Bring on the financial armageddon

[Disco Pickle]

In a world organized in accordance with Keynes' specifications, there would be a constant race between the printing press and the business agents of the trade unions, with the problem of unemployment largely solved if the printing press could maintain a constant lead...

Jacob Viner (1936)

I know there's the myth of the autonomous Fed... [short laugh] and when you go up for confirmation some Senator may ask you about your friendship with the President. Appearances are going to be important, so you can call Ehrlichman to get messages to me, and he'll call you.

Richard Nixon to Arthur Burns
(see Ehrlichman (1982))

(I had written this for the Financial Fuckery thread in response to Cain's reply but it got long winded (and a bit preachy and well..  well, that's what O:KM is for and so..))

I'm convinced that a necessary step is to get a Paul Volker in the Fed to do the unpopular thing and raise the prime up to fix what Bernanke (and Greenspan before him) have done with it all outside of the Fed's commitment to not operate as a political arm of which ever party is in power.

I really do believe that the disconnect that is supposed to exist has been eroded (maybe it never existed?  Oh, Nixon, you dog) and we now have too many foxes in the chicken coop.

Then, I'm not a subscriber to the Keynesian idea that prices of goods have to rise as prosperity does, (otherwise stated that with low unemployment, higher prices are expected) nor do they have to be maintained in the face of an impending reset to real values that were overinflated.  

I'd sooner cash out at a penalty and stuff it in a mattress and let the dollar deflate as it should have done when everything hit the fan in 08.  

There's a strong lesson that should have been learned in the 70's that has been almost completely ignored in this recession.  Inflation ran rampant for half a decade and unemployment stayed high contrary to the wisdom of the times that the trade off for high unemployment should be a fall in inflation.  Unfortunately, monetary policy was being semi-dictated by Nixon against all standards by which the Central Bank is supposed to abide.  

To site an excellent article:

According to the then accepted view, the central bank influences the real rate of economic expansion by means of monetary policies. This influence however, carries a price, which manifests in terms of inflation. For instance, if the goal is to reach a faster rate of economic growth and a lower unemployment rate, citizens should be ready to pay a price for this in terms of a higher rate of inflation. Thus was it believed that there is a trade-off between inflation and unemployment (the Phillips curve). The lower the unemployment rate the higher is the rate of inflation. Conversely, the higher the unemployment rate the lower the rate of inflation is going to be.

http://mises.org/daily/2351

And then Volker came in and did what no one who had to face an election could have done, he raised rates.  Of course, he was working with real numbers.  Public numbers everyone had access to, specifically the M3, the REAL money aggregate.  The Fed doesn't publish that number anymore for a number of stated reasons (false ones IMO) but it SHOULD be published because it effects everyone on the planet and you don't have to be an economist to understand the number it's going to show you.  

So Volker came in and he raised the funds rate (already at 11% in 1979, moved to 20% in June of 81 (the prime rate hit 21.5% in 81 as well)) in the face of debilitating unemployment of and inflation hovering around 13%, completely unexpected by the top Keynesian economic thinkers of the time and his tenure at the Fed took inflation from around 13% in 1981 down to around 3% in 1983.  

What followed was painful, if history tells it right.  Unemployment hit almost 10%, if we're to trust the people who publish those sorts of numbers.  But employment did change course.  The following decades after Volker's tenure jobs grew, people thrived.  They borrowed against the jobs that were created and bought property.  Some of them paid it off and own their houses to this day.

So what are we to do now that we face the same sorts of numbers?  (and if you really believe that the inflation numbers along with the unemployment numbers are being accurately reported well then I've got some beautiful, slightly "irrigated" land to sell you in south Florida)

China's central bank has raised rates again and again to curb and try and keep prices at levels normal people can afford.  They're fighting the tide we're helping to create by pumping the world's reserve currency into the markets.  

to quote the same (IMO excellent article):

The beneficiaries of this increase are the first recipients of money. With more money in their possession (assuming that demand for money stays unchanged) and for a given amount of goods available, they can now divert to themselves a bigger portion of the pool of available goods than before the increase in money supply took place. This means that fewer goods are now available to those individuals who have not received the new money as yet (i.e., the late recipients of money).

We need a Volker at the head of the Fed.  Someone to step in and say no to both parties.  To popular opinion about what the cost of borrowing is "supposed" to be in a recession.

Yeap, it will be painful in the short run.  It's still not the decades long floundering that Japan has done since the 80's and we're likely to completely emulate with the current monetization of debt.

The longer a real liquidation of "investments" that have no hope of being paid off in the short run is put off and people and corps over-leveraged are propped up, the longer the NEXT inevitable recession is going to be.  This cycle is extremely predictable and one of the problems that's risen from that predictability is that insurance companies like AIG, in bed with top players at major banks, were under writing bets that the investments would decline in value.  

We owe it to ourselves.    

Personally, I am against the economic ideas of John Maynard Keynes and I believe they've done this damage.  

I believe that the general public's indifference and ignorance to the systems in place have done even more.

My disclaimer is that I lean more toward Austrian thought and if there's a color that school has colored this rant then it's probably gold, but that doesn't mean I think we should move back to gold as a medium of economic exchange.

To any of you fucks who actually got to the end, thanks for reading and I hope for feedback.  I promise to read it with an eye that I may be very wrong.  I can't be certain, but I'm more than willing to entertain the idea.

Sorry for venting it here.  Should dump it on financial boards.  

[Edited for redundancy and spelling]