Monday, July 30, 2012

Stop the Fed 's Hegemony (Political Moral Hazard)

The Federal Reserve continues to believe that low interest rates will make people behave as if the 2007 Crisis and its aftermath have never happened. How can it be that individuals want a 'time-out' and the Fed wants people to not have any 'time-outs'?

Time-outs are perfectly rational and what the Fed is doing is totally irrational. The Fed seems to think that people have lost their way in this economy while it is just the opposite: the Fed has lost their compass.

The Fed's stock of credibility is at stake and should the Fed continue to think that under severe economic uncertainty people should spend more than they have then the Fed should surely reward them for the 'uncertainty' risk and not punish them for being savers. This punishing attitude of the Fed will haunt the Federal Reserve for a very long time and people will not believe that the Fed has savers' interests at heart. The Fed is interested in big things and not 'unary' individuals. Apparently, we, as individuals, do not exist for the Federal Reserve.

Whatever the Fed does is to protect the financial sector and to protect itself from the government. Hence, the Fed is just like the Federal government but without true political constraints/consequences. The Federal Reserve can 'spend' as much as it wants for as long as it chooses as long as the financial markets believe them. Financial markets have been wrong many times in the past and should the markets be wrong again a game of chicken will quickly ensue.

The Fed behaves like a hegemony and demands that people act according to some economic models that do not exist. They are a government within the government and should people refuse to obey their 'orders' to spend then rational individuals are doomed and will continue to be punished. Why?

The Fed seems to not be able to comprehend that economic agents have lost faith in institutions. People cannot afford to take on debts at institutions that will always be backed up by the government while individuals will be left 'holding the bag' after the fact. People will be punished through 3 diverse mechanisms: inflation, taxation, and misrepresentation.

The money that the Fed is printing will have to show up, at some point, in higher inflation. History does not lie about that.

The government is borrowing money at very low costs and at some point the US government will have to pay the money back. Where do you think the money will come from? Economic growth? If economic growth alone could pay off all the government debt then the 2007 Crisis would not have happened.

Misrepresentation happens when we elect people to, say, cut taxes, and they cannot possibly do that. Misrepresentation has many causes, but the Fed is one of the most important accessories to misrepresentation by 'quantitative easing' and pursuing a policy of cheap money.

Consequently, by promoting -and perhaps praying for- inflation, taxation, and misrepresentation the Fed is political, in spite of the fact that they pretend otherwise. We are past the fifth grade on how the Fed operates.

Mr. Bernanke, take down this charade and pay the true savers their fair share. Make the economy depend on individual capital and not 'quantitative' easing. For how long are you going to be able to borrow money from future growth? 3 years? 10 years? By that time the Fed will be holding more Treasury bonds than any other government or financial institution in the world. We are in the 5th year of the 2007 Crisis and the end of the crisis is nowhere in sight. The degree of economic uncertainty has not decreased by much since 2007.

So, then, what will happen should the US government enter bankruptcy?

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