Friday, September 21, 2007

Ron Paul Takes On Uncle Ben Over Currency Depreciation

Ron Paul asked Ben Bernanke a question yesterday at the House Banking Committee hearings on mortgage problems:

“I want to follow up on the discussion about moral hazard. I think we have a very narrow understanding about what moral hazard really is. Because I think moral hazard begins at the very moment that we create artificially low interest rates which we constantly do. And this is the reason people make mistakes. It isn’t because human nature causes us to make all these mistakes, but there is a normal reaction when interest rates are low that there will be overinvestment and malinvestment, excessive debt, and then there are consequences from this. My question is going to be around the subject of how can it ever be morally justifiable to deliberately depreciate the value of our currency?”

According to Scott Reamer at Minyanville, Paul then spoke about the rise in wheat, corn, soybean, oil and gold prices since Bernanke lowered the Federal Reserve's benchmark interest rate by 50 basis points and asked how he could consciously depreciate the value of the American currency when he knows it only helps Wall Street, banking interests and the rich over everybody else.

Reamer says Bernanke didn't answer Congressman Paul, but that doesn't mean we shouldn't look very closely at what Paul was asking:

You will not be surprised to know that B-52 Ben didn’t answer the question. He couldn’t answer the question (at least truthfully). Was he going to say that the Federal Reserve is a quasi-private institution whose prime directive is to cartelize and protect the profits of the banking industry? Was he going to say that the only policy the Fed knows is based on the flawed Keynesian logic that wealth can be created out of thin air via printing presses? Of course not.

But his non-answer is not germane. The element that Ron Paul introduced is: the morality of the Federal Reserve’s constant injection of credit into the system at the slightest hint of macroeconomic distress. And I mean slightest: we haven’t even seen a GDP print below 0. We were only down 4.2% from the ALL TIME high in the Dow (the Fed’s own research suggests that the stock market is the best leading indicator of the economy).

Back in July of 2006, I wrote a piece introducing this moral element into the discussion of the Federal Reserve’s monetary policies. I wrote then words that today, after a pre-emptive, forestalling 50 basis points decrease and more than $1 trillion in worldwide central bank injections of credit, are as germane as ever:

“A constant loss of value in the monetary unit forces all manner of dire consequences on economic actors: it favors consumption over saving, speculation over investment, capital over labor, and the young over the old; it prevents accurate economic calculation about the future and thus clouds investment horizons; it hollows out a country's middle class making for more class conflict between haves and have nots… there are grave time preference consequences as well that impact not only long term investment projects (as noted above) but also the very manner in which parents raise their children and how children care for their ageing parents, as well as the lessons of frugality and hard work that once were the bedrock of this nation.”

Bravo to Ron Paul for giving voice to the hundreds of millions or pensioners, savers, working stiffs, poor, fixed income beneficiaries, laborers, gasoline-, bread-, milk-, and egg-buyers who weren’t able to ask Mr. Bernanke why he – like every Fed chairman before him since 1913 – screwed them for the benefit of the top 5% of the population of this country.

The privileging of debt over savings in the modern American economy is really a problem.

With Uncle Ben printing money as fast as he can and throwing it into the air, I suspect we're going to get even more debt in the near future.

But eventually, the debts have to be paid.

What happens when it becomes clear we don't have the money.

I know - Uncle Ben will print more!!!

As they say in the Guinness commercial, "Brilliant!!!"

Uh, huh.

I'm still musing over a column by Floyd Norris reprinted here from the NYT - Fed caught by surprise, say insiders.
In part: By Thursday, however, the markets were moving in ways that cannot have made the Fed happy. The US dollar fell - an expected result from cutting short-term interest rates - but long-term rates rose, and so did mortgage rates.
Sounds like an own goal...
I saw that too. It will be interesting to see what the Fed does if their rate cuts causes a rise in long-term interest rates. Interestingly enough, banks did not cut the interest rate on savings accounts when the Fed cut rates. Not sure what that suggests, other than in the past banks cut their rates as soon as the Fed cuts.
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