One could make the case that the proximate cause for the current financial crisis lies in the Federal Reserve’s monetary policy which attempted to assist financial institutions recover from the dot com crash by keeping the federal funds target rate artificially low for a long period of time.
As you may remember, the dot com boom was an era, some say error, of “irrational exuberance” where computer-related companies that failed to produce a single dollar profit were valued as astronomical prices by the Wall Street Wizards. Until someone noticed that the emperor had no clothes and it came crashing down.
The artificially low interest rates on safe and sound Treasuries was absurdly low, so those that manage the global pools of investment capital turned to the next safest thing: mortgages. Of course, after every creditworthy borrower had received the mortgage they wanted, the Wall Street Wizards, once again, turned to their machinations to produce more “product” and thus the seeds of the mortgage meltdown were planted.
Now the Federal Reserve is repeating the pattern to re-capitalize financial institutions, many of which were technically insolvent, so as to continue “business as usual.”
The way the scam works is …
The Federal Reserve offers to loan financial institutions money at near zero rates; collateralized with the bank’s dodgy paper. As per the Federal Open Market Committee (FOMC), the rate is between 0% and one-quarter of one percent. (0.25%).
Now the financial institution can purchase other institutions for their assets, invest more money in high-yielding consumer credit card debt or engage in consumer and commercial lending to stimulate the economy. But, in nothing more than an electronic bookkeeping entry, the financial institution simply re-invests the money in federal treasuries for a guaranteed profit of at least three percent. With billions of dollars in play, this is a totally unearned profit that will help the financial institution to erase that portion of their balance sheet which would render them insolvent.
The resulting federal securities could also be used to meet the institution’s core capital requirements or to collateralize further debt.
As a result, the American consumer gets little or nothing in return on their bank deposits and fixed income investments. Thus producing crushing burden on senior citizens living on fixed incomes and needing the income from their investments to survive.
So I am understandably upset when I see Reuters reporting …
“Bullard sees Fed action if recovery fails”
“Federal Reserve policy makers all agree they would provide more support to the economy if the recovery suffers a serious setback, St. Louis Federal Reserve Bank President James Bullard said on Friday.”
"’I think everyone on the committee is completely on board with the idea that, you know, if things got really bad, we would try to take other action,’ he said on CNBC television.”
“Bullard said he has concerns that the Fed's current policy of promising exceptionally low interest rates for an extended period could have the opposite of its intended effect of stimulating growth.”
Other than re-capitalizing the banks, the Fed policy does not seem to be pumping additional liquidity into consumer and commercial lending. And the Fed policy does little or nothing to compel the financial institutions to start releasing their overhang of foreclosed and distressed properties on the market so that the housing market can find it’s true bottom and return some semblance of “trust” in the valuation of real estate assets.
The reason that the financial institutions are delaying significant and meaningful mortgage modifications is that they are either hoping for better times in which to sell their real estate or fear having to actually book loan losses which might impair their balance sheet and require them to raise additional capital or face regulatory problems.
“The Fed's policy setting Federal Open Market Committee promised ultra low rates for a long time to underscore its intention to support the economy as it was battered by a deep financial crisis and painful recession.”
Promoting a rate increase to avoid “deflation” …
Along with Thomas Hoenig, President Federal Reserve Bank of Kansas City, who has courageously called for the Fed to raise interest rates, Bullard is hawkish on a rate increase.
“The St. Louis Fed president's concerns with deflation illustrate the quandary facing the Fed, which has watched the recovery fade despite taking some of the most aggressive actions in central banking history. U.S. economic growth slowed to a 2.4 percent annual rate in the second quarter of 2010 from a revised 3.7 percent growth rate in the first quarter, the government said on Friday.”
Is the answer to real deflation, artificial inflation?
There is no doubt in many economist’s minds that the government plans to inflate its way out of this recession. By creating more “but cheaper” dollars, the Fed can pay down some of its outrageous debt at cheaper costs using devalued money. And, if you remember the definition of inflation: “too much money chasing too few goods, thus driving up prices,” you can see the result of turning on the printing press and cranking out additional dollars.
“Bullard said with interest rates near zero, the central bank should shift its focus from promising low interest rates to using its printing press to push more credit into the financial system as economic conditions fluctuate.”
“However, some at the central bank remain concerned the Fed's super-easy money policies are a recipe for inflation down the road. Bullard said the Fed must also be on guard against such risks.”
The economist’s famous “on the one hand” viewpoint …
"’There's two sides to this,’ he said. ‘On the short term you do have pretty low inflation, and trending down, and you do have some risk there. In the medium term, you've got a huge balance sheet that could turn into really a lot of inflation.’"
What they are NOT saying …
The greatest strength in the United States economy comes from being able to create and manufacture things that other people want. Strength does not come from the Wall Street Wizards who create nothing, but make outrageous bonuses for nothing more than pushing paper back and forth over the table as they whipsaw the American economy with their daily tales of “why the market behaves as it does.” Producing joy or fear for mass consumption in order to drive the volatility that makes trading profitable.
And it is this production capability that the U.S. government is killing. By imposing onerous rules, regulations and taxes. By supporting unions which kill productivity, raise costs and reward seniority over merit. No wonder America outsources to remain competitive. At every turn the anti-capitalist Marxists and their environmental friends are attempting to kill American business – and the economy – in order to pursue their toxic agenda.
Not to mention that these Wall Street Wizards fail to realize that it is better to sell foreclosed homes to creditworthy borrowers at an affordable price point than it is to let them simply decay into nuisances which must be bulldozed. Without a reliable real estate market and somewhat of a true valuation for real estate assets, you cannot spark a true and meaningful recovery.
Bottom line …
The Obama Administration is playing both sides of street: pandering to Wall Street to raise significant campaign funds (using financial regulatory reform as a fund-raising vehicle) and the toxic unions to raise voter support. They, the incompetent politicians, are simply screwing over the American consumer/taxpayer with their policies which are designed to push a political ideology, not a recovery.
We need to vote for competent and honest brokers to represent “we the people.” We need to break the Carter-Clinton-Bush-Obama” cycle of politics above people and once again return our nation to its rightful owners.
Reference Links …
“Nullius in verba.”-- take nobody's word for it!
“Beware of false knowledge; it is more dangerous than ignorance.”-- George Bernard Shaw
“Progressive, liberal, Socialist, Marxist, Democratic Socialist -- they are all COMMUNISTS.”
“The key to fighting the craziness of the progressives is to hold them responsible for their actions, not their intentions.” – OCS "The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius “A people that elect corrupt politicians, imposters, thieves, and traitors are not victims... but accomplices” -- George Orwell “Fere libenter homines id quod volunt credunt." (The people gladly believe what they wish to.) ~Julius Caesar “Describing the problem is quite different from knowing the solution. Except in politics." ~ OCS
“The key to fighting the craziness of the progressives is to hold them responsible for their actions, not their intentions.” – OCS
"The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius
“A people that elect corrupt politicians, imposters, thieves, and traitors are not victims... but accomplices” -- George Orwell
“Fere libenter homines id quod volunt credunt." (The people gladly believe what they wish to.) ~Julius Caesar
“Describing the problem is quite different from knowing the solution. Except in politics." ~ OCS