The Other McCain

"One should either write ruthlessly what one believes to be the truth, or else shut up." — Arthur Koestler

‘Free Money’ Madness at the Fed

Posted on | August 21, 2010 | 5 Comments

For more than 18 months, the Federal Reserve has kept its funds rate at effectively zero — a policy of monetary stimulus so extreme that it would have been unimaginable a few years ago. This policy was instituted as an “emergency rate” after the 2008 meltdown, Federal Reserve Bank of Kansas City President Thomas Hoenig said a week ago, and its continued extension cannot be justified.

“I wish free money was really free and that there was a painless way to move from severe recession and high leverage to robust and sustainable economic growth, but there is no short cut,” Hoenig said in an Aug. 13 speech.

What is going on here, as a private-sector economist warned me in May 2009, is that officials are “trying to re-inflate the bubble.” The Huffington Post’s Shahien Nasiripour has a report, based on a briefing with a “senior Obama administration official,” that includes some balancing voices of reason:

The Fed will keep the main interest rate near zero for an “extended period” to support the recovery. Some Fed officials, most notably Thomas Hoenig, the president of the Kansas City Fed, believe that maintaining a zero interest-rate policy for an extended period will inevitably lead to asset bubbles: cheap money encourages speculation, and speculation can drive prices to an artificially high level (like housing during the boom years).
Christopher Whalen, a noted bank analyst at Institutional Risk Analytics, said this month that big banks “are busily creating the next investment bubble on Wall Street — this time focused on structured assets based upon corporate debt, Treasury bonds or nothing at all — that is, pure derivatives.” Whalen said low rates are to blame for this burgeoning bubble.

This neo-Keynesian madness at the Fed is unsustainable. Economic reality will eventually make itself felt and the blame will fall squarely on the administration that gave us “coked-up stimulus monkeys.”

Category: Economics

Comments

5 Responses to “‘Free Money’ Madness at the Fed”

  1. Joe
    August 21st, 2010 @ 4:19 pm

    So long as inflation remains low, I do not see it changing anytime soon.

  2. Joe
    August 21st, 2010 @ 4:19 pm

    So long as inflation remains low, I do not see it changing anytime soon.

  3. Joe
    August 21st, 2010 @ 12:19 pm

    So long as inflation remains low, I do not see it changing anytime soon.

  4. Kojocaro
    August 21st, 2010 @ 11:19 pm

    yea the inflation will rise if the rich get their tax cuts or something

    /Youngforeskin

  5. Kojocaro
    August 21st, 2010 @ 7:19 pm

    yea the inflation will rise if the rich get their tax cuts or something

    /Youngforeskin