More on the bailout

Yesterday the Federal Reserve Bank created $800 billion out of nothing (that’s the sort of dangerous magic that Central Banks can perform) and threw it out of the proverbial helicopter.

The Fed will buy up to $600 billion of debt issued or backed by Fannie Mae, Freddie Mac, Ginnie Mae and Federal Home Loan Banks and up to $200 billion in financing to investors buying securities tied to student loans, car loans, credit-card debt and small-business loans. The intent is to jump start lending to consumers.

Given the state of the economy, and the excessive burden of debt already being carried by consumers, why would any self respecting financial institution want to lend more to people who are all too likely to fail to repay what they borrow? If they do lend, and improvident consumers default, then the taxpayer loses - again - and the cost is passed to the next generation.

Another scenario is that inflation – whether it is another asset bubble or skyrocketing wages and prices – takes off as a result of this promiscuous creation of money. If so, repayments will turn out to be worthless and our economy will pay a high price.

Just later.

Those who have lived reasonably frugal lives, saving for retirement and significant purchases, are now the ones who will suffer. Life is not fair (my mother taught me that) but trouble ensues when enough people are imposed upon by the undeserving - or at least those perceived to be undeserving. This is fertile ground for the rise of a demogogue and, unfortunately, the USA is not immune from that political disease.

Recessions are an essential part of the economic cycle. They serve to flush out capital misallocations, and other excesses, that occur during good times. Panicked attempts to avoid the inevitable will surely be negated by the Law of Unintended Consequences.

Those results are rarely to our liking.