Monday, September 15, 2008

A Positive From The Crisis: Banks Getting Back To Basics

The current financial crisis is the result of aggressive Fed money printing during the Greenspan era and the early Bernanke era, and the faulty econometric equations designed by "quants".

The quants and their econometric equations will be thrown under the bus. That will not be the fate for Fed Chairman Bernanke. Although it is unclear that Bernanke understands he is exacerbating the crisis by his current slow monetary policy, his slowed monetary policy is producing a needed cleansing of malinvestments caused by the previous money printing. This is the exact prescription that proponents of the Austrian School of economics would recommend. It is unlikely that Bernanke is a closet Austrian, it is more likely that he is clueless.

Thus, the crisis atmosphere will continue as the money growth remains tame. As a bonus, the crisis period is doing wonders for clearing out the bad actors in the banking industry. It is much like a dentist drilling a tooth to remove decay. The pain is no fun, but the result is appreciated. All the decay must be removed before the pain stops. It's likewise for the economy.

Bernanke, of course, will not allow the dentist to complete his work, at some point he will jump out of his chair, spit into the nearby sink, smack the drill out of the dentists hand and start printing money again. At such time, the remnants of decay will remain in his teeth, and it will spread further.

But Bernanke has not yet jumped from his chair and the cleansing period continues, as the WSJ points out in an article about bankers getting back to basics, here.

-Robert Wenzel

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