Liberty Maven

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by Jake, the Champion of the Constitution
Originally published Friday, April 10, 2009 at http://www.nolanchart.com/article6275.html

I started a conversation on my Facebook wall and thought I would try to see if any here at the Chart (or Liberty Maven) want to add to it. The subject was this Reuters post where the president of the Kansas City Federal Reserve Bank, Thomas Hoenig, said that hard as it was to predict when the winding-down process must be initiated, it will happen and the FED will do its best to avert inflation.

“We know it has to happen, but the timing I can’t tell you. Nobody knows. We will watch every indicator of data that suggests a recovery is on the way… Failure to do that at the right time means you risk a much higher inflation environment.”

On March 18th, the FED’s Open Market Committee stated:

“In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued.  Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability.”

Not released on their website yet, Avery Goodman reported that the FED stated on Wednesday:

“Members agreed that the monetary base was likely to grow significantly as a consequence of additional asset purchases; one, in particular, stressed that sustained increases in the monetary base were important to ensure that policy was consistently expansionary. Members expressed a range of views as to the preferred size of the increase in purchases. Several members felt that the significant deterioration in the economic outlook merited a very substantial increase in purchases of longer-term assets…”

I made an off-hand remark that it doesn’t take a genius to figure out what will happen next (a mess) and received a few really thoughtful replies.  Here is the  counter argument:

Printing of money is a necessary evil in the short term in order to finance 1) the bailouts within the finanical sector 2) ballouts in the housing sector 3) and to provide stimulus to companies and individuals who have or will lose jobs due lack of credit in the finance sector and due to concurrent falling housing prices, i.e. all of these factors create a negative downward death sprial through a negative feedback loop.

If the government simply stands on the sidelines and lets companies that are too big to fail all go bankrupt, the consequences would be catostrophic. Confidence would fall further, causing panic, bank runs, massive deflation as credit would literally freeze to a halt, people would save and not spend at all. As such, the government, I believe, was caught in a tough situation: 1) do I let market forces pan out or 2) or do we step in here? I believe they were right to try and first unfreeze credit, albeit through unpopular bailouts.

This allowed them to somewhat restore confidence in the finanical markets and the greater economy as seen in the tightnening of credit spreads. Banks are originating new loans again as seen in Wells Fargo/Wachovia. Treasury programs will hopefully allow banks to get to value toxic assets (that still have value) and then get them off the books, thus allowing them to originate more loans. Broad market indicators are still falling, but at a de-accelarating rate, which indicates a bottoming-out process may be underway, (granted it may be a very long time that way live at the bottom before recovery ensues.)

The important thing is, despite that things are still very bad, there is now finally more clarity and less uncertainity, which will lead to a stabilization of confidence. BUT yes, Summers is right. We will have to be vigilant regarding inflation over the next few years. The bailouts have effectively monetized our debt, which will likely hurt the $ in some way or another.

The most important thing after all is said and done is that better regulation is put in place and that banks increase the effectiveness of their lending and screening policies and that bankers are no longer able to use incredible amounts of leverage while enoying assymetric payouts, i.e. enjoying privately in the upside gains of their investments while socializing thier lossess – this is the true problem that needs to be rectified. Read Nassim Taleb’s 10 principles on how to defend ourselves as a society from Black Swans.”

Replies to this were:

The government hasn’t been sitting on the sidelines, it’s been actively and deliberately controlling our lives socially and economically for quite a long time.

Each of the proposed reasons you listed for justifying money printing as a necessary evil are themselves consequences of government intervention.

You’ve effectively suggested government, despite having created the problem, should also be the solution; this only continues the perpetual positive feedback loop at the expense of our civil liberties and purchasing power.

Printing money is not a necessary evil, nor is government intervention; government is not the solution to the problem, government IS the problem.

And:

After almost 100 years of a regulated economy you would think we would learn that it doesn’t work well; in the long run it always fails. Read Mises’ book “Interventionalism”, Hazlitts’ book on Inflation and just about anything by Rothbard…

My reply was:

Wachovia/Wells Fargo’s numbers are likely cooked and are propaganda to get suckers into the market – we shall see. Their assets:derivatives ratio is just 4.4 when compared with Citi (26) and JPMorganChase (50).

The FED caused the problem by inflating these bubbles (Nasdaq/Subprime/Dow and the upcoming Alt-A/Option/ARM), do we really think it can be covered over by more paper? My opinion, from the numbers, is its a bald-faced lie. I happen to agree with them about not actually having a free market for decades as is suggested in Perkin’s Economic Hit Man.

Second point is that you are overestimating how much control the government has. My opinion is the bailouts are somewhat of a public spectacle for the masses. Outside of Congress, the FED has been blowing up the monetary base and their balance sheet like crazy. Barack has no say. Even though its their job per the Constitution, Congress has no say and no balls to do their job.

My translation of this FEDspeak:

March 18th – “Inflation is a slight risk, watch out for deflation, which means everything is cheaper which is actually better for all consumers.”

Now – “We are going to inflate like hell and will probably make mistakes. Watch out.”

Comments anyone?

Tu ne cede malis sed contra audentior ito. Do not give in to evil but proceed ever more boldly against it.

[Reach the Author Here!] www.CampaignForLiberty.com

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We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

As always, unlike the NFL, the author grants full permission to allow any accounts of, rebroadcasts, retransmissions, repostings in part or full of this article to your blog or anywhere else in order to promote the Restoration of our Republic.

Veritas numquam perit. Veritas odit moras. Veritas vincit. Truth never perishes. Truth hates delay. Truth conquers.

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