The Fed Shouldn’t Escape Blame for Investment Bubbles
By Alan Stewart Carl | Related entries in Economy, Money, Oil
If you haven’t noticed, gas prices are back down. In fact, oil has been on one heck of a ride, going from $70 a barrel up to over $140 a barrel and back down to $70 in just one year.
The value of the U.S. dollar took a similar ride, except its value decreased dramatically before returning to about where it was 14 months ago.
What just happened?
The Wall Street Journal points out this volatility was an investment bubble caused as much by Ben Bernanke’s moves at the Federal Reserve than by real market conditions. The Fed mistook the credit crisis as a problem with liquidity rather than a fear of insolvency and created the pressures that drove money into commodities like oil and into non-dollar currencies. Now that the extent of the credit crisis is known and a global recession has begun, the bubble has burst.
As much as unbridled greed and poorly targeted regulations are to blame for recent bubbles, the WSJ is right to remind us that the Fed has played its own important and destructive role (even if Alan Greenspan refuses to admit culpability for the ridiculously low interest rates which helped fuel the home lending boom). In our rush to punish and regulate the free market, we can’t ignore our monetary policy and the problems brought on by Greenspan and Bernanke. As the WSJ says:
As Congress plumbs the causes of our current mess, the main one is hiding in plain sight: Reckless monetary policy that did so much to create the credit mania and then compounded the felony with a commodity bubble and run on the dollar whose damage is now becoming apparent. The American people intuitively understand what’s been done to them, which is why they are so angry. If the next President ignores the monetary roots of our troubles, he is courting the same fate as George W. Bush.
Government doesn’t like to admit that government can be a problem. But if we want more stable markets in the future, we need to be sure to address the problems on all fronts and not just those within the free market.
This entry was posted on Friday, October 24th, 2008 and is filed under Economy, Money, Oil. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
October 24th, 2008 at 8:12 am
As of about 6 months ago, I noticed how the tanking of the dollar was feeding in the growth of fuel prices, which then rippled through lots of other stuff.
When things started to get worse in other places, I starting seeing people write things phrases like “an overabundance of capital seeking out high returns.”
This leads me, total economic layman, to think that the very roots of the current state of affairs is closely related to interest rates being too low for too long. Too much capital too easily available. So I agree with you about that. The point where I step back is where it comes to assigning blame.
To my knowledge, virtually no one of prominence was advocating for higher interest rates to protect the economy. Even if Greenspan had by miracle been so prescient as to insist on slowly backing away from such low interest rates, and begun ticking them up, how long would he have survived. Surely those with any passing familiarity with American politicians knows that he would have soon found himself friendless and without political support.
Just for sh!ts and giggles, I’ll toss out a weirdo hypothesis that I recall from Robert Pirsig’s 2nd book, Lila. I’ll substantially butcher it, but here goes. Pirsig says that sociopolitical systems come to have a life and imperatives of their own. They begin to operate well beyond human control, sort of like if humans were the hardware and interacting governments, businesses, and institutions were the software.
Reboot time. No?
October 24th, 2008 at 8:52 am
kranky,
You are half way there with your interest rate pondering. We would have complained about an interest rate hike, certainly, but maybe interest rates should be market determined. Does the Fed have enough visibility into the market to do a good job setting rates? Isn’t that were bubbles (relating to capital) are being formed – poorly priced capital? A position held by a vocal minority of Americans has been that the Fed role in setting monetary policy should be reconsidered.
October 24th, 2008 at 3:31 pm
Maybe Shane. But then he who makes the market would set the rates. So it’s a moot point today.
I don’t think it’s politically feasible. Few Americans would accept any situation where it became very difficult for many Americans to get credit. And the preferences and behaviors of consumer credit outfits make me extremely distrustful that the market would do a good job of anything beyond separating more consumers from more of their money.
My gut says that if the market alone determined rates and regulation was low, we’d veer towards usury.