Please indulge me as I discuss another misinformed article on CNN Money / Fortune. I believe the intent of the article was to analyze the effect the recent “economic recovery” will have on the mid-term elections tomorrow. Unfortunately, somewhere along the way someone took a seriously wrong turn…
Instead of injecting capital into banks who were unlikely to lend the money back out in such a dismal credit environment, Sinai argues the government should have supported housing prices — the root of the crisis — by directly intervening in the mortgage market.
While this statement starts off with a valid point it quickly takes a turn into incompetance. Yes, a mid-tier cause of the crisis was housing prices, however it wasn’t the housing prices were falling which was a problem, it was the fact that housing prices were way too high. The price of housing increased much too fast at an unsustainable pace due to artificial demand. (Artificial demand factors include low interest rates, Fannie Mae & Freddie Mac, and legislation encouraging lending to individuals who would not normally recieve a loan.) By supporting housing prices at a level created by artificial demand, you only serve to delay the enevitable attempt at economic equilibrium.
Of course, Fed monetary policy, which has kept interest rates at effectively zero, has also “had a significant effect on the economy,” says Sinai, producing a stock-market rally that caused wealth gains, and boosting investor confidence. And a lower dollar, he notes, has helped exports, which showed a healthy increase in last week’s GDP figures.
I’ll save for another time the problems with the way in which we measure Gross Domestic Product (GDP.) Once again, Sinai is only correct, but not for the right reasons. Fed monetary policy has had a signifigant impact on the economy, but it hasn’t resulted in the types of tangile gains to which he alludes. Yes, the dollar is low (read: weak) which helps exports but does nothing for the millions of things the United States imports every day. As a net importer the short-term result here is that we all pay more for the things we do not produce at home.
The “healthy” increase in last week’s GDP figures are the result of some one-time consumer driven incentives to make purchases in the 3rd quarter. (e.g., cash-for-clunkers, first-time home buyers tax credit, etc.) Let’s wait until the 4th quarter numbers to see how sustainable this really was.
Additionally, the Fed’s actions and their impact on the economy have not really had time to completely work their way through the system and make themselves known. I’m sure in two years we will all be feeling the effects of an inflated money supply in the prices we pay for gasoline, food and other goods. And then we’ll know just how much the Fed’s monetary policy has helped everyday Americans.
As the economy improves, economists will give a pat on the back to Bernanke — even as they worry about inflation and what will happen when he takes his foot off the money accelerator.
Have we learned nothing? Didn’t people say this exact same thing about Greenspan back in the earlier part of the century? Aren’t we cursing him now for the period of extreme low interest rates that lead to these asset bubbles in the first place? My, how quickly we forget…
The best part of this entire article is the wonderful commentary from the Internet community at-large. People throw around the term inflation when they mean rising prices. They talk about how the stimulis has positively impacted the economy, yet provide no concrete examples other than, once again, rising asset prices with no fundamental economic growth.
Please remember, an economy largely based upon consumer spending with no underlying rise in the standard of living to support such spending is not a strong, or sustainable, economy.