The Plan, American version

Bernanke announced that the Fed will print up $40B a month and buy mortgage-backed securities with it. The European Central Bank is doing essentially the same thing, printing up money to buy the bonds of its laggard members at their nominal value.

It won't work here either. What happened in 2008 is what should have happened in 2008. The FIRE sector was ridiculously overvalued and should have been liquidated. Murray Rothbard explained it all in 1963 and it's no less true today. Where the Fed thinks they have outsmarted the old Austrian model is in providing a secondary market for the supply side as opposed to merely stoking demand. They will cover up the hole in nominal wealth by printing money and buying the toxic assets and stowing them on a balance sheet somewhere, and wait for the economy to grow us out of the hole in the meantime.

The problem is that the Fed is continuing to pour false savings into the same errors that real savings were sucked into from the beginning. Liar loans and 4/2 houses miles away from economic centers were never worth as much as the market said they were. Now that the iron laws of supply and demand are reasserting themselves, we're much poorer than we think. The aggregate demand which the Keynesians are banking on is shot, as consumers continue to labor under massive debt loads and declining real wages.

The hoped for growth will not happen. The false savings will outbid the real savings for capital, and the malinvestments in housing and finance will continue, not to mention the increasing tax and regulatory burdens on US business and downward pressures on US consumption. So the private sector continues to sit on overseas cash and buy Treasury bonds yielding zero real interest. The heavy hand of the Fed and foreign central banks of net exporting nation is felt there as well, buying up T-bills from the secondary market so they can continue to honor the US government's checks. The countervailing motivation is for the Fed's open market policy to chase investors into higher-yielding corporate bonds and equities. Again, it won't happen because the private sector is not spending, waiting for the next fiscal or monetary shoe to drop. The whole scheme is a ridiculous house of cards.

If, $2T later, all these markets (FIRE, student loans, sovereign debt) still require so much intervention, isn't economic reality trying to tell us something?


Ingemar said…
Is there an email I can contact you? There's something I've been thinking about, namely, Church growth can lead to bubbles.
Go to my complete profile and send it to my gmail.