classical economics
for analysis,  forecasting
and policy design

By Wayne Jett
© May 14, 2009

    On May 6, Secretary of Treasury Timothy Geithner unburdened himself of regrets that U. S. monetary policy “was too loose too long” and, thus, along with other central banks, the Federal Reserve and Treasury contributed through such “errors in policy” to causing the global “economic meltdown.” The Wall Street Journal called this Geithner “revelation … a sign of intellectual progress” because it begins the process of acknowledging the “credit mania and panic” had “monetary roots.”
    The Journal added a time frame, saying “too loose too long” meant 2003-2005. With this media assist, Geithner added a third leg to the stool of orthodox thinking that already included “lack of bank supervision” and “slow government response” as causes of the ongoing debacle.
The Failure of Intellectual Integrity
    Assuming Geithner is correct, which he is not, the Journal should explain to its readers the theoretical basis for overcoming “too loose too long” with monetary and fiscal policies which are by far the “loosest” in U. S. history, making 2003-2005 appear highly constrained by comparison. This is what Treasury and the Federal Reserve are attempting, while doing their best to drag along other central banks and national treasuries in the absurdity.
    During 2003, 2004 and 2005, the Fed injected new liquidity of $36.536 billion, $34.626 billion and $39.369 billion, respectively, for a total of $110.531 billion in three years. As of 12 months ended May 14, 2009, the Fed supplied $1.253 trillion in additional reserve funds from all sources, including $75.125 billion during the most recent week.
     To summarize, the Federal Reserve injected 11.34 times more new liquidity in the past 12 months than in all of 2003-2005, and 34 times more on an annual basis. Moreover, during 2003-2005 GDP in current dollars grew 18.65% during 2003-2005, averaging 6.22% annually. During the two most recent full quarters, GDP shrank 6.3% and 6.1% respectively from a year earlier. Concurrently, federal budget deficits are now in the range of five to ten times those of 2003-2005, purposely spending for projects otherwise unjustified.
    To achieve any semblance of theoretical consistency, shouldn’t Geithner and the Journal argue Fed policy was much too tight in 2003-2005 and is about right now? Yes, that would be more consistent theoretically, but as absurd as “too loose too long.” The Journal has temerity to call this intellectual progress. Its editorial board is too bright to have missed the point.
    Alan Greenspan prevaricated during his last years as Fed chairman by asserting monetary experience was in “uncharted waters” when long rates declined as short rates were manipulated higher. Waters now plied by the Fed have been charted previously by other central banks, all now defunct, but never by the Fed itself. The Fed has created, and continues creating, new currency liquidity in proportions unmatched in its history. Implications for inflation are ominous.
Wall Street Game Plan Off Track?
    The Federal Reserve acts to greatest advantage of Wall Street banks which own controlling interest in the system. The game plan of the Paulson/Geithner Treasury and Fed has been to enable Wall Street’s favored banks to grow by acquiring smaller, regional banks and by buying severely marked-down financial assets from other banks. Assessing its status is difficult, but this game plan may be stalling, stalled or abandoned.
    Non-Wall Street banks received fair hearing in the House, which pressured the Financial Accounting Standards Board to clarify its “mark to market” Rule 157 so GAAP accounting could move nearer reality in reporting values of financial assets. Without an intimidating billionaire at Treasury, House members mustered enough courage to stumble into the path of Wall Street’s design to sweep other banks into its kit-bag in the interests of “banking consolidation.”
    In this context, why did Geithner (i.e., Wall Street) play the “too loose too long” gambit at this time? When this phrase is used by Fed or Treasury, it means the big banks want a higher Fed funds rate target to jack up lending rates on bank credit.
Mercantilism's Smaller Production Model
     Higher bank lending rates would provide another nail for crucifixion of economic growth on the cross of mercantilism. Already U. S. mercantilists, personified by Henry Paulson, John Mack, Jamie Dimon, George Soros, John Paulson, Robert Rubin, and their functionaries such as Barack Obama, Geithner, Charles Schumer, Christopher Dodd and Lawrence Summers, have ushered in an era of aggressive mercantilism. Their calling cards: crushed capital markets, demolished small investors, high-risk Federal Reserve, high budget deficits, high unemployment, collapsed private credit markets, “buy American” trade barriers in bailout legislation, collapsed U. S. auto industry, shrinking GDP, “cap and trade” energy taxes of $80 billion annually on the horizon, higher income tax rates, and new taxes on soft drinks while sugar tariffs are maintained.
    These policy actions do not flow from stupidity or from good intentions gone astray. If permitted their desires, mercantilists will add higher bank credit rates to the above-mentioned list of economic malpractices. Their deliberate design is to produce a much smaller production model for the U. S. economy – just as mercantilists accomplished during 1929-1940. The smaller production model means poverty for the middle class, less competition for mercantilist elite, and another prolonged “buying opportunity” for mercantilist billionaires as they enjoyed during the Great Depression.
    Fed chairman Bernanke may think creating liquidity at apoplectic levels, such as he is doing now, would have prevented the Great Depression. Indeed, if two presidents and Congress had not driven and drained liquidity from the private economy, the Great Depression would not have occurred. But the current Fed and Treasury is impairing the U. S. economy in ways that may be impossible to overcome for generations, if ever.
    This scenario is not entirely futuristic imaging. It is present, painful reality for many Americans experiencing jobless, homeless dependence upon government relief from destitution created by mercantilist influence on public policy. Improvement in the investment climate depends upon the middle class pressing Congress to perform the proper role of government in driving fraud from the markets. ~