Friday, August 10, 2007

Our Subprime Thinkers

"In recent years, monetary policy has created an expectation that the Federal Reserve will bail out investors when asset bubbles deflate. The recent crisis in the subprime mortgage market is at least partly the outcome of this new approach to monetary policy. ... The collapse of the subprime mortgage market is the latest in a series of financial bubbles whose existence reflects, at least in part, moral hazard in financial markets. ... Today, monetary policy is fostering moral hazard. ... A different question would be to ask whether monetary policy should be conducted so as to create or exacerbate asset bubbles. ... In effect, the central bank is promising at least a partial bailout of bad investments", Gerald O'Driscoll, formerly with the Dallas Fed, WSJ, 10 August.

Fed bailouts of "persons of consequence" are inevitable, to the detriment of savers. That's the real reason the Fed exists: to engage in taxation without making Congress pass new tax legislation. I have a better question: why have a Fed at all? The Republic survived until 1913 without it. Who needs a Fed now? By the way, the creation of a central bank was part of Karl Marx's Communist Manifesto (1848). Really. Read Marx's platform.

No comments: