Saturday, January 9, 2010

Chairman Bernanke's Monetary Apologia: Discounting the role Fed policy played in the crisis won't help avert the next one.

by Judy Shelton at The WSJ

…nowhere in his 34-page apologia does the Fed chairman fault Congress for inflicting Fannie Mae and Freddie Mac on the home mortgage industry; nowhere does he attempt to analyze the damaging influence of government intervention in the private sector, or its distorting impact on market assessments of risk-and-return tradeoffs.

Instead of trying to shift blame away from the easy-money policies of the Fed that accommodated such ill-considered government intrusion into the mortgage-lending business—spawning a treacherous boom in exotic derivative instruments structured against seemingly endless supplies of securitized U.S. debt—Mr. Bernanke should strive to better explain why the Fed ignored troubling indications of a growing bubble.

According to U.S. Census Bureau statistics, the average sales price of a new home in 2000 was $207,000; the average price in 2007 was $313,600, more than 50% higher in just seven years. During the same period, based on Consumer Price Index (CPI) numbers for the interim years provided by the Bureau of Labor Statistics, the average sales price of a new home should have been $250,625 in 2007—that is, if the CPI fully captured the impact of excessive monetary issuance….

In the same way that inflation-indexed Treasury obligations provide an indication to the Fed of aggregate expectations on consumer prices, gold-backed Treasury notes would offer an additional useful tool for conducting monetary policy—one more broadly reflective of potential bubbles in both financial markets and commodities.

Don't be surprised, though, if the Fed balks at the proposal. When it comes to the golden canary, it has already proven itself tone deaf.

[While a bit dry, this article really deserves to be read in its entirety. JS] Read more here…