Skip to comments.Central Problem: the Central Bank
Posted on 12/26/2009 12:49:45 PM PST by reaganaut1
[T]his is neither a housing crisis nor a Wall Street banking crisis. This is a monetary crisis, rooted in the lending of money created out of thin air. This is what leads to economic booms and busts.
The current crisis goes back to the Asian Contagion of 1997 and the meltdown of the Long Term Capital Management hedge fund in 1998. In response to each of these situations, the Federal Reserve cut interest rates and rapidly expanded the money supply. This excess liquidity helped push stocks, especially tech issues, to unsustainably high levels. The excess money created by the Fed and the banking system spilled into the rest of the economy, pushing up consumer prices.
To combat the rise in prices that it had caused, the Fed tightened monetary policy, which precipitated a massive plunge in stocks. Then, to bail out investors and stimulate the slowing economy once again, the central bank expanded the money supply rapidly to force rates lower. It ultimately jammed down the overnight fed-funds rate to 1%.
Unhappy with the correspondingly low returns on money-market funds, recently burned by the stock market, and spurred on by Wahington policies intended to encourage homeownership, investors turned to real estate, largely housing, seeking higher returns. In time, in the hands of frenzied investors, the new money created by the Fed and banking system boosted home prices sharply.
In our present crisis, excess money created by the Fed also pushed up consumer prices. Once again, concerned about this, the Fed raised interest rates, thus raising mortgage rates. Subprime borrowers were the first casualties of these higher rates. Unable to afford their interest payments, they kept refinancing their loans by taking out new ones.
(Excerpt) Read more at online.barrons.com ...
A lot of truth in this article
save for later
We can’t help but realize as to who has some influence on the Fed (fellow bankers, real estate interests and other associated interests).
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