is to blame, with a partial exception for Reagan. As I wrote in "The Reagan Lesson" and "A Thought on the Clinton Surpluses", Reagan alone of all the presidents since Nixon resisted the impulse to use the Federal Reserve's open market operations to finance government spending by printing money. Granted, Reagan's choice did place a drag on growth and helped create the slump of 1981-82, but looking back, if we are going to spend more than we take in, private borrowing still seems preferable to inflating the money supply.

Actually, going back even farther, our problems go back over a century, to the beginning of federal intervention into the banking industry just ebfore the Civil War. As I described in "The Limits of Technocracy" and "The Inflation Engine", even the modestly centralized banking scheme which preceded the Federal Reserve allowed the pyramiding of inflation, as well as the central direction of banks to inflate uniformly, making it inevitable that we would begin to experience the "boom and bust cycle". However, as described in "Our Financial Problems", it was really with the Federal Reserve that centralized inflation became a reality. But even the early Federal Reserve, though inflationary enough to create the boom leading to the Great depression, was not as inflationary int he early days as it was to become.

The real birth of modern inflation started with FDR's decision in 1934 to ban the holding of monetary gold. With US citizens no longer able to withdraw gold from the banks, there was no longer fear of "bank runs", which allowed inflation to reach heights previously unknown. However, there was still the threat of foreign holders fo dollars demanding redemption in gold, so there was a check on inflation. The amount of money and credit still needed to retain some relationship to the amount of gold we had on hand.

Whihc brings us to 1973 and Nixon's closure of the gold window. This began our modern cycle of rapid inflation, ever more rapid boom-bust cycles, and, recently, the habit of trying to inflate our way out of any crisis, leading to ever worsening financial collapses, narrowly averted through ever escalating inflation.

Between 1971 and 1981 prices, as measured in gold, rose 600%. That is unprecedented in any era, and led, very rapidly, to the Carter-era phenomenon of "stagflation", rising prices with collapsing growth rates. While many treated this is unprecedented, it was not. Only their obedience to Keynesian dogma kept them from understanding that ti was the inevitable outcome of inflation, as we saw in Germany in the early 20's. After the frenzy of activity caused by misdirected investment during the early stages of inflation, the next stage is for growth to stop, the economy to even begin shrinking, while prices continue to rise. It is the logical outcome of both a loss of faith in the currency, a reluctance to invest in non-concrete assets, and the loss of capital caused by early malivestment. (See my essay "Inflation and Uncertainty" for a partial explanation.)

Only Reagan's change of policy kept us from proceeding farther in the hyperinflationary direction. By voluntarily suffering through a deflationary crisis in 1981-1982 and refusing to try to inflate his way out, Reagan kept the economy going and provided several years of real growth and investment which have kept us going through the many inflationary years since. His government and economic plan was far form ideal, spending was still out of control, money was still being printed by the Fed, just much more slowly, and we never once approached a balanced budget, but it was still superior to the inflationary madness that came before him.

However, since Reagan, we have seen nothing but inflation, rather rapid inflation, followed by one crisis after another. Fortunately, having a strong foundation from the Reagan years, we were largely protected until nearly the end of the Clinton administration, when the dot-com bubble and subsequent crash occurred. Clinton remedied this largely through inflationary means, leading rapidly to the collapse of 2000-2001, which George W. Bush solved through similarly ill-considered inflation, giving us the housing boom and bust, the results of which we are now experiencing.

And what next? Well, if the present is any guide, Obama will try to inflate his way out. If he succeeds, we can expect another short lived boom, followed by an even worse collapse. At some point, either now or later, this solution will not work any longer, and we will have to face the deflationary crisis we have been postponing for over a decade. In all those years it has continually grown worse, and it will not become easier to deal with by putting it off more.

When we finally have to face it, however, I worry that politicians, never brave in telling constituents they have to experience any discomfort, will try the "tried and true" solution, and will attempt to inflate their way out one last time. As a result, we will once again experience the Carter-era "stagflation" or worse. Which means, likely, not only will we eventually have to suffer through a pretty severe deflationary crisis, but before we do, we will experience all the pains of hyperinflation as well.

Then again, perhaps I am too pessimistic. After all, Reagan toughed out the recession of the early 80's. Then again, that was a different age, and politicians, and voters, seemed a bit less weak then. After all, while I blame the politicians, I should probably blame us. As I wrote in "What We Deserve", the politicians we have are nothing but a reflection of our own weaknesses.