“We have outlived the short-term and are suffering from the long-run consequences of [Keynesian] policies.” — Ludwig von Mises
In the past week, Wall Street seems to have breathed a great sigh of relief. Stocks rallied sharply, and gold fell. How is it possible for an inflation hedge like gold to fall in the face of another rate cut by the Fed and the injection of so much more liquidity? Easy. Gold was selling at a “crisis premium.” When the crisis temporarily subsided, as evidenced by major banks getting an infusion of private capital to survive for another day, the crisis premium faded.
The Fed’s artificial short-term medicine seems to be working, as the gigantic bottles of aspirin have thinned the blood of the economy and resuscitated the heart of the global markets.
But I wouldn’t be selling my gold any time soon.
Aspirin may save a life in the short term, but how much help can it provide with a patient with heart disease? The great Austrian economist Ludwig von Mises warned that “Middle of the road policy leads to socialism,” and between the actions of the Fed (more inflation, more bailouts) and the Federal government (threatening increased regulation), the latest crisis may not be the last.
What about Treasury Secretary Henry Paulson’s blueprint? In essence, it centralizes authority in the hands of an uber cop, the Federal Reserve, and nationalizes the regulation of the mortgage industry into a new federal Mortgage Origination Commission. It also expands federal regulation to the unregulated hedge fund industry. Right now, Paulson’s plan is regulation lite, but as Lord Acton says, “power corrupts.”
What should the government being doing? It should move in the opposite direction, deregulation a la Reagan. Remember, it was the Federal Reserve and the overreaching Congress that caused this debacle in the first place. Under the false fear that the dynamic United States was going the way of a static Japan, Greenspan’s Fed cut rates far below the natural rate to 1% in 2004, creating an unsustainable asset bubble, especially in real estate.
Congress was also culpable. For example, in 1995 Congress amended the Community Reinvestment Act, which required banks to lend to high-risk areas that they otherwise would avoid. Those banks that fail to comply pay fines and have more difficulty getting approval for mergers and branch expansions. It was the beginning of the subprime lending scandal. Mortgage lenders like Countrywide were encouraged by this legislation, and then paid the price.
Second, Congress should cut corporate taxes, which will boost US business and the weak dollar. The US dollar is terribly out of balance with the world’s currencies and unless some strong action is taken to encourage genuine economic growth, we are headed for a monetary crisis (as former Fed chairman Paul Volcker predicted a few years ago).
Congress also needs to encourage saving and capital formation in the U. S. We are suffering from a huge infrastructure deficit, which will require billions to meet minimum engineering standards. By making the Bush tax cuts permanent, Congress can make a difference.
Third, the Fed should keep the Fed Funds Target Rate at a reasonable “natural” rate. Any rate under 3% is clearly excessive and dangerous to the stability of the dollar. It may continue to intervene to help large institutions that face unexpected liquidity problems, but its aggressive rate cutting can only lead to more problems down the road.
In short, the Fed needs to maintain a stable monetary policy, which the late Milton Friedman said was an essential ingredient to natural prosperity of the commonwealth.
Announcing “World Economic Summit” on the Growing Financial Crisis
Given the gravity of the Fed’s latest panicky measures to inject liquidity into the monetary system to stave off financial collapse, I am holding a World Economic Summit at FreedomFest this July 10-12, with world-class economists and financial analysts, including Steve Forbes, Jeremy Siegel (Wharton School), Steve Moore (Wall Street Journal), Congressman Ron Paul, John Mackey (CEO, Whole Foods Market), and many others. I urge you to attend. Call Tami Holland, 1-866-266-5101, or go to www.freedomfest.com
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