Federal Reserve to inflate another asset bubble to kickstart economy?

January 26, 2009 by · Leave a Comment
Filed under: Opinion 

Is this what I am actually reading?  We should create more mal-investment to spur spending that will lead us right into another crisis that would likely be larger than our current debacle?  If this tells us the only way to fix systematic problems is by creating others ones, then I have to tell you that we might need to look our how we are structuring our monetary system.  

The more you read into all the problems we read about in the daily financial news, it makes me wonder if some other financial forces are at play that are residue to other artifacts?  My suspect is the extension of credit through a fractional reserve monetary system.  If money = credit through how we treat paper currency and checkbook/debit money then compound interest equals compound debt by banks taking more deposit and using that to extend credit back into the financial system as loans.  

This looks to be a recipe for disaster and we might be making it even worse if we are bailing out the debt while incomes are falling.  Maybe the default of the debt was part of the flawed process.  This is basically I am with this whole crisis.   When you step back and take a close look at how all these pieces interact and how the news has come out and what order, you can see evidences of what I wrote all over the place.

News:

Federal Reserve Chairman Ben S. Bernanke and his colleagues may try once again to cure the aftermath of a bubble in one kind of asset by overheating the market for another.

Fed policy makers meeting tomorrow and the day after are exploring the purchase of longer-dated Treasury securities in an effort to push up their price and bring down their yield. Behind the potential move: a desire to reduce long-term borrowing costs at a time when the Fed can’t lower short-term interest rates any further because they are effectively at zero.

The risk is that central bankers will end up distorting the Treasury market, triggering wild swings in prices — and long-term interest rates — as investors react to what they say and do. “It sets forth a speculative dynamic that is very unstable,” says William Poole, former president of the Federal Reserve Bank of St. Louis and now a senior fellow at the Cato Institute in Washington.

The Treasury market has “some bubble characteristics,” Bill Gross, the manager of Newport Beach, California-based Pacific Investment Management Co.’s $132 billion Total Return Fund, said in December on Bloomberg Television. He echoed that sentiment last week.

“I will say, and I have said for the past three months, the governments are very overvalued,” Gross said in a Jan. 20 interview. Treasuries last year returned 14 percent, according to Merrill Lynch & Co.’s Treasury Master Index, their best performance since 1995.

Inflated Prices

Recent history shows the economic danger of inflating asset prices. After a stock-market bubble burst in 2000, the Fed slashed interest rates to as low as 1 percent and in the process helped inflate the housing market. The collapse of that bubble is what eventually helped drive the U.S. into the current recession, the worst in a generation.

Faced with the danger of a deflationary decline in output, prices and wages, the Fed is considering steps to revive the moribund economy. On the table besides bond purchases: firming up a pledge to keep short-term interest rates low for an extended period and adopting some type of inflation target to underscore the Fed’s determination to avoid deflation.

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