Best of the Week
Most Popular
1. Dollargeddon - Gold Price to Soar Above $6,000 - P_Radomski_CFA
2.Is Gold Price On Verge Of A Bottom, See For Yourself - Chris_Vermeulen
3.Dow Stock Market Trend Forecast 2018 - Nadeem_Walayat
4.Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - P_Radomski_CFA
5.Why The Uranium Price Must Go Up - Richard_Mills
6.Dow Stock Market Trend Forecast 2018 - Video - Nadeem_Walayat
7.Jim Rogers on Gold, Silver, Bitcoin and Blockchain’s “Spectacular Future” - GoldCore
8.More Signs That the Stock Market Will Rally Until 2019 - Troy_Bombardia
9.It's Time for A New Economic Strategy in Turkey - Steve_H_Hanke
10.Fiat Currency Inflation, And Collapse Insurance - Raymond_Matison
Last 7 days
Golden Sunsets in the Land of U.S. Dollar Hegemony - 20th Sep 18
5 Things to Keep in Mind When Buying a Luxury Car in Dubai - 20th Sep 18
Gold Price Seasonal Trend Analysis - Video - 20th Sep 18
The Stealth Reason Why the Stock Market Keeps On Rising - 20th Sep 18
Sheffield School Applications Crisis Eased by New Secondary Schools Places - 20th Sep 18
Precious Metals Sector: It’s 2013 All Over Again - 19th Sep 18
US Dollar Head & Shoulders Triggered. What's Next? - 19th Sep 18
Prepare for the Stock Market’s Volatility to Increase - 19th Sep 18
The Beginning of the End of the Dollar - 19th Sep 18
Land Rover Discovery Sport 'Approved Used' Bad Paint Job - Inchcape Chester - 19th Sep 18
Are Technology and FANG Stocks Bottoming? - 18th Sep 18
Predictive Trading Model Suggests Falling Stock Prices During US Elections - 18th Sep 18
Lehman Brothers Financial Collapse - Ten Years Later - 18th Sep 18
Financial Crisis Markets Reality Check Now in Progress - 18th Sep 18
Gold’s Ultimate Confirmation - 18th Sep 18
Omanization: a 20-year Process to Fight Volatile Oil Prices  - 18th Sep 18
Sheffield Best Secondary Schools Rankings and Trend Trajectory for Applications 2018 - 18th Sep 18
Gold / US Dollar Inverse Correlation - 17th Sep 18
The Apple Story - Trump Tariffs Penalize US Multinationals - 17th Sep 18
Wall Street Created Financial Crash Catastrophe Ten Years Later - 17th Sep 18
Trade Wars Are Going To Crash This Stock Market - 17th Sep 18
Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - 17th Sep 18
Financial Markets Macro/Micro View: Waves and Cycles - 17th Sep 18
Stock Market Bulls Prevail – for Now! - 17th Sep 18
GBPUSD Set to Explode Higher - 17th Sep 18
The China Threat - Global Crisis Hot Spots & Pressure Points - 17th Sep 18 - Jim_Willie_CB
Silver's Relationship with Gold Reaching Historical Extremes - 16th Sep 18
Emerging Markets to Follow and Those to Avoid - 16th Sep 18
Investing - Look at the Facts to Find the Truth - 16th Sep 18
Gold Stocks Forced Capitulation - 15th Sep 18
Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - 15th Sep 18
Trading The Global Future - Bad Consequences - 15th Sep 18
Central Banks Have Gone Rogue, Putting Us All at Risk - 15th Sep 18
Gold Price Seasonal Trend Analysis - 14th Sep 18
Growing Number of Small Businesses Opening – and Closing – In the UK - 14th Sep 18
Gold Price Trend Analysis - Video - 14th Sep 18
Esports Is Exploding—Here’s 3 Best Stocks to Profit From - 13th Sep 18
The Four Steel Men Behind Trump’s Trade War - 13th Sep 18
How Trump Tariffs Could Double America’s Trade Losses - 13th Sep 18
Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - 13th Sep 18
Trading Cryptocurrencies: To Win, You Must Know Where You're Wrong - 13th Sep 18
Gold, Silver, and USD Index - Three Important “Nothings” - 13th Sep 18
Precious Metals Sector On a Long-term SELL Signal - 13th Sep 18
Does Gambling Regulation Work - A Case Study - 13th Sep 18
The Ritual Burial of the US Constitution - 12th Sep 18
Stock Market Final Probe Higher ... Then the PANIC! - 12th Sep 18
Gold Nuggets And Silver Bullets - 12th Sep 18
Bitcoin Trading - SEC Strikes Again - 12th Sep 18

