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.

10 comments:

Anonymous said...

The shade of Old Hickory rides again...

Printfaster said...

We are devolving into Argentina, and now we have the reincarnation of Juan and Eva. Given some of the signs of extravagance, it may be closer to Louis and Marie.

What I see is "all the king's horses and all the kings men" assembling around the future administration. Humpty will look the same before as after. Busted.

It will take more than Obama, who frankly completely lacks imagination, to get US industry producing wages. The capital cycle, unless the US goes to war and abandons all legalistic barriers to infrastructure development, will take at least 5 years to see meaningful job development.

The notion that leaf raking in the form of repaving and repainting, is infrastructure investment is ludicrous. The US is woefully industrial capital poor, and unless the grip of Wall Street and Washington is broken, will worsen.

Independent Accountant said...

Printfaster:
Have I not named the "boy" Lloyd Antoinette Blankfein? I have refered to Crane Brinton's book a few times and likened our situation to 1780s France. I agree with you. Until Wall Street's grip on the US is broken, nothing will improve here.

Anonymous said...

The Fed ("We control inflation and print money") are the good cop in the good cop/bad cop scheme run by congress.

Congress threatens to spend/print too much and the Fed is the restraining influence (and does the direct printing).

Congress created the Fed and if enough of Congress agreed they could uncreate them. However, for now, Congress is too interested in spending money they don't have and will do anything to avoid having to end their spending.

So "killing the Fed" won't help (and anyway isn't likely until the dollar is dead).

Independent Accountant said...

Anonymous:
Are you serious? Congress created the Fed to facilitate its running deficits. You are the victim of Fed propaganda.

Anonymous said...

Obama isn't going to have a second term after he has to tell the boomer's to forget SS and Medicare because the US is broke.

Printfaster said...

I realized that many folks have never heard the term "leaf raking" in a political context.

By the way, "leaf raking" was defined in the New Deal as a form of income redistribution:

economicsbulletin.vanderbilt.edu/2007/volume8/EB-07H40002A.pdf

Obama is singing FDRs songs. Too bad that FDR extended the depression into the 40s. It is also a trademark of ward-heelers, or community organizers in the modern jargon.

Anonymous said...

Is it Congress or the Fed who should be handcuffed?

Or should Old Hickory handcuff both?

BTW: Capitol Hill inveiled the $691 million dollar visitor center today. I hope some citizens "visit" Congress now.

Independent Accountant said...

Anonymous:
Old Hickory would leave nothing to chance. He would dispatch the Fed and all 535 members of Congress with his sword!

Anonymous said...

I saw some "End the Fed" posters up around... nice ring to it...

"End the Fed!"

"End the Fed!"

"End the Fed!"