This is a first, dreaded H, word "hyperinflation" showed up in a mainstream newspaper.
Fantastic piece, would be nice to see more of them in the local papers, to educate J6Packs about a massive fraud perpetrated by the Fed/Pig Men
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Fed’s action only serves to delay the reckoning
By Robert Hardaway
Updated: 10/04/07 6:58 AM
In 1624, frenzied speculators in Holland ran up the cost of a tulip bulb to 3,000 guilders (about $100,000). When fears arose that this “bubble” might burst, lenders reduced the interest rates on loans in order to allow speculators to continue buying the bulbs and thus keep the bubble going as long as possible.
Although it was a recipe for economic disaster, this short-sighted policy only ensured that when the bubble burst the consequences would be far more severe than if the excesses had been wrenched from the system earlier.
When American wage earners making $40,000 a year are being tricked by lenders’ teaser terms and the Federal Reserve’s low short-term rates into buying half-million dollar, two-bedroom shacks in the overheated California housing market, it is clear that housing has become today’s tulip bulbs.
The Fed policy of feeding the housing bubble with low rates has been rationalized by claims that low rates are necessary to “stabilize the markets” and to save the small homeowner from the economic impact of foreclosure.
Nothing could be further from the truth.
Homeowners who have put nothing down on their homes have little to lose when foreclosure lets them off the hook.
The real beneficiaries of the Federal Reserve rate cuts are the hedge-fund managers, who fear that they might lose their multimillion dollar bonuses; the banks; and the greediest speculators, who stand to lose money on their risky mortgage investments.
Unlike the family unit, which is expected to pay its debts, the United States for years has benefited from the fact that up to half its IOUs (i.e. dollars) that it uses to purchase foreign goods are never redeemed in this country, but rather circulate indefinitely as an international currency and are traded among foreign nations.
But when the Fed reduced interest rates, the value of the dollar dropped like a rock, causing many countries to redeem their dollars here. When those dollars start flooding the domestic market, inflation will skyrocket and interest rates will ultimately have to rise precipitously to avoid hyperinflation. So much for helping the homeowner.
But this is not the only way the “little guy” will be irreparably harmed by the Fed rate cut. Oil-producing nations will demand more dollars for their oil in order to receive the same price in their own currency, thus dramatically raising the price of gasoline. Low rates will also continue to prop up house prices at a level far higher than the average American can afford.
Fed policy can continue to bow to the political pressure for low rates exerted by leaders of big banks and the hedge funds or it can restore the full faith and credit of the U.S. dollar, make housing affordable and dampen the speculative frenzy that brought about the crisis in the first place.
Robert Hardaway is a professor of law at the University of Denver Sturm College of Law, and the author of 14 books on law and public policy.
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