Uncle Billy, Starring Ben Bernanke

Recently by Gary North: Dr. Keynes’s Health Care Prescription

Back in 2002, I wrote a review of It’s a Wonderful Life. In that review — written in the midst of the housing bubble — I offered this analysis of the savings and loan industry and its effects.

In Anno Domini 2002, we have been told that what has saved the American economy, and hence the world’s economy, from the miseries of a deep recession is the housing market. There is cheap mortgage money available, and Americans are now re-financing their homes. Fannie Mae and Freddy Mac are merely the Bedford Falls Building & Loan Society gone national and federalized through presumed loan guarantees for investors. Odd as it may sound, in this recent real-life remake of It’s a Wonderful Life, George Bailey is played by Alan Greenspan. He has received generally favorable reviews. . . .

The message: George Bailey made a difference because he helped depositors make loans to each other that were secured by real estate. That was the mode of national redemption in 1946, after a decade of depression and half a decade of war: “Own your own home!” On this theological foundation was built Levittown and the other post-War tracts. Exactly how Bailey did this during the Great Depression, the movie never says.

In the real world, building and loan associations did it because the U.S. government changed the laws under Roosevelt’s Administration regarding fractional reserve banking. There would be no more bank runs. The government would insure against this. It would make safer what fractional reserve bankers had feared most: borrowing short (accepting deposits that were redeemable on demand) and lending long (30-year loans at a fixed rate on real estate).

Then the government inflated the currency, raising interest rates, but also raising people’s dollar-denominated net worth through rising prices on their homes. Lenders then made additional loans based on rising property values: more valuable collateral. And so it goes, even today: the Federal Reserve System’s policy of depreciating the dollar in order to keep home owners happy. Mortgage investors are now locked into investments that will plummet in value if price inflation raises long-term interest rates. The system will either implode in deflation in one long bank run that will not end after one day at 6 p.m., or else the creditors who extended the mortgage loans will see their investments wiped out through mass inflation.

This is why, in a future remake of It’s a Wonderful Life, Alan Greenspan will star as Uncle Billy.

In 2002, I thought that Alan Greenspan should star as Uncle Billy. Now I know that Ben Bernanke was made for this role.

In 2008, we saw the results of Greenspan’s inflation, which was followed by the reduction of monetary inflation by Bernanke, beginning as soon as he came into office in February 2006. That change in policy guaranteed a recession, as I said at the time. It guaranteed the popping of the housing bubble, which I also said at the time.

Today, Bernanke’s FED is expanding the money supply at rates that dwarf Greenspan’s. The FED is keeping the federal funds interest rate close to zero, not Greenspan’s measly 1%.

December 26, 2009

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2009 Gary North

Political Theatre

LRC Blog

LRC Podcasts