Crossing The Line
Readers suggested a topic on central bank responses to the housing bubble. “Is the world financial system truly on the brink of collapse, or is Soros being unduly alarmist? And do carpet bombs of newly-created liquidity from the major central banks, as we saw dropped out proverbial helicopters this past week, serve to increase or to decrease global financial stability?”
“What concerns me about dire pronouncements from top financiers is that they might serve as smoke screens for central bank discretion to bail out those who gambled foolishly and lost big. When the end of the world as we know it is at hand, the usual rules are abandoned, and massive wealth transfers can be made without raising any serious objections.”
A reply, “The world financial system has already collapsed. They are throwing clearly worthless government fiat promises at it in an attempt to keep fooling people into believing that global financiers are wealth creators instead of wealth destroyers. As time goes on more and more people will realize that despite their faith, they can’t actually eat those promises, nor gas up engines with those promises, or protect their homes against the elements with those promises, etc. That is the core problem that this current generation must resolve. This generation must eventually break down the Big Lie and call it a big lie. Only when such a thing is liquidated, can a real economic recovery begin.”
Another said, “Notice how anytime the business environment is in decline, we have reached an abyss. Especially if lots of free, easy money isn’t delivered to the Banksters to ‘loan’ out. If printing lots of money is such an easy solution, and we want to ’stimulate’ the economy, then why don’t we just credit everyone $5000 to their personal accounts, a simple matter of digital transfers, and let them go out and have a really jolly Christmas?”
“Using round figures of 80 Million eligible working age adults, that would be, let’s see…..80,000,000 x 5,000 = $400 Billion. Did I get that right? Seems like a pittance. And we’ve been dealing with bailouts in the Trillions. Let’s just give all the working families, and even the welfare recipients, and the retirees $5000 bucks each to ’stimulate’ the economy.”
“Why don’t we do it? Because it would just devalue the dollar and create a ‘temporary’ spurt in activity. It doesn’t create WEALTH. It transfers the wealth already created. The real reason for printing is controlling who will be the beneficiary of the transferred wealth. That is what this is all about.”
One had this, “When I lived in Mexico in the 70’s and 80’s year end bonuses (AKA aguinaldo) was mandatory. Everyone got 20 days extra pay, and yes, people did whoop it up over the holidays. I recall seeing people buying cases of booze, heading off to Acapulco or Cancun, etc. Back then government workers would get … now hold on to your hat … NINETY DAYS of bonus pay.”
“Because inflation was so high, no one held on to the cash. Some would buy appreciating assets with them, but most simply spent it, often for purchases that had been put off.”
And another, “Greenspan suggested it and GWB’s economics team did something along these lines. I believe the household-level helicopter drops amounted to about $2K a piece; my wife has a fine viola bow to prove the wealth effect that resulted. Note that the payroll tax cut is intended to serve a similar purpose, though it is obviously regressive.”
The Economist. “Many of the world’s financial and economic woes since 2008 began with the bursting of the biggest bubble in history. Never before had house prices risen so fast, for so long, in so many countries. Yet the bust has been much less widespread than the boom. In some countries, such as Australia, Canada and Sweden, prices wobbled but then surged to new highs. As a result, many property markets are still looking uncomfortably overvalued.”
“An optimist could therefore argue that our gauges overstate the extent to which house prices are overvalued, and that if markets are only a bit too expensive they can adjust gradually without a sharp fall. It is important to remember, however, that lower interest rates and rising populations were used to justify higher prices in America and Ireland before their bubbles burst so spectacularly.”
“Another concern is that Australia, Britain, Canada, the Netherlands, New Zealand, Spain and Sweden all have even higher household-debt burdens in relation to income than America did at the peak of its bubble. Overvalued prices and large debts leave households vulnerable to a rise in unemployment or higher mortgage rates. A credit crunch or recession could cause house prices to tumble in many more countries.”
From Reuters. “The U.S. Federal Reserve and other central banks must not succumb to calls for additional help from monetary authorities in the face of high budget deficits, two top Fed officials said on Friday. Using the Fed as a printing press to solve the U.S. deficit problem would unleash the ’sinister beast’ of inflation and ‘is not an option,’ Dallas Fed President Richard Fisher told the Dallas/Fort Worth Minority Supplier Development Council.”
“Fellow inflation hawk Philadelphia Fed President Charles Plosser told a conference at his bank’s headquarters that any attempt to ‘resort to the printing press’ to avoid budget trouble was doomed to failure and could lead to hyperinflation. ‘Despite the well-known benefits of maintaining price stability, there are increasing calls to abandon this commitment in both Europe and the U.S.,’ Plosser said, just two days after a coordinated international central bank action to provide dollar liquidity to global banks.”
“Part of the blame for the pressures on central banks to aid on fiscal problems goes to governments, Plosser said, which have failed to agree on how to bring budgets into balance. But central banks, including the Fed, also bear some responsibility for crossing the line into fiscal policy with actions during the financial crisis of 2007-2009, he added.”
“‘Central banks are under increasing pressure to act, both because fiscal authorities have been unable to make credible commitments to maintain fiscal discipline and because central banks have been willing to engage in actions that stray into the realm of fiscal policy — for example, purchasing assets of the housing sector,’ he said.”
“The Fed has kept short-term interest rates near zero for nearly three years, and signaled it would keep them there through at least mid-2013. Top Fed officials have also discussed further easing through large-scale purchases of housing debt. Plosser says he would oppose such a plan, which he sees as crossing the line into fiscal policy since it represents de facto credit allocation to a specific sector.”
“Fisher referred to a recent conversation with European Central Bank official Juergen Stark, who two days ago spoke at the Dallas Fed to warn about political pressures for the central bank to expand its role into fiscal policy. The United States, Fisher said Stark reminded him this week, has an even bigger debt burden than Europe.”
“‘We don’t want to be in a situation like Greece. We are headed that way, if we are not careful,’ Fisher said. ‘We are headed in the wrong direction, and if we don’t bring it under control, we are going to have social unrest.’”
