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LA, California, USA
Experience: Intermediate
Platform: NinjaTrader
Trading: CL,ES mainly
Posts: 520 since Sep 2011
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Chairman Ben Bernanke made clear Friday that the Federal Reserve will do more to boost the economy because of high U.S. unemployment and an economic recovery that remains "far from satisfactory."
Bernanke: With unemployment high, [AUTOLINK]Fed[/AUTOLINK] can do more - 08/31/2012 | MiamiHerald.com
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And sadly, it will only get worse because of the fundamental design flaws in the system.
Of course you already know about how the Federal Reserve is flawed because by design it creates more debt than it creates money with which to pay that debt. If your out go exceeds your income....Your up keep will be your down fall.
But there are two other problems which doom more QE to failure.
The first flaw is inside modern economic theory itself, and even Allan Greenspan admitted before Congress that the best minds of Wall Street missed (or did not want to see) what was going on.
There are two kinds of purchases, goods and assets. Goods are items you purchase to use and expect to sell (if ever) at a reduced price. Assets are things purchased with the expectation of re-selling at a higher price. Normal rules of supply and demand (the wisdom of the crowd) are that as the cost of goods rises, demand will lessen, and commerce will slow until the price of the good succumbs to market pressures and comes back down. This is a naturally stable system that needs little interference. The mistake that the Federal Reserve and Wall Street made was assuming the same stability also applies to assets. As the price of gold rises, demand will slacken, for example. But this is not always true.
Houses inhabit a grey area. They are bought to use, like goods, but their price will usually increase like an asset. But Wall Street still viewed houses primarily as goods, with the increase in value really the accumulation of mortgage interest carried forward to the next buyer. And that was where they failed.
During the early 2000s, more and more Americans started viewing housing purchases as assets. As housing prices rose, demand actually increased as the promise of overnight profits lured more people to mortgage out the equity in their homes and invest the cash into additional houses. That demand in turn stimulated greater price increases, which stimulated more demand, etc. This is a naturally UNstable system, chaotic in the mathematical sense. Controls should have been imposed, but were not, and that is how the housing bubble was created. Everyone on the inside was too busy getting rich to realize the obvious smell of tulips in the air.
Worse, they were also too busy to notice something else going on.
With real-estate and mortgage-backed securities paying such high rates of returns (until the crash), investment money was lured away from other capital ventures ... like farming and manufacturing. Profits were higher investing in consumer debt than in investing in businesses with which to provide jobs so that consumers could pay that debt! American entrepreneurs outside the financial services sector were starved for investment cash and never opened their doors. This accelerated the loss of jobs, which triggered the mortgage and retail crashes. Again, we are seeing the effects of a naturally unstable system allowed to run its course without oversight.
This illustrates very clearly that Adam Smith was wrong about individual greed being good for the society as a whole. And this also proves John Nash was correct that one must keep an eye on the system as a whole to have the best outcome. Keeping that eye on the whole is, of course, the advertised job of the US Federal Government, and clearly, they dropped the ball on this one, too busy selling us solutions to make-believe crisis to notice the real crisis that was unfolding before them.
In this case, an essential part of the US economy was allowed to starve to death because it did not provide the highest profits.
It is for this reason that Russia is correct to take control of their central bank, to make certain that instability (greed) does not strangle essential parts of the entire system for the sake of a quick profit.
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