Another Speculative, Derivative Bubble

by oracleofreason

Former Reagan Budget director David Stockman made the case that it is beginning to look a lot like 2006 again. He warned during a recent interview that not only is the U.S. not in a stable economic recovery but the economy is in the midst of a housing bubble … again. This, unfortunately, is one of the side effects of not only having an unstable currency (which is backed by nothing) but that the Federal Reserve in tandem with banks can create money out of thin air.

As Dr. Hans Sennholz correctly pointed out, citing works such as Professor Edward R. Tufte’s 1978 work Political Control of the Economy, The Fed acts like a re-election campaign committee to pump money into the economy in support of the present White House administration, in this case President Barack Obama. Before it started its printing presses, The Fed bought billions of dollars worth of securities from the U.S. Treasury to initiate credit creation with the help of its member banks.

Since then The Fed has tried to stave off the effects of the turbulent, recession that resulted under the direction of Alan Greenspan which lead to the stock market and the housing bubble tat took place under the Bush Administration. Ultimately, The Fed controls the timing and depth of a recession by controlling the timing and amount of money it creates. However, one thing The Federal Reserve cannot do is stop a recession without the pains of economic readjustment in the form of recessions or, in this case, depressions. This is usually due to a shrinking of the money supply which is the result of The Fed refraining from printing more money commonly associated with raising interest rates.

With the economic fortunes reaped from The Fed’s actions, and because of the popularity he received as a result of September 11th, the Republicans rode President Bush’s coattails in 2004 to regain control of Congress. But they had their electoral fortunes dashed in 2006 due to the economic woes people are experiencing even today that associated with the President but are really the result of The Fed’s policies.

What is happening now and back in 2000 is a prime example of the Austrian theory of the business cycle. Due to artificially low interest rates, credit creation encouraged by the U.S.’s central bank the Fed’s easy money policy contributed to malinvestments, if not outright distortions, in sectors of the economy resulting in massive amounts of consumption (mainly geared towards housing) which, unfortunately, require recessions to correct. With its continuous interventions to pump even more liquidity into markets (like The Fed’s underwriting a loan for JP Morgan Chase Bank to acquire Bear Stearns) the end result is even longer readjustment periods.

When Herbert Hoover and F.D.R. enacted their economic policies, the period known as The Great Depression was extended far further thanks to constant government interventions then like we are seeing now. Such as immigration controls, propping up unsound businesses; imposing new banking rules; inflating credit; expanding public works; enacting new entitlements; and forcing up wage rates.

Rather than let the market go about its business of adjustment (which would have pulled us out of The Great Depression and the recession we are in sooner) it was intervention after intervention that The Fed and politicians used to try to fix the messes they created in the first place that made the situation worse. Now they are repeating the same mistakes of the 1930’s and those that contributed to the economic stagnation that occured during the 1970’s. Leave it to politicians and bureaucrats to hinder the risks and rewards of voluntary exchange and market processes while not taking into account the lessons of history. Here we go again.