Saturday, August 14, 2010

The Federal Reserve Strikes Again

A recent headline on the cover of Barron's said it all: "Why the Fed will soon print $2 trillion".

This past week the Federal Reserve, headed by Ben Bernanke, said it would continue to keep interest rates near zero and that it would continue to buy billions of dollars worth of Uncle Sam's debt.

Its decision has two obvious effects. First, the Federal Reserve continues to screw savers with those near-zero interest rates.

Second, the Fed's purchases of US Treasuries continues to distort the Treasury market. Their actions keeps rates artifically low, creating a dangerous bubble in the Treasury market. This bubble has sucked many unwary investors into bond funds and will blow up eventually. When the Treasury bubble bursts, it will cause huge losses for investors who thought they were playing it "safe".

Why is the Federal Reserve doing this? Because the so-called recovery in the US is a flop. Trillions of dollars of "stimulus" have produced nothing.....

Unemployment is not getting better. Consumers aren't shopping. Banks aren't lending. And the list goes on.....

Both the Federal Reserve and the US government continue to blindly follow Keynesian economics, named for famed economist John Maynard Keynes.

But it is a perverted form of Keynesian economies...Keynes is probably turning over in his grave.

The government only follows half of Keynes' advice - to stimulate the economy during downturns in the economy.

It conveniently forgot the other part - any stimulus money was to come from money that had been SAVED during good economic times.

Keynes' theory is much like the Bible story concerning a dream the Egyptian pharaoh had about seven lean years which would follow seven good years, that was interpreted by Joseph.

Apparently the US government didn't have a Joseph and forgot to save anything during the good years.

The Swedish Solution

And much like the BP oil crisis where the US government arrogantly refused any sort of help from overseas, the Federal Reserve refuses to implement a solution given to them by the Swedish central bank to jumpstart lending.

The United States has a big problem with its banks reluctance to lend to anyone. Here is why.....

When the financial crisis hit, in an effort to "save" the banks, the Federal Reserve began paying banks interest on any money deposited with the Federal Reserve. The Fed did not do this before the crisis hit.

So the banks' logic is "why take a risk and lend the money out, when we make money just by letting it sit there 100% risk-free at the Fed?"

Sweden had a similar problem with their banks not long ago. Their solution?

Negative interest rates.

In plain English, if Swedish banks left money deposited at the Swedish central bank, they would have to pay the central bank interest on the money!

Needless to say, Swedish banks soon took their money out of the Swedish central bank and began making loans in an effort to make a profit.

But the Federal Reserve, with its only concern seeming to be Wall Street and the banks, has refused to do this. At the least, it could go back to its old policy and quit paying interest to the banks.

But do not expect a change in the Fed's or the government's policies until the train (US economy) completely jumps off the track.

1 comment:

  1. Most, if not all of the blame goes to the Fed and Washington. Yes, Wallstreet is a bunch of leeches, but they are enabled by the government. There would be no bailouts if the government didn't give them.

    But the root of all of these problems (and even war) is fractional-reserve banking. If people used real money, like gold and silver, banks would not make foolish investments because something of real value is at stake. Instead, we have a system where banks only guarantee a fraction of your holdings of worthless play money, and all risk is passed on to the taxpayers.