THE MONETIZATION OF EQUITY: Printing Money to Buy American Industry
Gary North on LewRockwell.com: The present economy is the result of Federal Reserve policy. Bernanke tried to pop Greenspan's bubbles, but without creating a major recession. That policy failed, as I predicted it would from late 2006 until late 2008.
The FED decided to lower the federal funds rate. This is what it has always done in the past. I predicted it would.
It also decided to swap Treasury debt for the banks' toxic assets. I did not predict this. This is Bernanke's uniquely innovative policy. But this policy has not led to a revival of bank lending. The FED is pushing on a string.
This does not mean that the FED's expansion of the monetary base is impotent. On the contrary, it means that the FED can buy Treasury debt, hold down Treasury interest rates, and enable the Federal government to buy equity in American businesses. The government can lend, as it lent TARP funds, at 5% per annum. The government can remain the spender of last resort. It can become the investor of last resort. This has already begun.
The FED knows it is pushing on a string. It loves that string. Why? Because that limp string – no commercial bank lending – delays the advent of price inflation. This has enabled the FED to achieve the following by doubling the monetary base (the FED's balance sheet):
1. Bail out the big banks (asset swaps)
2. Keep the banking system from imploding
3. Bail out the Federal government
4. Bail out Fannie Mae and Freddie Mac
5. Keep real estate from collapsing
6. Slow price inflation to close to zero
7. Keep T-bill rates under 0.5%
At what cost? Unemployed workers. That is a small price to pay if you are a high-salary central banker with a fully funded pension.
The FED's policies have not failed. They have succeeded beyond Bernanke's wildest expectations. Greenspan's bubbles are all popped. Price inflation is gone. There is no price deflation, either. For the first time since 1955, the FED has attained its mandate from Congress: price stability.
Greenspan's FED never attained the power over the economy that Bernanke's FED now possesses. The FED has been given almost complete regulatory control over the financial system. Congress buckled. Bernanke has been given a free ride. The Federal government now owns General Motors. Keynesianism is having its greatest revival in 30 years.
So far, the FED has won.
