The indispensable Lew Rockwell posted a link from Politico today. It is an article about Thomas Hoenig and his reluctance to sign-off on the Fed’s program to usher in Quantitative Easing (QE). It is very insightful and I highly recommend reading it. You can find it here: “The Fed’s Doomsday Prophet Has a Dire Warning About Where We’re Headed”.
A few highlights:
“The real danger comes from [the Fed] encouraging or inadvertently tolerating rising inflation and its close cousin of extreme speculation and risk taking, in effect standing by while bubbles and excesses threaten financial markets,” Volcker later wrote in his memoir.
A steep rise in interest rates was required to reel in inflation but this caused asset values to plummeted and banks went under as a result.
Overall, more than 1,600 banks failed between 1980 and 1994, the worst failure rate since Depression.
This was because the banks assumed that the underlying collateral for the loans would rise in perpetuity. This was ingrained inflationary expectations.
The bankers saw farmland as collateral on the loans, and they believed the collateral would only rise in value. This gave bankers the confidence to keep extending loans because they believed the farmers would be able to repay them as land prices increased.
This all boiled down to the Fed’s actions. This was laid out by economist Allen Meltzer.
The author and economist Allan Meltzer, who reconstructed the Fed’s decision-making during the 1970s in his 2,100-page history of the central bank, delivered a stark verdict. It was monetary policy, set by the Fed, that primarily created the problem. “The Great Inflation resulted from policy choices that placed much more weight on maintaining high or full employment than on preventing or reducing inflation,” Meltzer wrote. “For much of the period, this choice reflected both political pressures and popular opinion as expressed in polls.”
The central bank was primarily concerned with achieving “full employment”. This gave them cover to pump money into the economy, keeping the boom going. When the bust finally came, it created disaster and heartache across the nation.
Isn't a little purchasing power a fair trade for FULL EMPLOYMENT? After all, these handful of people are VERY smart and know so much more than the rest of us. Have faith! <sarc>. Happ New Year, Alan!
Isn't a little purchasing power a fair trade for FULL EMPLOYMENT? After all, these handful of people are VERY smart and know so much more than the rest of us. Have faith! <sarc>. Happ New Year, Alan!