Bad money drives out good money is what was said in the days when only coins were honored, and they were shaved and the filings melted by the unscrupulous.
The bad money today is the fiat currency of the U.S. dollar. Government borrowing to finance U.S. wars weakened the dollar in this decade. Continually lower interest rates created more bad (easy) money in circulation, so too much money chased too few goods.
A broad swath of policy-makers ignored how the increase in non-core inflation (food and energy) would eventually dampen aggregate demand.
It’s not just headline inflation that showed how too much money was in the system.
The Bush Administration wanted to increase U.S. home ownership from 66% to 70%. They had plenty of tools at their disposal. Fannie Mae and Freddie Mac were a part of that plan, along with HUD schemes.
Fannie and Freddie had bought off politicians for years to avert scrutiny from accounting practices that would have caused lawsuits if they were used elsewhere.
I remember a study in the mid-1980s by some esteemed Washington think thank that a Salomon Brothers analyst had a hand in. It said that Treasury’s implicit backing of Fannie and Freddie raised borrowing costs to everyone else by 10 basis points.
It said nothing about a third standard deviation style market meltdown. It’s costing you and I at least 200 basis points now.
More liquidity to the current crowd of banks is only a stopgap until we know who the survivors will be. If the Fed keeps doing it, it won’t work.
What does this mean to you, Mr. Biofuels Project Developer? The government continues to crowd you out of the credit markets. Demand real-time accounting for every outstanding mortgage backed security issued by Fannie and Freddie. Make Treasury put it all on the Internet.
And by the way, your peer companies wonder if their deposits are safe. Maybe you should move your operating funds. – David Givens
Comments