My position on the Fed is that the problem is and has been very easy to see. Unfortunately, no one is addressing the real problem. The real problem is an outsized expansion of the monetary base and total credit RELATIVE to GDP. The fundamental flaw with a fractional banking system is that total credit must continually grow faster than GDP. If it does not, that means cash has become more valuable than other investment opportunities, which in turn means everyone in the system moves to deleverage at once, which brings down the entire system. Therefore, the Fed must take any and all measures to keep credit growing faster than GDP.
However, these Fed solutions only encourage more growth in banking balance sheets, more credit creation at elevated asset price levels, and therefore sets us up for further monetary base expansion and stagflation. The Fed and Treasury are sincerely trying to help the banks and get the economy back on track, but they are not addressing the real problem. If you look at historical problems of a similar nature, the unfolding is very similar. The “system” tries for more and more of the same, until the inflation becomes more painful than the problem it is seeking to solve.
If we as a society can agree on the problem (which is a big if), then the solution becomes more clear. Rather than taking extraordinary measures to try to keep the monetary base and total credit growing faster than GDP, we need to take dramatic steps to reduce total credit. How? I think the most equitable manner would be for the Federal Government to give all Americans with a Social Security Number $30,000. The Fed would monetize the debt issued by the Treasury to fund these payments, which would greatly increase the monetary base, but if Americans were obligated to pay off their debts with this money, it would also serve to reduce total credit. Anyone without debt would get to keep the cash. Meanwhile, the Fed would raise interest rates and change its mandate to mimic the ECB (price stability ONLY). While such a solution is imperfect and at the present point in time impractical, I believe any other alternatives will be short-lived and only exacerbate the real problem.
Fake Ben Bernanke
FakeBen.com
FakeBen is a blog to monitor the Fed and its actions and encourage community participation. At FakeBen, we believe that the Fed policy of the last two decades has created a credit bubble as large as that created in the 1920s. This bubble will lead to either inflation, a recession, or both.
