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Where is Alan Greenspan When You Need Him?

The people who are going to be hurt the most are middle class and those struggling to get into the middle class.

Fed Chief Ben Bernanke has decided to print more money in hopes of reviving the economy. I hope Ben is not doing this for political reasons; I hope it is because he truly believes this will save the economy.  Whatever his reason, it is my belief this is one of the worst moves of the last four years.  The last four years have been a financial disaster, so it takes some doing to top what has happened so far.

When cell phones were first introduced they were not only large, they were very
expensive.  Everybody was talking about how they were the future.  Some of us
held off buying a phone because it was hard to justify the expense.  We also understood all new products are expensive, but soon competition would increase the number of cell phones and the price would drop.  You will remember
that is exactly what happened.  When you increase the numbers of anything the value drops. 

Another example is cars.  When first introduced, they were very expensive and few people had them.  Enter Henry Ford and the idea of mass production.  Soon the middle class could afford an automobile and it created a whole new industry.

I go over these stories, stories you all know, to remind you as something increases in number, it decreases in value.  With Mr. Bernanke printing more money the value of the dollar will fall.  Every dollar printed makes an existing dollar worth less.  This loss of value will come through inflation.  It has been a long time since we had real inflation.  During the Carter Administration mortgage rates were over 12 percent if I remember correctly.

Researching this led me to a review of the qualifications of Mr. Bernanke. I found he is a very smart man, Harvard educated, a professor at Stanford, a tenured professor at Princeton. 

He served for years as a member of the Board of Governors of the Federal Reserve System.  This is a man who taught himself calculus as a young man because it was not taught in his grammar school.  His entire education is based on the study of economics.  He developed the theory of The Great Moderation “where modern macroeconomic policy has decreased the volatility of the business cycle.” 

With this background how could he think printing money is the answer to our current problems with the economy? 

Maybe, just maybe, Greenspan was a great Fed Chief.  Greenspan made it appear so simple that perhaps the idea of decreased volatility in the business cycle actually made sense.  Like all theories, the final test is how it performs in the real world.  We must not forget the bubble was in housing and easy money, not Fed action.  I do understand a number of people were calling for less money in the system at that time.  But inflation was dead for a couple decades and it was good for us.

According to news reports this purchase of bonds is an open ended commitment by the Fed.  Yet, if you listen to other economists they will tell you this pumping of money into the system will not work.  The last attempt by the Fed to fix the
economy cost nearly a trillion dollars and had a negligible effect on the economy.  I have a couple predictions that you might want to think about.

If the Fed continues to print money, and Obama is reelected, this process will result in inflation approaching 10 percent within two to three years.

When the Fed stops buying mortgage bonds, the mortgage rate will again exceed 10 percent.

The resulting slowdown will be at recession levels.  The people who are making money off this move by the Fed are JP Morgan Chase, Goldman Sachs and Morgan Stanley. The people making money on this deal will be the big stock market

Despite everything you are led to believe, the middle class will be the losers as we print more money.  If you are poor, it is going to be a mess. 

The government will not be able to deliver everything they promise. In order to pay for their promises the Federal Government will have to raise taxes to confiscatory levels.  This will drag down small businesses.  Most actions taken by this administration has benefited the rich and cost the middle class.  Expect more of the same.

Please understand I am not an economist, but do have a pretty fair understanding of what is happening.  You must do your own research.  If you have money in the bank, you will gain over the next several years. This will be a temporary gain for our seniors.  Initially if you are a small investor, you could make some pretty good money.  But look out at least two years and you can figure out where an overabundance of money will put you and your plans.

Bottom line, this intervention by the Fed is ill advised and dangerous. 

Sooner or later we are going to face the music on the debt and on the suppression of small business growth.  The people who are going to be hurt the most are middle class and those struggling to get into the middle class. 

The government is not your friend; it is a system which belongs to the people. Control government or government controls you. 

