More Bread and Perhaps Circuses?

By Op-Ed Contributor Jerone Anderson

On Chairman of the Federal Reserve Ben Bernanke's recent decision to lower interest rates and presidential candidate Hillary Clinton's emergency plan for the current lending crisis.

This seems like a very dangerous behavior for a leading candidate to make. Promising huge government spending to bale out the constituents who will most likely vote democratic. http://www.reuters.com/article/politicsNews/idUSN1024530420080111

It sets a terrible example of effectively trying to buy votes with promised government spending and also of fiscal irresponsibility unless such a measure is balanced by cutting spending somewhere else in the budget. Even then such a measure seems to overstep the bounds of government in the private sector and should probably be avoided.

Ironically it is the Clintons who got us into the housing mess by their failure to understand how to make stable banking systems during Mr. Clinton's presidency. By providing regulation changes to make bank consolidation possible it allowed banks like CitiGroup to profit in the short run but probably helped destabilize the banks bringing us to a mortgage crisis over loans that should never have been made to begin with.
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The current social net and policy changes to prevent predatory lending make sense but direct spending to help bail out failed mortgages is a patchwork solution which promotes continued irresponsibility and fails to bring lasting structural change to the underlying problems in the financial system.

Ben Bernanke has maintained a Greenspan style of interest rates which were kept too low for too long in the interests of maintaining growth but instead allowed for another asset bubble and increased liquidity in the system furthering the extension of credit in the subprime market.

Greenspan followed a similary flawed policy in the late 1990s by keeping interest rates low until the bubble collapsed and then trying desperately to cut rates to aid recovery of a situation that could have been prevented to begin with.

Now it appears with Ben Bernanke's comment to lower interest rates still further perhaps to around 4% is a similar desperate measure. The market now expects this kind of behavior and factors in the interest rate drops which now must occur at a time when inflationary pressures are relatively high.

If rates had been held higher at perhaps at 6% during Bernanke's tenure it would have helped prevent the bubble, the collapse and the inflation which resulted from it and more inflation that will result from trying to fix the bubble with still lower interest rates.

The fact that unemployment was below 5% last year (i.e. below the Non Accelerating Inflation Rate of Unemployment - NAIRU) is an indication of this type of policy and helps explain some of the domestic inflationary pressures we have been seeing in the last couple of years.

Unfortunately indexes such as the broad price index are little used or standardized and policy decisions revolve around the politically motivated thus intentionally inaccurate CPI which fails to reflect the true rate of inflation. Thus the failure of the market or fed to properly calculate the need for interest rate increases. Using the NAIRU as a kind of inverse inflation metric, though far from ideal, is one way to see what kind of problems may be coming along.

Now the fiscal end of the stick is being fashioned to match by the likes of Hillary Clinton promising "good new jobs" and money for her voting constituency. While the Romans were at war abroad the government gave out money to the poor and pacified them with circuses to distract them from the reality. All we need now are the circuses.