Mar 03, 2008

After watching for a month to see if the Fed's rescue plan in late January would succeed, the U.K.'s Telegraph has pronounced it a failure. Even those "brilliant" economists are outsmarting themselves, like those at Peloton Partners in the U.K. . . .

"The UK hedge fund Peloton Partners misjudged this fresh leg of the crunch. After an 87pc profit last year betting against sub-prime, it switched sides to play the rebound. Last week it had to liquidate a $2bn fund.

"Like many, Peloton thought Fed rate cuts from 5.25pc to 3pc (with more to come) would end the panic. But this is not a normal downturn, subject to normal recovery. Leverage is too extreme. Bank capital is too eroded. Monetary traction eludes the Fed. An "Austrian" purge is under way."

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/03/ccview103.xml&page=1

Some of this article deals with things that the ordinary person does not understand, but the bottom line is that they are now becoming downright frightened.

As assets fall in value, people's assets simply disappear, such as we see in the housing market. Equity in one's house is only as good as the ability to sell the house at the expected price. If values go down, it is the equity in the house that disappears.

But on the other hand, if the Fed creates more and more money, and the inflation rate goes up, debtors end up paying off loans in cheaper dollars. Recall Germany back in the 1920's, when it took a barrel full of cash to buy a loaf of bread. Anyone in those days who had debts could pay them off quite easily. It was the banks that took the hit, unless legislation changed the terms of the loans.

Watch for more and more bankers and economists to start comparing this to the Great Depression of the 1930's. Don't expect a politician to do it. It's hard for the Democrats to blame the Republicans too loudly, because the seeds of this began in the 1990's under Clinton, just like the seeds of the Great Depression began in the "roaring twenties." It was actually not hard to see this coming. I was writing about these "seeds" back in the Clinton era, but the noise of so much wealth creation always drowns out the warnings.

If you recall, the recession actually began just as President Bush was taking office in January 2001. The tax cuts, etc. managed to turn it around for a few years, as it gave people "faith" in the economy. Then came the War, and normally wars are "good" for the economy, since government creates more money and spends it into circulation. But this time all the war did was to drain the economy. The American debt has just gotten too far out of hand, and so this crisis is different.

The Fed was created supposedly to prevent this kind of thing from happening. It took the constitutional right to create money out of the hands of government and put it into the hands of those wise private bankers, the shareholders of the Fed. Surely they would know better than politicians how to create money and prosper the nation! Well, all this did was to create a national debt, because the Fed would not given money to the government. It LOANED the newly-created money to the government AT INTEREST.

If the government had retained its right to create money, then every dollar it created would have been that much less tax that the people would have to pay for the government programs. And every dollar of interest payment on the national debt could have been used for other things than to enrich the Fed's banker shareholders.

I suspect that when the dust settles in all of this mess, the Fed will no longer be privately owned. It may just be an entirely new world, and we need to be advocates of a biblical system to replace it.