excerpt from an article written by Richard Benson of sfgroup on this subject fwiw:
".....How about deflation? Take a look at your bills for insurance (health, home and car), home property taxes, gas, heating, college tuition, and anything the shrinking middle class might want. The CPI is up 3% from April 2002 - April 2003, the dollar is off 30%, and the Fed gets away with actually talking about deflation as a threat. Speculators will look back and laugh. John Q Public will look back and cry.
Greenspanâs history as Fed Chairman suggests that when there is anything obvious that would suggest a prudent Fed Chairman might want to take the Punch Bowl away (like a stock market bubble or housing bubble), he casts around for an excuse to distract from the obvious. For the stock market bubble, the theme was âproductivityâ; For the housing bubble, the theme is âdeflationâ.
In order to understand what is wrong with the system, one needs to focus on what used to be right. The old economy rewarded saving and investment. A balance between the need for funds and the use of funds was achieved by the concepts called credit underwriting and interest rate risk, and a return on capital as well as a return of capital. Investors needed to rely on the credit worthiness of a borrower to be paid back. Savers cared about their money. Lenders and portfolio managers were there to protect them and held to a prudent man rule. Through careful underwriting, only the best projects that could pay the required return got financed. Reasonably high interest rates balanced the risk of repayment, and many credits were denied because, frankly, supplying those projects with credit was foolish and would result in loss. In the Mid-1990âs, the Fed changed and so did the world.
The new Fed Model is based on two simple rules: 1) Forget about actual cash savings, and 2) if two entities in the economy enter into a contract, make sure that the contract is financed. Indeed, everything gets financed. There is no need to ration investments to the best projects and credits. Saving is not necessary because there is credit creation. Since credit can be created without limit, credit underwriting is not necessary. All ideas deserve to be financed. The Fedâs lack of knowledge or concern about credit underwriting is understandable because Fed officials are unlikely to have ever made a loan of their own money that they personally had to collect.
Indeed, the only loan the Fed ever makes is by buying United States Treasury Bonds, which the Fed knows will be paid. Old Treasury bonds will be paid because the Fed can always buy more New Treasury bonds with their own money (just printed up) to pay off the Old Treasury Bonds. Since the Fed can print money, it can always pay itself off! So, why would a central bank concern itself with credit underwriting or whether investments are any good? Money can always be created to make the investments good!
The Fedâs New Economic Model allows the economy and asset prices, like stock and housing, to âbreak freeâ and rise without any concept of true value. Money and Credit can be created by Alan Greenspanâs will and spent to carry the world economy. If easy money is always available, and all contracts will be financed, there is really no need for something so outdated and passé as savings, allocating credit, credit underwriting or due diligence. Any systematic concerns about getting repaid are overcome, because there is really no penalty to Moral Hazard and speculative finance. The Fed will always signal the speculators when to get out or guarantee their returns.
For the system, money has become either totally free, or extraordinarily cheap, and available to all. When you think of it, how could the âdot.com scamâ have been pulled off by Wall Street if money had been tight enough to require serious consideration of an investmentâs value? Now, after $7 Trillion was wiped out, what is the penalty? At worst, a few âfall guyâ stock analysts might be blamed, and a minor âspeeding ticketâ issued to the major Wall Street firms. Cost benefit analysis shows hundreds of billions in profits, and a mere $1.4 billion fine. Not a bad risk reward analysis for your newly minted MBAâs out learning the way the system really works. Wall Street can offer reward without risk, and itâs clear the best money to be made is in Moral Hazard and speculative finance (just donât keep the e-mails)!...."
Source:
http://www.sfgroup.org/ Benson's Economic & Market Trends-The Federal Reserve: âMoral Hazardâs Best Friendâ
May 13, 2003
. In 200 years from the ghetto the Rotschild have become one if not the most powerful family so there are rational reasons to fear that anybody which a minimum intelligence and success with time could become as rich as the richests.