There is no free in liberty.


Friday, October 21, 2011

Should the Fed be Driving Investors From Low-Risk Investments Toward Riskier Investments?


Behind the WSJ paywall:

Fed officials believe their past purchase programs helped to lift stock markets, by driving investors from low-risk investments toward riskier investments.

And from Ron Paul in the WSJ:

[The Fed] fails to see that the price of housing was artificially inflated through the Fed's monetary pumping during the early 2000s, and that the only way to restore soundness to the housing sector is to allow prices to return to sustainable market levels. Instead, the Fed's actions have had one aim—to keep prices elevated at bubble levels—thus ensuring that bad debt remains on the books and failing firms remain in business, albatrosses around the market's neck. 
The Fed's quantitative easing programs increased the national debt by trillions of dollars. The debt is now so large that if the central bank begins to move away from its zero interest-rate policy, the rise in interest rates will result in the U.S. government having to pay hundreds of billions of dollars in additional interest on the national debt each year. Thus there is significant political pressure being placed on the Fed to keep interest rates low. The Fed has painted itself so far into a corner now that even if it wanted to raise interest rates, as a practical matter it might not be able to do so. But it will do something, we know, because the pressure to "just do something" often outweighs all other considerations 
 What exactly the Fed will do is anyone's guess, and it is no surprise that markets continue to founder as anticipation mounts. If the Fed would stop intervening and distorting the market, and would allow the functioning of a truly free market that deals with profit and loss, our economy could recover. The continued existence of an organization that can create trillions of dollars out of thin air to purchase financial assets and prop up a fundamentally insolvent banking system is a black mark on an economy that professes to be free.

And that is why the Fed has been disastrous for our nation. 

We are already in a depression brought on by government (via the fed.) manipulating the money supply such that borrowing became irrationally cheap, then imposing irrationally low lending "fair-lending" practices on financial institutions and having gone so far as to remove legislated barriers to irrationally low lending practices, our government created a financial bubble from which it absolved the financial industry of the moral hazard of irrational lending.

What was the common theme between the Fed's low interest rates, government mandates to lend to the risky, and government's dismantling of barriers to risky lending?

The common theme was to put cheap money in the hands of the citizenry so that they could help propel the economy forward through spending.

Keynesian roots, diseased fruit.


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