Bernanke addressed the CFR on Tuesday 3/10, and he explained that the crises began as a result of global economic imbalances: the US and some other countries borrowed too much money, spent it, and didn’t have enough savings, and there were other countries that saved a lot of money and had excess savings, and loaned that money to the US, and the US blew that money, that the ‘free-market’ and the government didn’t take action to make sure the money was invested well.

Well, first, one of the ways a true free-market would make sure the money is invested well is that it would set the cost of money, the interest rate based on availability of real savings, be it ours or a foreign investor, and it would also be set based on a real expectation of return on investment. But when Bernanke’s Fed sets 1% or 0% interest rates, it becomes a free-for-all. Companies like Starbucks can engage in foolish strategies. People can buy homes they shouldn’t have, even if they have the income and the down-payment.

Second, Bernanke’s prescriptions are out of line with his diagnosis. If the problem was no savings and too much debt, then why does he continue to punish and destroy savings and encourage more debt? Artificially low interest rates discourage savings by providing little return through interest bearing accounts, of course, but also by inducing inflation. (I know the govt figures claim little inflation, but I don’t think that’s what we are seeing on the ground, now, and certainly not over the past decade.)

And finally, he suggests a new government agency that looks at business cycles and makes sure booms and bust don’t get too big. WTH? I thought the Fed’s original purpose was to do just that! Does he not understand that America’s savings rate is low because the Fed has kept interest rates at a ridiculously low level, far below where a true free-market would have kept them, for far too long? That our debt is so high because borrowing was cheap? He’s saying we need a government agency to make sure the Fed doesn’t print too much money and keep interest rates too low.

So, we need a back-seat driver who tells the front-seat driver what to do? And what their attempting to drive is the so-called ‘free market’? How about we just get rid of the Fed, go back to sound money, and let the market drive itself. Then we would be a lot closer to having a free-market.

But at the very foundation is the Fed, which controls the ‘money supply’. Greenspan and Bernanke have kept interest rates too low for too long. It all gets back to that, because that is the basis of the “cheap credit”.

http://www.youtube.com/watch?v=2K__ZsDH3Qw
http://www.youtube.com/watch?v=k2DRrsv4Des

And they think this consuming can be started by ‘stimulus’ of the road-building variety.

But if their base assumptions are wrong, then their prescriptions will be wrong.

They didn’t see a problem with inflating a credit bubble, providing cheap money to everyone from homebuyers that want to buy a McMansion they can’t really afford to companies like Starbucks or Marble Slab that wanted to put a store every 100 yards and on every corner to sell $5 coffee or $7 ice cream.

The above examples and a thousand more beside represent misallocations of wealth that, for the most part, was borrowed from non-Americans. Like the money all the NASDAQ investors put into Pets.com and the like, this wealth has already evaporated. Gone. Home prices (sans inflation) are NOT going back up. That was fake, and that money is GONE. Starbucks is not going to keep all of those stores open. They’re shutting down excess stores, and a lot of other commercial real estate is going to drop in value just like the home values did. This is playing out still, and we haven’t even gotten half way through the adjustments.

Many of the needed adjustments have been prevented from taking place. GM NEEDED to go bankrupt, if that was required legally in order for them to force a reworking of all labor contracts. There is no way for GM to make cars profitably using workers who almost can’t be fired, who make twice what equivalent American workers make elsewhere, who have utterly unrealistic benefits and pensions, and who insist it takes twice as many of them to do what other companies get done with half as many people. I believe that when GM last had record car sales, they still couldn’t turn a profit, and when they last did turn a profit, it was due to the financing side, GMAC, IN SPITE of the losses on the manufacturing side.

The economy is simply not going to be fixed by producing more consumer credit so that Americans can more easily afford to go into greater debt to buy ever more expensive union-made cars.

Excellent analysis of Geithner’s interview. Needless to say, I do not trust OIAF because he constantly lies. Having you breakdown Obama’s War on Capitalism is very helpful.

Could you define the “mark to market” accounting rule and how it impacts our financial institutions?

How can we counter their misinformation and mixed messages about the economy? In other words, how can we control our own economic future while having a dictator for a President?

Aaron- Kudos to your remarks….I agree 100% that any action Obama takes is a power grab….

Supposedly a very difficult individual. Huge ego. he pissed PAul Volker off within hte first few weeks of this administration by not including Volker in meetings. Never one to keep his ego out of the process.

Also was very involved in a number of decisiosn that kept regulation oout of the derivatives market.

Smarter than all of us, we should be honored to have him serve for us. (lol)

I thought he was too big to flail?

He’ll be thrown under the bus with Obama telling the world he was “not the Geithner he thought he knew.”

When staggering life fortunes can be had in a year based on bonuses that reward short-term corporate profits, why would we expect a CEO to make decisions looking at the profitability and viability of that corporation 5 or 10 years down the road?

What’s evolved during the last decade or so seems more like a perversion of capitalism than capitalism itself.