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Thursday, October 8, 2009

Fed Creating Another Bubble

So says famed economic analyst, Nouriel Roubini,

The Federal Reserve is running the risk of creating another bubble, and needs an exit strategy from its credit easing policy, says former Clinton White House economist Nouriel Roubini.

The sharp increase in the stock market and commodities, and narrowing of credit spreads since March, are partly due to a wall of global liquidity chasing assets and already causing asset inflation, Roubini writes in The Wall Street Journal.

Now, it's important to point out that Nouriel Roubini is nicknamed Dr. Doom because he's much more apt to take a negative position than a positive one. He's also now famous because he's one of the few economists that called the bubble and collapse of the housing market while others were chasing money.

I bring this up only because Roubini is echoing things I said months ago.

Back in 2002, the Fed Chairman Alan Greenspan lowered the Federal Funds Rate to .75%. The Federal Funds Rate is the rate at which banks borrow from each other. At the time, we were still recovering economically from the internet bubble popping. The pop of the internet bubble eventually cost three trillion Dollars in paper lost. The bubble burst was topped by the economic devastation of 9/11. About one million jobs were lost in October, November, and December of 2001. Then, this was followed by the revelations of accounting malfeasance at Enron et al. I bring this context because when Greenspan lowered the Federal Funds Rate this low so called experts justified it as an appropriate response to extreme economic weakening.


Now, new Fed Chairman Ben Bernanke has lowered the Fed Funds Rate to 1%, just .25% higher than Greenspan lowered it to. The reason no one is crying bloody murder is once again so called experts believe that Ben Bernanke is responding with aggressive action to an unprecedented economic weakness. The reason this is happening is that most people don't blame Alan Greenspan for even starting the mortgage crisis.

Bernanke is repeating very recent Fed history and he's repeating it even more aggressively. I had a very simple explanation. Bernanke, as Greenspan before him, is creating loose money. (that is money that's too easy to borrow) Once money is too easily available, it's borrowed and spent to accomodate the relative ease with which its gotten and not because there's necessarily a good place to put it. This, in my opinion, is a common trigger for bubbles. Roubini is far more technical but both of us believe that current Fed policy is creating the next bubble.


Anonymous said...

The only thing loose credit will do is help pay off bad loans and "fix" Wall Street. Its not going to stimulate economic growth. Only more jobs and higher wages will do that. After all, Americans are saving and paying off personal debt faster than ever right now.

Secured Loan said...

I can't find a single reason not to expect it to turn out like every other government infused bubble either. The Federal Reserve is keeping interest rates as low as possible and buying bad mortgages. The federal government is handing out $8000 tax credits to subsidize down payments for first.

Secured Loan