Bernanke, like the famous engineer Casey Jones, is often held up as a popular hero. However, Jones was the engineer of a major train wreck, which was due to his errors in judgment and his own overconfidence. Bernanke's current monetary policy is a train wreck waiting to happen.
Needless to say, those who benefit from bubble activities are not going to like this, since the diversion of real wealth to them from wealth generators will slow down or cease all together. A fall in economic activity in this case would in fact be the demise of various bubble activities.
As we review the Fed’s operations in 2012 we see the usual outcomes. The banking sector has benefited from its operations (unusually so, thanks to the
continued interest on reserve policy) and the government has received a free lunch by having a ready buyer for its ever-increasing debt.
The signs of an incipient asset bubble, induced by the Fed become more evident every day.
If the economy improves, the banking sector will increasingly loan out its reserves and bring inflationary pressure to prices. If the economy does not
improve, the Fed will not be able to unload the low-quality assets on its balance sheet, and thus the inflationary pressures will remain. The so-called
win-win solution to the crisis has become a lose-lose scenario.
If sanctity of contracts should rule in the world of private debt, shouldn’t they be equally as sacrosanct in public debt? The answer is no.
Paul Krugman in 2002: "Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."
The official reaction to the present crisis has been a virtual match to Rothbard's recessionary “don’t do” list.
Some experts are of the opinion that in the “new world,” because of Fed policies, there is little room left for the money supply to help explain the state of the economy.