Our system was set up to offer the best chance to each citizen.  What is happening now is outside our system.  It is not illegal; it is just outside the American experience of limited government and unlimited individual opportunity. 

This program Bernanke is following will only benefit the rich and the connected.  Mr. Bernanke has the training and understanding of the system that should tell him he is making a mistake.  Mitt Romney was correct to ask Ben Bernanke not to undertake this action.

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John Webb September 17, 2012 at 08:10 PM
"He even admitted that he was blind to the long-term consequences of his low interest rate policy and did not see the housing crash coming." Mfriedrich, I have heard this before, here is another thought process. Greenspan was tired and really out of gas by the end of his term. He did not see the consequences of the Congressional actions and he did miss that he had gone too far with easy money. But I think he was just trying to save himself and get out of the public glare at a time when it looked much worse than it was. He also has a very liberal wife and he was going to be facing her friends over the long term. I think this comment came from a tired old man who gave up. Do you see that?
MFriedrich September 18, 2012 at 04:51 AM
John, I'm not going to pretend to know what was going on in Greenspan's mind. I know that he was around 80 years old when he finally stepped down from his duties. Greenspan cheerleaded de-regulation of the financial industry believing the market alone would adequately keep lenders from risky lending practices. He was wrong. His policies turned a generation of Americans, including baby boomers, into anti-savers . He was a huge proponent of adjustable rate mortages - which is UNBELIEVABLE advice under circumstances where mortgage rates are the lowest in history (2004 the Fed's funds rate was down to 1.1%!!) The time to use adjustable rate mortgages is when rates are at their ZENITH, not their lowest. This has to have been the dumbest, most senile financial advice ever. Under Greenspawn, the housing bubble was born. Its crash wiped out the finances of thousands of poor, rich and middle class Americans. It did not spare any economic class. But yes, thanks to politicians, the middle class will be the one's with mop and a bucket cleaning up the mess with higher income taxes. Worse there will be high hidden taxes that come from the utter annihilation of the US dollar, 401k/pension implosion and decline of dollar-denominated stocks. Greenspan was once at the top of his game. In the end he was a bumbling old man, overwhelmed by the volume and speed of modern global finance of the information age.
MFriedrich September 18, 2012 at 05:00 AM
Sometimes people forget that the epicenter of the housing bubble and crash was Orange County, California. Many Orange County homedebtors, most of whom have foreclosed by now or are still squatting payment-free while standing in the foreclosure pipeline, no doubt long for these good ole days of using your house as an ATM: http://www.youtube.com/watch?v=3Np1XDRRsSM Ahh yes. Countrywide Financial.
MFriedrich September 18, 2012 at 05:05 AM
Here's another awesome blast from the past: http://www.youtube.com/watch?v=Ei5OrV-CmHg&feature=relmfu Greenspan had faith that lenders would adhere to fundamental lending standards with such low mortgage rates now available. But they did not. It's not normal to lend a bus driver on $36,000 year salary a $736,000 mortgage loan. But that's exactly what happened over and over again for years. http://www.youtube.com/watch?v=lPfHuQv3BFM It's too easy to blame the politicians. Most of the blame is starring right back at us in the mirror. Financial ineptitude of the US populace.
John Webb September 18, 2012 at 07:51 PM
I disagree on two points. First, when the adjustable rates started the interest rates for home loans was well above 10%, but you are also right; by the time the bubble burst the rates were very low. Second, The Community Redevelopment Act is why loans were being made to the wrong people for the right reasons. The banks had the Federal Government looming over them and threatening them if they did not make loans. I remember the hearings when the Bush Administration questioned the ability of banks to handle the large losses looming inthe future. Democrats Maxine Waters and Barney Frank said there was no danger and refused to ask the banks to tighten up on their lending requirements. Once again we are in agreement on one point, the middle class was stuck with the bill. We are currently being stuck with the bill and the loss of jobs under President Obama. Despite both parties always trying to save us, the middle class always gets the bill.


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