Another Great Explanation of this Mess We're In
He touches upon two major glitches. First, you have the Fed's loose monetary policy of the last five to ten years. Second, you have the resultant over-confidence that this loose monetary policy spurred within the marketplace.
Mr. Practical advances the hypothesis that, "Government policy, including egregious money market operations for years by the Fed, never allowed the market to stop the increasing leverage and debt at a level sustainable relative to realistic volatility and inherent income levels generated by the economy (all the while exporting our income base to Asia)."
I agree 100 percent. And he also says this, with which I agree, in principle:
"As liquidity, generated almost exclusively by increasing credit, dries up we will hear more and more cries for government to solve the problems they helped create. As we speak I hear that Senator Dodd is meeting with Bernanke and Paulson to 'come up with solutions'. I really hope they don’t find any, for their solutions will at best delay the inevitable and quite possibly make it worse. The real solution, which will be ignored, is to just let the market sort things out."
I would add that it is easy for us, in our commentator's ivory tower, to say what should be done in the abstract. But it would be very difficult to watch misery descend upon millions of relatively innocent people and do nothing, especially when your hide is at stake. Ben and his buddies must already dread the day they will be hung high and dry during the revolution that could follow their non-action, whether this fear is realistic or not.
[Thanks to tapestry.typepad.com for the photo.]
Ben must realize that he could repent, say his mea culpas, bite the bullet, and take the heat for all the Feds prior to his; but he won't. We can be sure that the temptation to "do something" will be irresistible, and we can place a pretty safe wager that it is us the taxpayers who will pay for this one--again.
As I have said in the past, perhaps this is justice of a sort, because after all, it is we taxpayers who voted the bums into office who created the Federal Reserve in the first place, and who empowered it to expand credit to the extent they have today. We are ultimately the responsible party. We must pay the piper and reform our government--which of course won't happen either.
What will more likely happen is just the opposite. The Federal Reserve will inflate us out of this crisis and the government will hand them new powers to "crack down" on the banking and financing industries. We are on that slippery-slidey slope and it is very hard to retract uphill, away from centralization.
And that's the bottom line.