Insomnia (insomnia) wrote,

Alan Greenspan admits it...

The Federal Reserve isn't independent.

"Asked by the Financial Times why he didn't push up borrowing costs more quickly once it was clear his 1 percent emergency rate had averted the risk of deflation, Greenspan had this to say:

`The presumption that we were fully independent and have full discretion was false,'' Greenspan said in an interview published by the newspaper on Sept. 16. Raising rates faster and sooner would not have been acceptable ``to the political establishment,'' Greenspan said.

(And let's not forget the Illuminati...!)

It's perhaps worthwhile keeping these "we cater to the political establishment" remarks in mind when you think about the recent 1/2 a percent Fed Reserve rate cut... the one that helps bail out the bankers, speculators, and all those responsible for the adjustable rate mortgage fiasco, while making everyone else's hard-earned savings worth less by deflating the dollar and driving up prices.

Current Federal Reserve Chairman Ben Bernanke seems to be ignoring the essential truths of economist Hyman Minsky, who basically said that economies were inherently unstable, and tend to go from boom to bust, because of economic and psychological factors.

To summarize why this is so:
"Individuals forget the lessons from the past and tend to take more and more financial risks. (...especially when you shower them with easy access to low interest loans, Ben.) The longer a period of expansion, the more people think recessions are a thing of the past and so the more indebted and the less liquid they are willing to be. . . Profit-seeking behaviors and competition for monetary accumulation tend to promote instability. Agents involved in a free-market system always try to guess the uncertain future in order to obtain a bigger monetary profit relative to their competitors. This race toward the future (i.e. our "chasing the bubble" oriented economy) is the source of the productivity of the capitalist system, but also of its instability. Indeed, it forces individuals to forget about the big picture concerning where the economy is heading, and to narrow their effort on beating the competition by all means. One of this means is the use of debt. (i.e. the venture capital speculation boom)Managers are not rewarded for managing a stable business but for an aggressive expansion of their market share and activities."

Minksy, who created his main economic theories back in the mid '60s, has essentially predicted much of what we've seen over the past few decades -- easy access to consumer and business credit, the ability for speculative, unprofitable, but future-oriented companies to get huge dumptrucks worth of venture capital funding so that they can beat their competitors to markets that don't exist yet, etc.

Minsky emphasized basic financial common sense, such as the law of diminishing returns -- the more money you throw at making more money, the lower return on that money you will make. Speculation-oriented economies inherently lead towards a lack of liquidity and a situation where debt is used to fund increasingly less successful speculative investments, until the day comes when those investments ultimately fail, dragging the economy down with it. 

In that context, what Bernanke is doing makes about as mush sense as giving sugar to a diabetic. Just as Bush doled out huge tax cuts -- and racked up a huge debt -- to keep a moribund economy marginally afloat, Bernanke is handing out low-interest rate money to whoever wants it, in the hope that things won't collapse during the Bush adminstration... because he isn't independent, and essentially serves the political establishment (and presumably the huge institutional banks and financial powerhouses behind the Plunge Protection Team.)

So, we're now in the unenviable situation where the Federal Reserve has colluded with the Bush administration and large financial institutions to dump even more "free money" into the economy, like sugar for a terminal diabetic. To paraphrase John Cleese, this economy wouldn't "voom" if you put four million volts through it. 

Instead, it seems far more likely that this "jumpstart" will rapidly drive up inflation by deflating the value of the dollar, while driving the "safe money" towards oil, gold, shotguns, flashlights, tents, batteries, and emergency rations. In the last week, the Euro has skyrocketed, and the Canadian dollar is now worth more than the U.S. dollar! 

Where are the good investments that all this new money should supposedly chase? Purchasing overpriced bubble housing? Investing in a new company that is trying to be the first one to corner an increasingly smaller, less lucrative marketplace than prior startups? Not likely.

What we'll get instead is inflation AND recession, where demand dries up because of higher prices and because consumers are scared for their savings and for their jobs.

There's a word for this. Stagflation. Coming soon to a town near you!


Be sure to shout "Thanks Ben Bernanke!", the next time you pump yourself a tank of gas, ok?!

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