Market Oracle FREE Newsletter

Trading Any Market

Bail me out Bernanke

Economics / Credit Crisis 2008 Mar 28, 2008 - 02:36 PM GMT

By: Peter_Schiff

Economics Now that the Fed and the Treasury Department have clumsily come to the rescue of the financial titans of Wall Street, it is now politically dangerous to resist similar pleas from just about everybody else. Populism is emerging as a dominant theme is this election year, and with so much largesse showered on Bear Stearns and JP Morgan Chase, politicians are demanding even more generous terms for consumers. In Washington , it seems that two wrongs apparently make a right. Another downside to corporate bailouts is that they provide the critics of free market capitalism with plenty of excuses to weigh down American economic vitality with even more unnecessary regulation.


In the first place, the current mess did not result from a failure of the free market, but from too much government interference. The real estate bubble, and the shaky securitized products it spawned, resulted from the Fed artificially setting interest rates too low.  Had interest rates been allowed to find their market levels, rather than be set by government decree, the real estate bubble never would have been inflated in the first place.  

In a nation short on savings and heavy with debt, the free market would naturally set interest rates quite high. With lots of demand for credit, but a limited supply of savings, the risk of lending and therefore the price of credit (interest rates) would be high.  Although onerous to borrowers, high rates would have both encouraged saving and discouraged borrowing.  In the end, these market forces would reduce interest rates and produce a more stable balance between savings and consumption.  However, the Fed did not want American consumers to be subjected to free market discipline that might otherwise reign in their non-stop spending.  After all, reckless consumption was falsely believed to be the engine of our prosperity.

So the Fed fixed the price of credit (interest rates) well below the rate that would have been set by the free market.  This sent false economic signals to the market that more savings were available than actually existed, leading to an over-investment in housing.  Also, by keeping the rate of interest below the rate of inflation, rampant speculation was encouraged, and the foundation was laid for the very type of mortgage financing that has now come back to bite us.

In the second place, no one on Wall Street should be bailed out.  The effects of the bursting of the housing bubble should be dealt with by the market, despite the fact that the underlying bubble itself was a byproduct of government intervention. 

Apart from the problems created by interfering with the market's attempts to restore balance and reallocate resources, bailouts create all sorts of moral hazards.  After all, why should bailouts be limited to investment banks or overstretched homeowners?  What about renters who also borrowed too much money?  What about those behind on their credit cards, auto or student loans?  Why shouldn't they get bailed out?  How about small entrepreneurs whose start-up businesses failed -- should they get bailed out as well?

In market economies all sorts of people lose money, sometimes as a result of circumstances entirely beyond their control.  While this is clearly not the case for most homeowners and mortgage lenders, some would obviously fall within that category.  However, it is not up to government to rescue them.  Even if some borrowers and lenders were lead astray by the false economic signals sent by the Fed, they are never-the-less responsible for any losses they might have incurred as a result of following them. The real danger is that while government interference is actually at fault, it's the free-market that ends up taking the blame.

For a more in depth analysis of the inherent dangers facing the U.S. economy and the implications for U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.” Click here to order a copy today.

By Peter Schiff
Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

Peter Schiff Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules