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Friday, January 11, 2008

Fed Cut Coming, or Blowing a Bigger Bubble

From WaPo:
Federal Reserve Chairman Ben S. Bernanke ... signaled that the central bank will cut interest rates aggressively to try to prevent a serious economic downturn, using unusually direct and forceful language.
 
In the past two weeks, new evidence has emerged that the United States is at risk of entering a recession. Just yesterday the nation's largest retail chains reported weak December sales, and credit card companies American Express and Capital One said they are seeing more unpaid bills.
 
In a speech in Washington, Bernanke said fed policymakers "must remain exceptionally alert and flexible, prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability."
 
Bernanke, in his first public comments of 2008, said that "additional policy easing may well be necessary."
Bubbles are created, or expanded, whenever a central authority arbitrarily influences business profitability apart from productivity. This is one thing Ron Paul got correct at last night's South Carolina debate, although I'm not willing to concede a recession has started already:
CHRIS WALLACE: Congressman Paul, do you support a government program to stimulate the economy?
 
RON PAUL: Well, a government program is too vague. What kind of a government program?
 
If it's appropriating money and trying to stimulate that way and spend more money, no, that would be the wrong thing to do. But a government program of a -- of a reduced tax burden, yes, that would be.
 
Also, to solve this problem, you have to understand why we're in a recession. I believe we're in a recession. I think it's going to get a lot worse if we continue to do the wrong things that we've done in the past, that it's going to be delayed, just as what happened in the Depression.
 
But you have to understand that over-stimulation in an economy by artificially low interest rates by the Federal Reserve is the source of the recession.
 
The recession has been predictable. We just don't know exactly when it will come.
If you do the wrong thing, it's going to last for a long time. The boom period comes when they just pour out easy credit and it teaches people to do the wrong things. There's a lot of malinvestment, debt that goes in the wrong direction, consumers who do the wrong things, and businessmen who do the wrong thing.
 
So we have to attack this and understand the importance of Austrian theory of the business cycle. If you don't, we're going to continue to do this and the longer you delay the recession, the worse the recession is, and we've delayed a serious recession for a long time.
 
The housing market's already in depression and a lot of people are hurt and the standing of living in this country is going down. Look at what's happening to the dollar.
 
And what is being offered by the Federal Reserve and Treasury and everybody in Washington? Lower interest rates. Well, lower interest rates is the problem. Artificially low interest rates is the artificial stimulus which causes the bubble, which allows the inevitable recession to come.
 
So what we need to do is deal with monetary policy and not pretend that artificial stimulus by more spending is going to help. That won't do you one bit of good.
For those who would dismiss out of hand Mr. Paul's allusion to the Great Depression, consider this from Glenn Beck this week:
Well, the last time we had an election like this was 1928. 2008 is the first time since 1928 that there is no incumbent President or incumbent vice president running for either of the presidential nomination or not running in the presidential election...
 
In 1928 the economy was going strong. There were some signs and people were saying, wait a minute, hang on, there are some problems here. But the roaring '20s were still roaring. Much of the credit was given to [Republican nominee and eventual winner, Herbert] Hoover. He was the secretary of congress in Coolidge's administration. Voters weren't thinking about the debt. They weren't thinking about economic collapse. Those in Florida that had purchased all of the land in Florida by the water, Florida started to become a boom and everybody was saying, oh, look, here it comes. And what happened? Right around the corner the economy collapsed. By the way, today we are still in the official longest economic expansion where billions of dollars of wealth have been created. Housing prices, if you look at what happened in the 1920s in Florida alone and what's happening right now in 2008 in Florida alone for the housing market, it's damn near the same thing...

Religion in 1928 was also a major factor. Democratic nominee for president was Alfred Smith. His mistake, the reason why you don't know Alfred Smith, the reason why he didn't make it to be President is his mistake was to be Roman Catholic. He was the first Roman Catholic to run for the presidency. It turns out America wasn't ready for a Roman Catholic. ... Today can we say Mitt Romney.
 
And the best thing is because the roaring '20s, the rich got richer. Remember in 1929 the rich were about to throw themselves out of windows because the rich were also stupid. As the rich got richer in the 1920s, everybody was starting to say, wait a minute, hang on just a second; this socialism thing seems to be working over in Russia. This was before they really knew what was going on. In the 1920s all of these Fabian movement people, all these people, the Progressives, were going over to Russia and studying what was happening over there. They would come back and they would say, okay, sure, there's a lot of blood in the street, but this is a good system. And they started to sew the seeds of federal government needs to be bigger. Remember, fascism was on the rise. 1928, government should be bigger, government should help flood victims. The rich shouldn't be as rich. Remember they were about to become very, very broke. The rich shouldn't be rich.

You've probably heard Herbert Hoover's slogan but you've only heard half of it most likely. The half you heard is a chicken in every pot. Vote for Herbert Hoover and you'll have a chicken in every pot. But that was only half of it. It was a chicken in every pot and a car in every garage. A car was starting to be a right. Only the rich could have a car. The roaring '20s were only happening for the rich. Why not a car in every garage and a chicken in every pot. That was 1928. 

... You better study 1928 because here it comes. I think this is exactly what happened in 1928 is about to happen to us as well.
Well, we'll see, of course, because this is all speculation. But if you're in the market, you might want to start raising cash.

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