Funny money

By Charles Bogue
Real Talk

When I was young, I heard stories of inflation in South America so high that locals would show up with a wheelbarrow full of money to make a modest purchase of food or clothing. We sometimes called it funny money.

The United States of that day would scoff at such financial mismanagement. Yet today, the clock that tracks our national debt in Times Square ran out of space at $10 trillion and is being redesigned to accept a quadrillion.

There is a menu of likely causes for how we got into this mess, but the result is that the United States has the world’s highest level of foreign debt — debt that nearly doubled during the presidency of George W. Bush.

As President Barack Obama continues unprecedented spending in an attempt to save our economy, we may soon need to borrow that wheelbarrow from South America in order to complete our own shopping.

In addition to trying to salvage our economy, the president revealed this week his 88-page financial regulatory reform — his effort to curb the financial system’s history of excess and prevent history from repeating itself.

Basic economics requires a monetary policy be used as a tool to regulate the business cycle through expansion, recession and recovery. Oversight of the monetary supply is critical to this process. 

I propose that the creation of funny money influenced the eventual dismantling of our economy. Unlike government-printed money, funny money is created by financial institutions without producing a tangible product or rendering a service. 

Funny money is not new. The savings and loan crisis of the late 1980s was initiated when the government chose to guarantee individual deposit accounts of savings and loan companies in addition to banks. This brought a flood of money to infant companies that then invested without regulation or restriction.

Funny money was clearly created in the run-up to the dot-com crash of the early 2000s by the excessive funding and underwriting of yet-to-be-born companies without earnings, assets or products.

Enter 2009. As we recover from a binge of spending we find it is not real but funny money that fueled the fire. By providing home loans and credit cards to borrowers lacking ability to pay, financial institutions found a lucrative profit source for their investors.

By pooling these flawed loans and classifying them as separate assets, investment companies leveraged, insured and packaged these products for sale to unsuspecting investors, creating even greater supply of funny money.

In this entire process, including the creation of exotic unregulated financial products, profits were made, but few, if any, actual goods were produced or services provided. More funny money came into the system, fueling consumption with money yet to be earned. Profit without productivity created a false economy built on a foundation of useless paper. 

School is out for the country’s financial institutions, and they have clearly failed the test of self-regulation. As we hear the cries of innocence and requests for leniency, the entire class will suffer for the crimes of the few. No acts go unpunished and some things never change.

Charles Bogue is a real estate broker in Napa. He can be reached at 486-5511 or e-mail: cbnapa@napanet.net.

Napa Valley Register Copyright © 2009