Fed Up

Forbes ^ | 5/3/2009 | Steve H. Hanke

[bruinbirdman]

Investors watching the recent rally may think that the Fed has saved the day, but its approach is fraught with danger.

There's a lot of finger-pointing going on over who's to blame for the financial crisis: bankers, derivatives traders and the regulators who failed to keep an eye on them. Let me add two names that usually escape the dragnet: Fed Chairman Ben S. Bernanke and his predecessor, Alan Greenspan.

Rather than confess and repent, the folks in Washington are running the recovery plan with the same misguided prescriptions: more government spending, more government regulation and a fivefold increase in lending capacity for the global deadbeat-assistance agency called the International Monetary Fund. These won't work.

One of our problems is the Fed's preoccupation with the risk of deflation. Fixated on this risk in 2002 and 2003, Greenspan pumped out dollars, cutting the Fed funds rate down to 1%. The easy credit boom continued, inflating asset prices. We're living with the aftereffects of asset speculation. And now the Fed is prescribing more of the same medicine: easy credit. The overnight lending rate for Fed funds is down to 0%.

What the Fed has failed to realize is that most deflations are good ones, not bad ones. During the last two centuries there have been many deflations throughout the world. Almost all of them have been good ones precipitated by technological innovation, rising productivity, global capital flows and sustained economic growth. If farm mechanization cuts the price of wheat, you get a rising living standard. This is good.

Instead of lowering interest rates seven years ago, the Fed should have raised them. This would have blunted the credit boom that led to the bubble. The most visible excess was a buildup in debt relative to GDP and a deterioration of debt quality

[lmr]

The last asset bubble that popped cost many people their homes and destroyed quite a bit of imaginary wealth. We head down the same path, making the same mistakes. The next asset bubble that pops will cost us our currency.

Somehow, I believe this is the goal; the endgame.

[randita]

Deflation is a positive thing, but better if it comes gradually. When it comes with a vengeance right after a huge bubble in home prices and a recession with high job losses, e.g., it leaves a lot of people underwater on their mortgages with no income to pay it.

[palmer]

Rather than confess and repent, the folks in Washington are running the recovery plan with the same misguided prescriptions: more government spending, more government regulation and a fivefold increase in lending capacity for the global deadbeat-assistance agency called the International Monetary Fund. These won't work.

What won't work? Job #1 at the IMF is propping up the dollar, now with a side order of gold price bashing. Ultimately that won't work either, but it will for a while.

[hripka]

Is Anyone Minding the Store at the Federal Reserve?

http://www.youtube.com/watch?v=PXlxBeAvsB8

Rep. Alan Grayson (D-FL) asks the Federal Reserve Inspector General about the trillions of dollars lent or spent by the Federal Reserve and where it went, and the trillions of off balance sheet obligations. Inspector General Elizabeth Coleman responds that the IG does not know and is not tracking where this money is.