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How Wrong Can a Wrong Thing Be?

by Mitch Feierstein about 5 years 5 months ago

"This looks like a very solid and robust recovery to me" - B. Bernanke

"This looks like a very solid and robust recovery to me" - B. Bernanke

Just how wrong can a policymaker be?

Take this news, that as late as 2006 the Fed managed to miss obvious signs of collapse in the US housing bubble. Although the stats pointed to a once-in-a-century boom which would, unless financial gravity went on holiday, turn into a once-in-a-century bust, somehow those guys at the Fed thought that a gradual stabilization and firming of prices was in the cards.

That’s despite the obviously manic prices, despite the obviously crazed (and often fraudulent) activity in the mortgage markets.

Now you might think so what? That’s history, right?

Well, yes – except the same guys are in charge, and the same guys are pumping vast amounts of American dollars into supporting the housing market. Since January 2009, some $1.25 trillion have gone into supporting this market – which has nevertheless fallen. Current reports suggest that the Fed may be contemplating additional purchases of $750 billion.

But we all know what happens when you plunge huge amounts of cash into a fundamentally unsound asset: you lose money. In this case, unelected officials at the Federal Reserve lose US taxpayer money. And maybe it would be worth taking a risk on these things, if you really thought the guys in charge knew what they were doing. But they don’t. In 2006, they saw a bubble and called it stable. In 2012, they’re thinking about placing $2 trillion on the same number of the roulette wheel and hoping for a better outcome. That’s bold policy-making for sure. But also dumber than taking a bungee jump without checking your rope.