(Money and Markets) -- Since last year’s collapse of the banking system, hundreds of billions of dollars have been spent to bail out some of the major players. Additionally, governments all over the world, and their central banks, have implemented huge stimulus programs to combat the consequences of the burst real estate bubble. Economic history is being written right before our eyes. Hence, I refer to this episode as the largest economic experiment since the implementation of communism. And here’s what really frightens me: None of the experimenters saw this crisis coming, but all of them claim to know the remedy! At the same time politicians and economists are very busy explaining what they deem to be the reasons for the economic malaise … Speculators, hedge funds, greedy bankers, and lax regulators are said to be responsible. And a lot of talk about a market failure is being presented as the alleged root of this crisis.
Sure, hedge funds, bankers, and regulators certainly played a role. But their reckless behavior is but a symptom of what had been going wrong and was not the cause. And the latter proposition is plain wrong. Let me explain why …
This Crisis Is Not a Market Failure.
It’s a Monumental Policy Failure!
Irrational central bank policies are the source of the current crisis. By now, nobody — not even Greenspan or Bernanke — will deny that the U.S. housing market was a huge speculative bubble. And the bursting of this bubble triggered the banking problems and the recession. So we have to look into what causes a speculative bubble to understand the real culprits of the current predicament. The answer is fairly straight forward: Expanding money supply and credit growth. Since the central bank controls the money supply and credit growth, it’s obvious that the central bank is accountable for the evolution of bubbles and the consequences of their inescapable bursting. You could easily conclude then, that an unsound monetary policy caused the real estate bubble. That means that the same unsound monetary policy is also accountable for the sad and predictable consequences of the bubble bursting. Unfortunately we’re not hearing or reading much about this obvious truth. Instead, fairytales about market failure are dominating the media. And an old and cynical policy joke comes immediately to mind: “When the day of reckoning arrives there is but one policy solution: Lying, lying, lying.”...--Claus Vogt...Cont'd...LINK