Is this the Fed's Plan?

[AoiMasamune]

I was watching CNN today (I know, shame on me), and I was listening to some anchor butcher the 'Economy' issue for the millionth time. I don't know I keep expecting something new eventually. Anyways, my mind started to wander off into introspection about everything I've picked up and jammed into my brain over the last year about the Fed and their methods, working groups, and philosophy, and I felt like I got struck by lightning. I don't know if I'm right, and I don't suppose I'll ever know for sure, but a bunch of things start to make sense. So without (much) further ado:

So the Federal Reserve wants to save the mortgage industry from total collapse, if it fails to do this, we enter into another (worse?) great depression. This can't happen. Thus Bernanke cuts interest rates, attempting to lower the payments on adjustable mortgages, but this is only a temporary fix and he knows it. So a more permanent solution has to be found. Inflation is the key. Inflate the currency, the dollar looses value against commodities like oil and gold AND REAL ESTATE. As the dollar looses value, it eats up the gap between the real value of land in dollars, and the artificially created value that existed before the mortgage bubble exploded.

Now, Bernanke knows that the sudden massive inflation is going to hurt taxpayers, so the president's working group pushes the "stimulus" plan into congress. Bush uses his tried and true methods of "OMG We're gonna die!" legislation to make it go through without a hitch. Thus the taxpayers get the money back that they lost to inflation, and Bernanke's conscience is somewhat appeased.

So what happens when SHTF? They'll deal with that when it happens, and it probably won't. OPEC is proving to be very resistant to Anti-American forces (eg. Ahmadinejad and Chavez) and as long as OPEC is firm, foreign nations will continue to soak up our inflation because they have no other choice. Besides, after Iraq is finally stabilized, we can take care of Iran, and no one really listens to Chavez anyways. The rest of OPEC is either in our pockets via debt, or too scared to take a stand after our Iraq example.

If we can just inflate to the point where the price of land in inflated dollars is equal to or greater than the value of the average Joe's mortgage, without causing the country to detonate, everything will be just peachy.



So what do think, is this whats going through their heads?

 

[acptulsa]

That's actually possible. Mostly, I think, what is going throught their heads is we have to hold this crap off 'till after November.

Otherwise, Dr. Paul might win and fire us.

 

[AoiMasamune]

If that is the plan, and if it works, then it could buy this craziness we call an economy another decade or two.

So the question now is... what are the chances that it works?

 

[pinkmandy]

Bush uses his tried and true methods of "OMG We're gonna die!" legislation to make it go through without a hitch.

This line cracked me up. Thanks for the smile.

I can't contribute to your theory- just not knowledgeable enough economically.

 

[Acala]

Not that farsighted

I don't think they are that farsighted. I think they are hoping to prevent a recession by pouring money into the growing hole (and into the pockets of the financial elite) by every means they can think of. They don't draw the one-to-one relationship between money supply and inflation that many of us do. They also don't buy into (or don't understand) the Capital-based theory of the business cycle that explains that inflation - even if it doesn't cause rising prices - causes harm in the capital structure and impoverishes some sectors of the economy.

I think they are hoping they can inflate just enough to get the boom going again without inflation in prices.

But who knows what they are thinking? Not me.

I think that at some point they are going to lose control of the inflation. There will not be the political will to stop it until it is too late.

 

[DrCap]

It is a reasonable plan on the surface, and I've considered this for some time.
To summarize the plan, inflate the mortgage debt away and home values will rise again and everyone will be happy, right?
There are 2 problems with the plan if that's what bernacke is going to try to do however.

1). With the lowered rates, this time credit will not be as easy and also home buyers won't be suckered in to the low rates. Remember last time when rates were 1% at the Fed, everyone thought home prices can only rise, never fall- (since they only fell in dollar terms in the depression). This time, even with really low rates, most consumers won't be tricked again- the news today really is that HOME PRICES FELL 2% NATIONWIDE IN ONE MONTH. That is awful for real estate, but not reported. So the credit won't be there, and even if it is, the consumer won't fall for the same trick twice.

2). More importantly- if inflation goes up, all borrowing costs will go up as well. Historically, borrowing money costs 5% plus the rate of inflation. So if we have 10% inflation, the interest rate would be about 15%. It wasn't that many years ago when people paid 15% for home loan interest rates. So the fed can't successful inflate out of the mess. Obviously if interest rates on mortgages go up like that, the housing market would crash anyway. If for some reason this didn't happen because private market was too stupid to dump their 30 year fixed mortgages, etc, then the people holding the mortgages and giving out new mortgages would be taking most of the inflation hit- but that won't happen.
Also too if rates skyrocket like that, the rate to service the federal debt will also skyrocket, costing the government a lot more on the $9 trillion plus we already owe. So instead of about 450 billion to pay the interest on the debt the government will have to pay about 1.35 trillon on the debt, and thus either cut spending elsewhere to the tune of $900 billion a year. These number make the bailouts and stimulus package look meaningless.

Although I think bernacke will really screw things up for our country, and I think even the best economic minds would find the current crises a total disaster to try to save from collapse, I also think the fed is smarter enough to see the above problems with trying to inflate our way out of the mess. (It took a lot for me to write this without swearing!!)

 

[AceNZ]

My view about this is that the Fed is acting to save the banking industry. Period. That's all Bernanke and his ilk really care about. The rest is fluff or distraction. He doesn't give a damn about inflation, the dollar or the housing market, except to the extent those things impact the banks.

The economic stimulus is pure election year pandering -- a poorly camouflaged attempt to buy votes.

 

[Paulitician]

But who knows what they are thinking? Not me.

Same. I've even struggling to figure out whether this will be a hyperinflationary depression, or a deflationary depression--or whether a depression will happen at all (maybe by miracle they'll be able to postpone or avoid it). I've taken the hyperinflationary scenario as conventional wisdom mainly because I'm very keen on such people such as Jim Puplava, John Williams, Jimmy Rogers, Peter Schiff etc. (as well as the fact that Ben Bernanke himself has said he's going to do whatever it takes to make sure banks stay liquid/solvent so what happened in 1929-1933 doesn't happen again, and if that means helicopter drops, well by God it means helicopter drops). But lately I've been hearing pretty interesting arguments for another deflationary scenario--and they're mostly from technical analysts, but even some fundamental analysts are saying deflationary market forces are going to be too strong for the Fed to reverse. So I'm seriously very confused...

 

[Signzit]

did you guys see this?

http://www.ronpaulforums.com/showthread.php?t=130111

 

[jclay2]

My view about this is that the Fed is acting to save the banking industry. Period. That's all Bernanke and his ilk really care about. The rest is fluff or distraction. He doesn't give a damn about inflation, the dollar or the housing market, except to the extent those things impact the banks.

+1776. It is too bad that bernank doesn't want to focus on a REAL crisis like the explosion of derivitaves over the past 10 years. The credit crunch is largely a result of people not knowing what certain mortgage backed securities are worth. Just imagine how bad the credit crunch will be when everyone recognizes that they have no clue what their 600 trillion in derivatives are worth. Absolute chaos is what is going to happen.

 

[acptulsa]

did you guys see this?

http://www.ronpaulforums.com/showthread.php?t=130111

That thread and others like it touch on the scariest part of it all. Our dollar has enjoyed demand despite itself for, primarily but among others, being the official currency of oil purchases. This is ending, and there's a source of demand gone.

The supply, on the other hand, grows bigger than ever.