Econ 101: It Ain't Pretty

This will be a very useful 'short-take' on the economic problems for those of you who skipped Econ in college. The Badger deserves credit for finding/posting it.

It is the work of Steve H. Hanke, professor of applied economics at The Johns Hopkins University in Baltimore and a senior fellow at the Cato Institute in Washington, D.C.

...the main culprit is the U.S. Federal Reserve. In late 2002 Ben S. Bernanke, then a Fed governor and now the chairman, persuaded Alan Greenspan, then chairman, that the U.S. was in the grip of deflation. In consequence, the Fed pushed down on the monetary accelerator.

...The Fed’s laxity stimulated the economy and pushed final sales to an unsustainable growth rate of 7% in nominal terms, i.e., before inflation adjustment.

[This, along with GWB's inane 'housing is a Constitutional right' yammering, seriously over-inflated housing/real estate values, along with everything else. Yes, Virginia, your appraisal is WAAAAYYYY over reality.]

...the lax monetary policy encouraged investors to take undue risks chasing high yields. To make the most of tiny yields, leverage became the flavor of the day.

[This was the genesis of the Bear/Lehmann/Merrill Lynch lust for sub-prime yields, and the immediate cause-of-death of AIG.]

...The Fed’s policy blunder also weakened the dollar and thus stimulated commodity price inflation...the price of a barrel of oil climbed sevenfold, from $20 to $146. About half of that climb was a function of rising demand (such as from India and China); the remainder can be laid to the weak dollar. The same happened with other internationally traded commodities such as rice and soybeans. [Not to mention corn....]

There are two components to economic tinkering: monetary policy (discussed above, and generally the province of the Fed) and fiscal policy--the province of politicians. The author now discusses fiscal policy.

The U.S. Congress played its part, too. In 2003 and 2004 Fannie Mae and Freddie Mac, the government-sponsored mortgage buyers, were engulfed in accounting scandals. To get Congress off their backs, they became more committed to financing homes for families with low incomes. The ploy worked like a charm...Fannie and Freddie became the largest purchasers of subprime and borderline (Alt-A) mortgages in the 2004–07 period, with a total exposure of $1 trillion, and thereby contributed mightily to the housing bubble as well as their own later collapse

[Not to mention earmarks, irresponsible No-Child/Medicare Part 4, etc. They were Christmas-tree gifts, but purchased at the price of the current crash.]

The Bush Administration wasn’t sitting on its hands while the Fed and Congress were giving birth to a boom-bust disaster. It was making matters worse by spending recklessly and piling up debt. Just weeks before the giant bailout was signed into law, the Congressional Budget Office issued a report stating that the Administration’s spending had put the economy “on an unsustainable path.”

Hanke is not Pollyanna. The politicians will make things a lot worse; they will attempt to prop up housing prices (the Realtors have lobbyists...); they will attempt to prop up the Big Three, (or more accurately, the Big 2.375); and at the same time, will prop up every State in the Union. It won't work, folks...

Hanke's sum?

Expect more irresponsible political behavior and market panic. We’ll see deleveraging-driven deflation in the near term and more inflation in the long term

In other words: ALL asset-values will deteriorate for the next 12 months or more; and then, with the flood of USdollars pushed by the Fed and Congress, the USDollar's value will drop like a rock--making oil, corn, steel, ....ALL commodities....far more expensive then they are today.