“The market has failed, and officialdom is perpetuating that failure.”

[Crewleader]

by Mike Whitney / December 19th, 2008

Ever since the two Bear Stearns hedge funds defaulted 17 months ago triggering a global financial crisis, the Federal Reserve has been busy putting out one fire after another. Fed chief Ben Bernanke has slashed interest rates to .25 percent, handed out billions in emergency funding to teetering insurance companies and mortgage lenders, and provided $8.3 trillion in loan guarantees to keep the financial system from collapsing. Unfortunately, nothing the Fed has done has either stabilized the markets or stopped the contagion from spreading to the broader economy where consumer spending has fallen sharply, unemployment has skyrocketed, manufacturing has slipped to a 30 year low, and housing prices have plummeted. Bernanke, the Princeton academic who is an expert on the Great Depression, is limited in his understanding of the crisis by his “monetarist” bias. He believes that the only way to fight credit contraction is by flooding the financial system with liquidity (”quantitative easing”). But this remedy focuses more on reducing the symptoms rather than curing the disease. Christopher Wood sums it up in an article in the Wall Street Journal article “The Fed is Out of Ammunition”:

The origins of the modern conventional wisdom lies in the simplistic monetarist interpretation of the Great Depression popularized by Milton Friedman and taught to generations of economics students ever since. This argued that the Great Depression could have been avoided if the Federal Reserve had been more proactive about printing money. Yet the Japanese experience of the 1990s — persistent deflationary malaise unresponsive to near zero-percent interest rates — shows that it is not so easy to inflate one’s way out of a debt bust.

Bernanke’s strategy may provide some temporary relief, but it won’t fix the underlying problems. The debts will have to be brought forward and written off, insolvent institutions will have to be shut down, indictments will have to be served to those who defrauded investors, and transparency will have to be re-established. Bernanke and his colleagues at the US Treasury believe they can bypass these confidence-building measures by simply opening the liquidity-valves and waiting for the economy to come charging back to life, but it won’t work. Liquidity is not credibility and it’s the lack of credibility that has investors racing for the exits.

http://www.dissidentvoice.org/2008/12/the-market-has-failed-and-officialdom-is-perpetuating-that-failure/

[Hydra]

1. "It's the jobs, stupid!"

It doesn't matter how much money Bush and the Fed give to their cronies to buy up their competitors...gee, maybe that was the whole point of this mess?

[Mike 03]

2. Yes, this process of deleveraging will take years. It's scary. NT