FED sells out to Financial Institutions – Risks Inflation to Bailout Speculators

My business mentor taught me, “If you have to go bankrupt make sure you create a very big hole.” His reasoning was simple, if banks were going to lose a great deal of money they would not let you go under. If you are responsible and try to keep your debt and equity ratio in line they have no interest in saving your company. The FED just cut the funds rate and the discount window 0.50%.

The FED stated that it was acting to help the market be more liquid. It is not important that food and energy prices are up over 20% (so much for inflation). The dollar responded dropping to a new historic low against the Euro. Oil went up and we can see that commodity prices will continue to increase. In a service economy, like the US, where we produce only 18% of what we consume, the lower dollar is inversely proportionate to increasing inflation. In other words, today the goods you buy to survive will cost 1% more than yesterday. That translates to a 365% annual inflation rate.

The financial analysts are already talking about moral hazard. The favorite saying is, “Do you want to make the entire economy suffer to PUNISH a few greedy individuals.” This is an obvious attempt to move the discussion from the Bailout of Financial Institutions to punishing some unknown hedge fund. In a country where we have 1% of the population homeless, 33% of the population “Food Insecure”, we cannot afford national healthcare and kids have to mortgage their future to pay for college, we can make the population pay to Bailout the Financial system.

The problem is not the seizing of the credit markets. Banks who do not have sufficient liquid reserves are insolvent. That is what the term means. They should be forced into liquidation. Remember these are the same companies where the CEO makes $100 million a year.

The real problem with the US economy is that we no longer make anything and in this “service” economy we have allowed our infrastructures to go to pot (and not the kind you can smoke). We must refocus our energies and fix our economy. The excesses must be eliminated and resources allocated to create value not just smoke and mirror services.

The housing market did not begin to deflate because of the credit crunch. The imbalances in supply and demand caused the stagnation in the housing market. This in turn made investors sell their houses causing an increase in inventories. This resulted in the inability to tap into the fake house equity appreciation resulting in borrowers defaulting on mortgages and foreclosures thus increasing inventories. The reason for all this hoopla is that we built too many houses accompanied by a bad economy. It always comes back to, “It’s the economy, stupid!”

I am really naïve. Although I know that our public servants think only about their own personal interests and how they can get more money from the corporations I always hope to be surprised. I want to be able to respect our government and the people in it. I want to have faith in our government when they tell that we need to do something that it is actually true. I want to know that politicians and government employees are doing the job they are paid for so I can worry about doing my job.

This move by the FED is a bad thing. The stock market will go up but this will not have a positive effect on the disastrous situation of the US economy. Unfortunately if people do not have jobs they have a hard time accessing credit. If food increases 20% a year at a certain point families must choose between eating dinner and buying clothes.

The only way I can think for the individual to offset this is for every working Joe to become a day trader and hope they can ride the wave before the financial institutions finish selling their holdings leaving the US economy in shambles. Greenspan was worried about some country in the Middle East cutting off oil supplies. I have serious doubts that when this happens that our economy will have a need for oil as we head into Argentina style inflation and 1930s style depression.

Good job, Mr. Bernanke. I hope you are well compensated. Just think, every time the TV gurus do not agree with you they will tell you, at full volume, just what you need to do.

Tags: Government Politics Recession Corporate America Finance Federal Reserve Economy Reaganomics