Bad Medicine

Its_resolved There is a terrific opinion piece in the Sunday Washington Post, titled Bad Medicine that is your MSM Saturday morning reading for the day.

Its by James Grant, purveyor of the Grant’s Interest Rate Observer.

While some folks (myself and Nouriel Roubini and Jimmie Rogers and Mark Faber) have been warning about Housing and Credit for two or three years, Grant has been warning that this crack up was the inevitable result of Greenspan’s easy money policies for at least decade.

Here’s his take:

"Low interest rates, easy money and malleable accounting rules are what plunged Wall Street into crisis. Yet it is low interest rates, easy money and malleable accounting rules that top the list of federal fixes. The unifying theme of the new bailout bill, all 451 pages of it, is the hair of the dog that bit you.

The unblinkable fact is that Americans own too much house. We overpaid and overborrowed, and many of us are "upside down," as the car dealers say. What to do? Recognize the losses and write them off. What not to do? Inflate the currency and debase accounting standards.

But inflation and debasement are the very policies being put in place. The Federal Reserve, not waiting for Congress, embarked last month on a radical program of money-printing. Reserve Bank credit — the raw material of bank lending — is growing at the year-over-year rate of 61 percent.

Credit creation is the Fed’s signature crisis-management policy: Let a bubble inflate, then watch it burst; clean up with lots of dollar bills. After the stock market broke in 2000, then-Fed Chairman Alan Greenspan set about easing policy. In company with Fed Governor Ben S. Bernanke, the man who wound up succeeding him, Greenspan warned against "deflation." He vowed that this country would not sleepwalk through a decade of falling prices, as Japan had done. Rather, the Fed would push interest rates low enough to jolt the U.S. economy back into prosperity."

I’ll bet being right is small consolation for him . . .

(Note: The cartoon above is from Grant’s site, and you can order a framed version by clicking here).


Bad Medicine 
James Grant
Washington Post, October 5, 2008; Page B07

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