Posted by Karl Denninger
… and what’s worse, makes clear they won’t stop – and why.
Indeed, what James Bullard has done with this speech is both destroy the claims of Bernanke that low interest rates didn’t cause the bubble (remember, Mr. Bullard is a Fed President) but at the same time he pulls down the curtain on exactly why The Fed ignores bubbles!
Specifically, Bullard said:
He noted that monetary policy necessarily affects asset prices and interest rates.
“Historically this did not appear to create prolonged run-ups in asset prices, but changes in the recovery of employment in the past two recessions led the Fed to keep interest rates low for a long time,” he said. “Both periods featured prolonged increases in certain asset prices: for technology in the 1990s and housing in the 2000s. During this time, unemployment hit lows of 3.8 percent in 2000 and 4.4 percent in 2007, and inflation was low and stable.”
If the fed funds rate target was kept too low for too long in the 1990s and 2000s, “Why didn’t we see more inflation?” he asked. “Yet, without an increase in inflation, asset price misalignments seem to have caused significant problems for the macroeconomy.”
You did see an increase in inflation – a big one. The Fed simply defined it out of existence by refusing to count it!
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.
Note that nowhere does it say “the price of houses does not count in the definition of inflation.”
A house is a “good.” It is occupied and consumed (yes, I know people call it a capital asset, but a car is a capital asset too and nobody says THAT isn’t consumed!)
Just try not applying inputs in the form of repairs and maintenance (new roofs, new water heaters, a new furnace, appliances, etc) from time to time and see what that “house” looks – and functions – like in a few decades.
There was plenty of inflation Mr. Bullard. Indeed, there is a solid argument that not only was there inflation in the 2000-2007 decade there was a metric ton of it that you and the rest of The Fed intentionally ignored in the form of home price acceleration!
Oh, and as for why The Fed hasn’t (and won’t) suppress asset bubbles?
He added, “If the asset prices contain reliable information about future inflation and output, then the Fed might respond to the bubble using monetary policy, but the focus would not be on responding to the bubble per se. Another alternative would be to use regulatory, supervisory and lender of last resort powers for financial stability, but financial institutions would need to be capable of withstanding large shocks to asset prices, as well as other shocks.”
Got it? Financial institutions are incapable of surviving asset price deflation. But wait – if asset price increases aren’t inflation, then asset price deceases can’t be counted as deflation, right?
Isn’t that double-standard nasty?
Bullard has inadvertently pulled back the curtain and exposed the reason that we will suffer another crash in the markets, this one worse than the last.
Since the Fed Policy of “easy money, blow asset bubbles” became the mantra (post 1987) each crash that occurred has been worse than the last and has involved greater and greater portions of the economy. This is an inherent mathematical reality when one tries to paper over the insolvencies exposed by an asset price crash through blowing a bigger bubble – to be “successful” you must place more of the economy at risk!
If The Fed’s policies are not modified we WILL suffer another crash and it WILL be larger than the previous ones – perhaps large enough to destroy our economy and government entirely.
No folks, we did not “avoid a Depression” – we are in fact directly on the path to guarantee one – a Depression worse than the 1930s, and perhaps serious enough to imperil our government’s stability.
The idiocy I have spoken of at The Fed since The Ticker began, and which Fed President James Bullard has just inadvertently admitted to, must be eradicated from The Federal Reserve through Congressional action (or executive order) while there is still time to do so.