The Fed put a mechanism in place, back in the late Reagan years, under chairman Volker, to regulate the money supply to match, and gently prod the economic growth of the economy while suppressing the rise of inflation.
What it has done over the last decade is pump a large amount of liquidity in the markets, which was eagerly lent out by large institutions. As this money was spent on the goods and services we all enjoy, as homeowners and citizens, it kept an economy drunk on consumption and stock gambling, but weak on savings, afloat and humming along.
Two of the things that appeared on the scene were the adjustable rate mortgage (AMR) and the Sub-prime mortgage (SPM).
These are mechanisms guaranteed by design to fail.
What goes down, usually goes back up, right? Well that rule applies to inflation amongst other things. Unfortunately, credit was offered and accepted by the worst parties that could have been chosen for their risk profile. People accepted loans that they could barely afford at the bottom of the interest rate cycle. As the cycle turns the corner, disaster looms. People with AMRs can’t pay the rates and they foreclose. SPM loans become worthless debt junk, which cannot be traded, which hurts the banks that offered them, since that money is now tied up.
What nudged the inflation beast to the edge of the cliff?
Commodity pressures come along, for oil and corn. Both of these not only dramatically affect consumer prices, but producer prices as well, since they are both energy feedstocks for the industrial and biological components of our civilization.
- You can thank general world consumption from emerging Asian markets.
- You can also thank the tireless main stream media fear-mongering of the oil futures market, with their incessant anti-war propaganda and lionizing of figures like Amadinejad and Chavez.
- And a big thanks goes out to one of the [expletive deleted] energy bills to ever be rushed through the congress. Elements in the bill, geared toward sating green lobbyists, have finally done some serious damage.
- Ethanol provisions in the bill are drying up corn prices for both human and animal feed. The demand pressure on corn, drives up prices for everything downstream, meat, dairy, eggs etc. As biological consumption shifts towards other grains, demand pressures on those sources drives prices up on all baked goods, cereal grains etc.
- Draconian restrictions on domestic fossil fuel exploitation, keeps us slaves to hostile foreign oil suppliers and their political aspirations and desires. We cannot exploit tar sands of
Canadaand the northern territories, a supply richer than , because of the ‘carbon footprint’ of refining those sources. Thanks Al Gore. Saudi Arabia
They all should have known this was coming. They all foolishly thought inflation was defeated. Well it was held at bay, by the fly-ball governor of Fed monetary policy. That governor is now being removed from the circuit. It is not being removed by sound economic policy. It is being removed by political pressure, from the same fools that allowed this mess to propagate in the first place. They do not want to give the economy the bitter medicine it requires, to stem inflation, because that medicine will taste very sour and will wreak havoc with AMRs and SPMs.
Of course, pumping more liquid into the system will not fix it. That will make inflation worse, the dollar weaker and will still precipitate the credit crisis. As inflation rises, regular non-sub prime low interest rate loans will become worthless debt, just like the SPMs, only later in the cycle. Inflation can cause havoc, if left unchecked. Playing feel-good politics with old style Federal fiscal policy will not work.
Some sort of bailout is unavoidable, given that we will all suffer, if the fall is not broken. Given that, the congress absolutely must make new AMRs and SPMs illegal as a condition of taking public credit on that debt. They need to do that today, instead of encouraging the issuance of more worthless debt, on top of a pile of weak dollars at low interest rates.