Tuesday, December 2, 2008
Handcuff the Fed?
"On Nov. 14, 2008, the Dow Jones Industrial Average closed at 8497.31. On November 13, 1998, the adjusted (for dividends and split) close was 8919.59. There has been great volatility, but no net capital accumulation as measured by the Dow in a decade. Other indexes, such as the Nasdaq, tell a similar story. Capital has been invested but as much value has been destroyed as created. The U.S. cannot afford to have another lost decade. Or to see the dreams of another generation of Americans who had been told to take responsibility for their financial health by investing in the stock market dashed by failed monetary and fiscal policies. ... Mr. Obama's task is made all the more difficult because there has been a perfect storm of bad policies and practices. ... The subprime saga follows a familiar pattern. Easy credit begets a boom and then the inevitable tightening of credit bursts the bubble. What is not familiar is the scale of the devastation wrought in this boom-bust cycle. Never before had financial markets eveolved such a complex superstructure of interlinked securities, derivatives of all kinds, and special-purpose investment vehicles. Professor Gary Gorton of the Yale School of Managment has best described that complexity in his paper 'The Panic of 2007,' published by the National Bureau of Economic Research. He makes it clear that as this system evolved there was not a sufficient guard against systemic risk. ... The incoming administration must think about that possibility because the timing of boom and bust cycles seems to be shortening. The next bust could come five or six years from now--or about in the middle of an Obama second term. Should that happen, Mr. Obama would be unable to blame Republicans for the mess and would be tagged as the second coming of Jimmy Carter. To avoid such a fate, Mr. Obama needs to stop the next asset bubble from being inflated by imposing a commodity standard on the Fed. A commodity standard (such as a gold standard) imposes discipline on a central bank because if forces it to acquire commodity reserves in order to increase the money supply", my emphasis, Gerald O'Driscoll at the WSJ, 17 November 2008.
No such scheme will work. You can't "handcuff" the Fed, as much as I might like to handcuff Zimbabwe Ben and his cronies. The Fed exists to redistibute wealth. It is the head of the Wall Street snake. You must kill it. Andrew Jackson, where are you? Your country needs you. Come back. Please.