Thursday, July 2, 2009

The Fed as an arm of government

Mike Larson at Money and Markets writes:
The Fed is now clearly a politicized institution, working hand-in-glove with the Treasury and the rest of the administration.

In short, the Fed is NOT an independent body willing and able to see around the economic corner and take decisive, proactive steps to head off disaster. Instead, it’s an institution that has failed repeatedly to uphold its responsibilities in the regulatory and monetary policy arenas. And thankfully, policymakers are coming around to that view . . .

You probably don’t need me to tell you the whole long, sorry history of the Fed’s easy money policies — and their repercussions. Suffice it to say that under former Chairman Alan Greenspan, and later Ben Bernanke, the Fed’s policy has been to ignore asset bubbles as they inflate … then come in with monetary guns blazing when they burst, thereby laying the foundation for the next bubble.

In 1998, the Fed went totally overboard after the collapse of Long-Term Capital Management, slashing rates to soothe the capital markets even as the economy was heating up. Then it pumped huge amounts of money into the economy out of fear of the Y2K bug. These two events pumped even more helium into the Nasdaq bubble, which then popped in 2000.

The Fed’s response to that bust was to drive the cost of money into the gutter. Thanks to that policy, and the reckless disregard for prudence throughout the lending industry, we experienced the biggest housing and mortgage bubble in the history of the U.S. We also saw too much dumb lending and asset inflation in the leveraged buyout business, in the commercial real estate arena, in commodities, and in the emerging markets.

Rather than combat those bubbles head on, though, the Fed deferred. And now we’re living with the painful fallout.

Yet remarkably, after two huge bubbles and busts fueled in part by misguided policy actions, the Fed is going back to its old playbook. It’s flooding the economy with the biggest tsunami of easy money the world has ever seen. And predictably, it’s having a whole host of unintended consequences . . .
Thanks to Rob Moody at Strike-the-Root for this reference.

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