From The Founder's Desk
columnist: Walt Thiessen

Topic: Monetary Policy
Fed Failures Noticed by NYT & WSJ

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Now this is interesting. When both the Wall Street Journal and the New York Times come out with articles about potential coming stagflation on the same day, you know something is up.

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by Walt Thiessen
(Libertarian)
Thursday, February 21, 2008

Apparently, presidential hopeful Ron Paul isn't the only one who thinks there's economic trouble on the horizon due to Federal Reserve machinations. Both the New York Times and the Wall Street Journal published independent reports today suggesting that stagflation might be on our economic horizon.

While neither report actually blames the Fed for what's happening in the economy, the fact that the number one daily and the number one financial newspaper in America came out with separate articles on the same day where they use the words "stagflation" and "Federal Reserve" in both articles is noteworthy at the very least.

For those who are under 30 and don't remember stagflation from the 1970s, let me tell you: it's pretty nasty. Stagflation is where the economy stagnates into recession while inflation continues to rise. It's the worst of all possible economic conditions, short of pure runaway inflationary recession.

The Times article noted, "With the credit markets in disarray from the collapse of the housing bubble, Mr. Bernanke is cutting rates in a headlong rush to blunt the risks of recession."

The Journal article adds, "A simultaneous rise in unemployment and inflation poses a dilemma for Fed Chairman Ben Bernanke. When the Fed wants to fight unemployment, it lowers interest rates. When it wants to damp inflation, it raises them. It's impossible to do both at the same time."

What's a manipulative central banker to do? That's the dilemma facing Bernanke and the Fed board. All of this is a long way from recognizing just how damaging Federal Reserve manipulations are, but it's a start.

I was going through a website maintained by the Northern Virginia Association of Realtors today. They publish monthly reports on the state of housing in Northern Virginia, which is another name for the Virginia suburbs of Washington, DC. It's a very affluent area, and housing prices have really risen dramatically over the past 8-10 years or so in this area. So when I start seeing housing reports, particularly in counties that don't border the District of Columbia, where housing prices have fallen 15-25% over one year ago, I know that the housing rout is on.

What does this have to do with the Federal Reserve? Plenty! One of the major motivations behind all the recent rate cuts that the Fed has engaged in has been all the problems with sub-prime mortgages. The intention was to help shore up the real estate lending markets so that the lending crisis could be relieved by reducing the lending rates and bringing mortgage rates down. Unfortunately for the Fed, mortgage rates have been going up, not down. This means that the stimulus hasn't worked the way they'd hoped. In fact, it's backfired.

When we see dramatic declines in housing prices in a prosperous area (where the number of sub-prime mortgages has been pretty minimal), it means that the Fed has been seriously failing in achieving its goals. It also means that people aren't willing to take out more mortgages on overpriced real estate, particularly if they're credit worthy and not candidates for sub-prime mortgages.

Even the National Association of Realtors isn't optimistic, which is unusual. Whenever there's a real estate wind, you can always count on the agents to whistle into it. But according to a recent report by a small California newspaper, "The National Association of Realtors reports the price of a median home in the United States dropped 6 percent when comparing December 2007 versus 2006, describing the drop as 'the largest on record.'"

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2008 Walt Thiessen, all rights reserved.
Published: Thursday, February 21, 2008
Last modified: Thursday, February 21, 2008

The views expressed in this article are those of Walt Thiessen only and do not represent the views of Nolan Chart, LLC or its affiliates. Walt Thiessen is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.

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