Here's a clip that Bloomberg television posted of Fed Chairman Ben Bernanke denying that the Fed's easy monetary policy had anything to do with speculation and the massive mis-allocation of capital that took place during the past decade.
It had nothing to do with the Fed cutting rates to 1% and holding them there for thirteen months, making borrowing money nearly free in relative terms.
Chairman Bernanke's denial is questionable, at best, and we have laid out the case implicating the Fed's oversteering in great detail previously, such as in "The long shadow of the Y2K bug." Those who doubt the direct causal link to the most recent crisis should take a glance at the enormous spike in CDO (Collateralized Debt Obligation) issuance depicted in this graph, beginning in 2003 and accelerating during the Fed's easy-money policy.
Unfortunately, not many expect the Fed Chairman to come out and say that he and his predecessor share tremendous responsibility for the carnage of the past decade, or to state his New Year's Resolution (or New Decade's Resolution) not to do it again. Mr. Bernanke, after all, is seeking Congressional approval for his reappointment -- his job is at stake here. Ultimately, his statement is in line with the way we should probably expect a government bureaucrat to behave.
This realization, however, should give investors an important insight. Government bureaucrats and politicians are going to go on enacting less-than-perfect policy. Yet in that less-than-perfect environment, entrepreneurial innovation and value creation by well-run businesses continues, and those who search for those opportunities and participate with their own capital can experience exceptional growth.
This is an important resolution for investors to consider at the start of this new decade.
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For later posts on the same topic, see here:
- "Glenn Beck is an economic butterbar" 11/04/2010.
- "Likelihood of Fed over-steering increases" 01/25/2011.
