Wednesday, December 17, 2008

Federal Reserve Officially Insane

The Federal Reserve has loosened all ties to reality. Swallowing Keynesian economic theory whole, it has decided to lower the Fed Funds rate to effectively zero for the foreseeable future. As if that weren't crazy enough — apart from everything else it makes money market accounts almost worthless — it is now going to inflate the money supply like the U.S. was Germany, circa 1922.

The mid-term consequences of all this are obvious to any right-thinking economist. (Forget long-term consequences. Concern for those was discarded long ago.) They are less obvious, but no less true, for anyone who has given the subject some amount of thought and study. To both parties the principles are simple: you can't create wealth by printing money; you can't solve an existing credit crisis by creating a new one.

Thomas Sowell has written another fine article on the related subject of bailouts, titled Postponing Reality. No one could say it better. What even the perspicacious Dr. Sowell doesn't mention, perhaps because it's so obvious, is that a great deal of reality will continue to happen while parts of it are postponed.

Interest-bearing instruments will be worth squat, discouraging savings/investment. Prices will be artificially propped up, distorting the market and harming millions. Worst of all, politicians will be encouraged to believe that their tweaking of the economy is legitimate.

But if years of teaching college have left you with a habit of ignoring any inconvenient facts of history and science, not to mention producing the morals of a dictator, none of that matters. The economy is in crisis. Something must be seen to be done.

Unfortunately for those of us who still live in the real world, there is little hope that these policies will be reversed anytime soon. There is lots of talk of Obama keeping Bernanke on at the Fed. Even if he were replaced, we'd almost certainly get someone very much like him.

Forget trying to hold onto your wallets. Try holding onto your sanity.

1 comment:

Brad said...

We are long past the point where a true statesman, of which there are precisely zero serving in any elected office today, could stand up and wax eloquently about the absurdity of our government’s reaction to a problem they are largely responsible for creating. They break our legs with their incredibly stupid policies and while we lay in pain they charge in on white horses to set and cast our broken appendage acting righteously justified the whole time while being totally oblivious to the fact that our leg wouldn’t need the attention had they left well enough alone. The irony that they are using our money to both break and fix our leg doesn’t even occur to them.

The country is just plain ill informed, ignorant or fully engaged in cognitive dissonance if they think that the primary cause of our current economic woes is the "Free Market" form of capitalism. We haven't had a true free market in this country for decades.

When the government can force banks to make unsavory loans, the free market is being subverted.

When the government takes the position that health care, education and housing are "Rights" and not earned privileges, the free market not to mention the constitution is being subverted.

When the government steps in and federalizes many of our banks, attempts to federalize our auto companies and disgustingly socializes all business risk while simultaneously privatizing the returns, the constitution and the free market are not only being subverted, they are being shat upon.

It’s sad how many people think the government should solve all the problems they helped to cause when their track record is so abysmal. Bad business decisions should hurt! Consequences should be paid. Room should be made for a competitor that can do a better job. That is what Free Markets do. Free Markets reward those who provide something that has perceived value at a profit and punishes those who do not. Bailing these companies out is rewarding the bad behavior and punishing those who are doing a good job. Why should Toyota have to not only earn my business by producing a product with higher perceived value but also have to overcome a massive tax payer subsidy to their competitors? Who is being punished here? Not the car companies who made bad decisions but rather those that made good decisions, the consumer and the tax payer!