Trump
can either ‘bite the bullet’ now if he really wants to improve
the American economy or he can ‘kick the can down the road’ like
his predecessors have, noted financial commentator Peter Schiff tells
MintPress.
by
Whitney Webb
Part
4 - The real roots of the coming crisis: The Fed
After the
economic crisis in 2008, central bankers made it a point to blame
everything but their own policies, largely focusing their critiques
on financial deregulation as the primary cause. While deregulation
was certainly a factor that allowed the crisis to unfold, it was the
monetary policy of the Federal Reserve that formed the underlying
structural cause of the crisis.
In 2001,
following the bursting of the “dotcom” bubble, the Fed lowered
the federal funds rate a total of 11 times, creating a flood of
liquidity in the markets. This liquidity, sometimes referred to as
“cheap” money, spurred the flow of capital into high-yielding
“subprime” mortgage loans. Soon after, a real estate bubble was
born. As the Fed continued to slash interest rates, this bubble
swelled to massive proportions and “cheap” loans were then
repackaged into collateralized debt obligations. This development
allowed major banks, including the now defunct Lehman Brothers and
Bear Stearns, to leverage between 30-40 times their initial
investment.
Everything
seemed great for a time — that is, until homeownership
reached a saturation point and the Fed decided to rapidly raise
interest rates from a four-decade low of 1 percent in June of 2003 to
5.25 percent in June of 2006. These higher interest rates drastically
changed the amount homeowners were paying on their mortgages, causing
many to default — a contagion that would soon spread through
financial markets and precipitate the crisis.
Despite the
clear role of the Fed, many were taken by surprise when the economic
crisis unfolded. However, some economists saw it coming, particularly
those who were critical of central banking policy. As Libertarian
organizer and activist Matt Kibbe noted in Forbes in 2011, a handful
of well-known investment bankers and financial commentators
associated with the Austrian school of Economics, including Jim
Rogers, Peter Schiff, and James Grant, were among the few who
predicted the crisis.
The
difference between these individuals and those who were caught
unaware was a focus on the analysis of the effect of human action on
markets instead of Keynesian mathematical models, which focus on
total spending in the economy and how that impacts economic output
and inflation.
Central to
the approach focusing on human action is the realization that the
policies of the Fed create boom and bust cycles, or “bubbles,” by
distorting information regarding price signals. Banks may have seemed
like they were over-investing, but they were actually just responding
to the Fed’s false signals.
“Private
banks take their marching orders from the Fed,” Schiff told
MintPress. “If you took the Fed out of the equation, then these
banks would not behave in the manner that they do.”
While the
Fed’s role in 2008 is now evident, nothing has been done to prevent
central bank manipulation from causing yet another crisis. In the
years since the 2008 crisis, the Fed has taken its manipulation of
the dollar and interest rates to new extremes. Like it did between
2001 and 2007, the Fed has expanded the money supply and kept
interest rates at historic lows since the 2008 crisis, again making
“cheap” money to fuel markets. However, as 2008 taught Americans,
“cheap” money can only remain so for so long until the bubble
bursts. Unlike 2008, however, the stakes are now much, much higher.
The Fed’s
money printing stimulus following the 2008 crisis, known as
quantitative easing, or QE, has added an unprecedented $3 trillion to
the money supply. While that money was meant to stimulate the
American economy, it ultimately has gone to inflating stock markets.
Additionally, interest rates are at historic lows, and the Fed is
hesitant to hike them despite the necessity of doing so, chiefly
because – like 2008 – raising the interest rates will ultimately
cause the bubble to burst. Considering the “too big to fail”
banks are now much larger than they were in 2008, the conditions are
set for a perfect storm.
And when
that inevitable storm hits, Schiff noted that central bankers are
likely to respond to the next crisis much as they did in 2008. He
explained:
“[Central
bankers] will certainly take the opportunity to blame Trump. They are
going to blame it on the deregulation, which is what they did last
time. It was an abundance of liquidity that caused that last crisis —
that’s what created 2008 crisis. What the Fed has been doing since
then has actually laid the foundation for the next crisis.”
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