The Fed can't stop the recession and may hurt

The Federal Reserve has been taking action to preserve the banks and financial institutions. They are the institutions it serves but they are the ones who created this mess. Unfortunately, the only tools it is using to fix the economy are all designed to increase liquidity in the system. This is another way of saying the Fed is throwing boatloads of free and cheap money at the problem. But the problem for the overall economy isn't the money supply, although more cheap money might save some banks. Money supply has been running at ridiculously large increases before the crisis.

The best measure is the total money supply is M3, which the Bush administration made sure it would no longer issue reports on in 2006. That rate of money supply growth is 15%. Why create more money when you are already creating 15% a year? What the Federal Reserve is going to create with the current "solution" they are using is stagflation.

Stagflation, a combination of high inflation and no employment growth occurred in the late 60's to early 80's. The Federal Reserve and the White House floundered around for years seeking a solution.

The current economic crisis is also similar to another time in our recent history. The "Savings and Loan Crisis" of the 80's. Similar to now it was created by loose lending requirements, lax regulation, and obscene profits for the few. It can be argued that the S&L Crisis was also an effect of the Fed's cure for stagflation. The high interest rates doomed Savings and Loans which were financed by low-interest-rate mortgages. The US taxpayers were left holding the bag for a $125 billion bailout of the financial institutions that time. That was a much easier and smaller problem to solve - rescue the Savings and Loans and wait until the housing market adjusted. This time tax payers could end up holding a trillion dollar bag.

Similarly, how did they finally cure stagflation? Raise interest rates to kill inflation, it took over four years, and wait till the economic system adjusted. The failures of S&L's were collateral damage. Note that this cure that worked is the opposite of what the Fed is doing now. There are reasons that this is not even being considered. One of them is that the government is hiding the real inflation numbers. Why, I'm not sure, but Social Security increases should have been about twice what they were which may have something to do with it. (The increases for seniors should have been even higher if like me you think there should be a Senior Citizen inflation index with a much higher weight given to medical price increases. ) If you go back to when they started adjusting the CPI, Walter J. "John" Williams thinks Social Security checks should be double.

What can improve the economy without stagflation? You can ease the pain of it for most Americans by readjusting taxes to benefit the 95% of Americans who have been screwed by tax cuts for the rich. From 1979 to 2005 real family income for the average family has gone up 15%, for the top 5% - 81%.

You can readjust the business taxes to promote job growth in the United States.

You can give business credits for new job creation and entirely new industries and quit rewarding the plantation industries. A digression to modern politics and plantation economics with President Bush as an example.

You can work out policies that reduce inequality because the United States has been making great gains that the great majority of people are not benefiting from as the riches are funneled to the rich.

You can promote the new jobs that will be created by the new green solutions to the environmental crisis.

You can spend money on education for the new jobs and lowering the cost of education for all. Bush has presided over the largest educational cost increases for typical families in history.

You can increase legal immigration that creates new jobs and more workers and take action to end the illegal low wage slave immigration.

We can pay for some of this by ending the war. We don't have the money for the $2 trillion Iraqi war. Bring them home now. Money being spent on an aggressive military posture wastes money that generates jobs on needed infrastructure improvements, better roads, bridges, homes, flood control and communications.

Get radical in 2008. You see what the Washington conventional wisdom brings. Also listen to what the presidential candidates propose. By the way, solving business problems by cutting jobs is probably not the experience you need for this - I'm looking at you Romney. Watch how many Republicans propose to solve the problem by cutting taxes for the rich and businesses. Like Bush, many believe whatever the problem is you cure it by cutting taxes. They rarely say one of the current problems is how much of your taxes is going to pay for the government debt and the liabilities the government has piled up under Bush and left for us and our children to pay for in the future.

Look at history, Democrats are better for the economy, better for the stock market, and better for the average American. Better in every measurement.

Update: The Panic seems to be on - "In 2008, Americans will wake up to the worst economic times that anyone alive has ever seen." (Gerald Celente, 17 December 2007.) Thanks Janette.

"Better superglue yourselves to the floorboards and pray for God's mercy."

Bob Herbert - "They should stop, take a deep breath and acknowledge the obvious: the way to put money into the hands of working people is to make sure they have access to good jobs at good wages. That has long been known, but it hasn’t been the policy in this country for many years."

Tags: economy, inflation, debt, stagflation, Federal Reserve