So, let’s understand one thing, Mr. Bernanke and the Fed, Treasury Secretaries Paulson and Geithner, and our other assorted financial messiahs saved nothing. What they did was prop-up a no longer viable way of doing things, and the only question from the beginning was how long the props would last. With yesterday’s Fed announcement that they would keep the Fed balance sheet above two-trillion dollars, it’s obvious none of the props can be taken away, and no doubt, over time will be added to, again not for revitalizing anything, but simply propping a no longer viable system.
What’s been amazing about the last three years is how little the dialogue about the economy has changed in anyway. The monetarists are not simply fully in charge, but still completely dominate all economic thought and policy. Let’s understand what happened in this country over the past three decades. We undertook an experiment that the best economy was one that concentrated wealth and assured not high paper asset prices, but bubble prices. Each time the bubble deflated, more money was thrown into the system to inflate a new and bigger bubble. Unfortunately, the girth of the last bubble was so large, it became impossible to blow a new one, instead the Fed has focused on trying to keep parts of the last bubble inflated. This is a losing game, which will come apparent to all over time.
Yesterday’s Fed announcement will soon be followed by others, it has one end in mind,(tx yves)
The Federal Reserve’s decision to buy Treasuries and keep interest rates low will support “risk assets” without bringing down unemployment, said Anthony Crescenzi at Pacific Investment Management Co.
Raising asset prices has been the number one goal of economic policy in the last thirty years. As former Fed Chair Alan “Bubbles” Greenspan stated last week:
I don’t know where the stock market is going, but I will say this, that if it continues higher, this will do more to stimulate the economy than anything we’ve been talking about today or anything anybody else was talking about.
The question is how long can the Fed and Treasury continue propping? Looking at the Japanese experience one could say indefinitely, but with ever decreasing returns. Japanese stocks and real estate, twenty years past the popping of their bubble, remain at 20 – 25% of their peak bubble values. Think about how far that’s going to get you in your 401k retirement. Its hard to see how the Fed’s propping will end any differently.
Deflation is not simply a monetary problem. The 1930s Depression wasn’t caused by the Fed. Milton Friedman was wrong on this, as he was most things. All deflations arise from large financial bubbles that precede them, and these bubbles are signs of serious imbalances in the economy. In the end, deflation is not going to be addressed until the imbalances are dealt with, and we’re a long way from that. The American trade deficit is once again up to record highs — so much for doubling exports — wages continue to sink, military misadventures continue to drain the public purse, and our oil addiction continues unabated. Now when you add to that, despite all the best of the Fed’s efforts, a slow grind down in asset prices, you would think at some point we’ll reach a point to begin a real discussion on change, if so, we’re not there, yet.
Cross-posted from Archein:
Archein
Enjoyed your post. Found the post via yahoo. The housing market is the only thing that is going to turn around the economy. Particularly in Arizona.