Monday, November 17, 2008

To Prevent Bubbles, Restrain the Fed -

In another article bemoaning the Fed, the WSJ reports some amazing statistics:

To Prevent Bubbles, Restrain the Fed -

First on the performance of the stock market:
"On Nov. 14, 2008, the Dow Jones Industrial Average closed at 8497.31. On Nov. 13, 1998, the adjusted (for dividends and split) close was 8919.59. There has been great volatility, but no net capital accumulation as measured by the Dow in a decade. Other indexes, such as the Nasdaq, tell a similar story. Capital has been invested but as much value has been destroyed as created."
Then on the relative size of the subprime market:
"In 2001, there was $190 billion worth of subprime loan originations -- 8.6% of total mortgage originations. In 2005, there was $625 billion worth of subprime originations -- 20% of the total. In the same period, the percentage of subprime mortgages securitized -- loans that were packaged and sold to investors -- rose from just about 50% to a little more than 81%. (These numbers all trailed off slightly in 2006.) The great easing in monetary policy ended (with a lag) when the Fed began raising rates in June 2004.

The subprime saga follows a familiar pattern. Easy credit begets a boom and then the inevitable tightening of credit bursts the bubble. What is not familiar is the scale of the devastation wrought in this boom-bust cycle."
To prevent this boom-bust cycle,the author (Gerald P O'Driscoll Jr.) calls for a return to some commodity standard. A view that I do not really hold, but can see why there are more calling for it and given evidence, I may not disagree with it as much as I would have a few years ago.
"Mr. Obama needs to stop the next asset bubble from being inflated by imposing a commodity standard on the Fed. A commodity standard (such as a gold standard) imposes discipline on a central bank because it forces it to acquire commodity reserves in order to increase the money supply. Today the government can inflate asset bubbles without paying a cost for it because the currency isn't linked to the price of a commodity."

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