Wednesday, December 2, 2009

The Federal Reserve as a Salvador Dali Work of Art

I am beginning to think more and more that Salvador Dali must have somehow been involved in the design of the Federal Reserve. (Particularly as reflected in his work, The Great Masturbator) There are simply few other ways to explain the latest thinking at the Fed.

WSJ's Jon Hilsenrath reports that the Fed is considering a new role, "bubble fighter". "Mr. Bernanke wants to use his powers as a bank regulator to stamp out bubbles," Hilsenrath tells us. Of course, this report from WSJ comes as Bernanke goes before the Senate Finance committee tomorrow to testify as part of his confirmation hearing, so we have to take this entire Bernanke desire as perhaps even something less than a wet dream. But will the Senate buy his nonsense?

Here's a few things for the Senate to consider:

1. Many hold that the Fed through manipulation of the money supply and interest rates are actually the creators of bubbles (and you can certainly put me in this camp)The Fed in charge of monitoring bubbles is a lot like putting Charles Manson in charge of monitoring so that there is no excess violence on television.

2. Aside from the fact that the Fed causes bubbles, who is to say that the Fed would even recognize a bubble when one is in the air. As I have pointed out numerous times, in 2004, New York Federal Reserve economists Jonathan McCarthy and Richard W. Peach wrote a paper Is There A Bubble in The Housing Market Now? Their answer was decidedly, "No".

Just why are we supposed believe the Fed can even identify when a bubble exists, when they completely missed one of the largest bubbles in financial history?

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