New School Politics

In the past week the Federal reserve has inflated the money supply first by injecting more liquidity into the system through Open Market Opperations and then by cutting the discount rate on Friday. Many also expect Bernake to cut the Federal Funds Rate when the Fed meets next month by one, maybe even two, base points. Not surprisingly this move was applauded by many, especially Wall Street which rallied over 2% on Friday.

Recent Fed policy worries me however. While Bernake’s most recent reactions have been masqueraded as remedial they are truly just more of the poisen that is causing the market readjustment that we are currently experiencing. The problem currently being experienced has arrised from overly exuberant investments, especially in Real Estate, that have been spurred by very low interest rates. Currenly many of those investments are being back-tracked as companies realized that they were overly risky and too costly to be supported by the economy’s time preferences.

As I have said before, for interest rates to be as low as they have been capital accumulation should have been equally as impressive. To the contrary, savings have been very low meaning that a shortage of loanable funds is currently being realized on Wall Street. Loose monetary policy from the Fed is not the solution to the problem; it is the problem. 

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