A truly frightening economy ... by gimleteye

"Lenders role for Fed makes some uneasy" is the top of the fold, front page story in today's New York Times. It answers the question, where does intervention stop once it begins? And the answer is terrifying: nowhere.

"Since March, when the Fed stepped in to fill the lending vacuum left by banks and Wall Street firms, officials have been dragged into murky battles over the creditworthiness of narrow-bore industries like motor homes, rental cars, snowmobiles, recreational boats and farm equipment — far removed from the central bank’s expertise. A growing number of economists worry that the Fed’s new role poses risks to taxpayers and to the Fed itself. If the Fed cannot extract itself quickly, they warn, the crucial task of allocating credit will become more political and less subject to rigorous economic analysis. That could also undermine the Fed’s political independence and credibility as an institution that operates above the fray — concerns Fed officials acknowledge. Executives and lobbyists now flock to the Fed, providing elaborate presentations on why their niche industry should be eligible for Fed financing or easier lending terms."

The Obama administration is not to blame for allowing the Federal Reserve-- the nation's monetary gatekeeper-- from so overtly straying from its presumed neutral role in caring for the nation's economy. The Fed is not meant to be an arbiter of fiscal policy and priorities. I re-read the Wikipedia entry on the Federal Reserve: there is nothing... and I mean NOTHING... that describes the ventures into the marketplace that the Fed is now routinely undertaking.

The New York Times notes the inevitable infection by politics of Federal Reserve decisions on which industries to include, or, exclude from bailouts or other support.

"At issue is a joint venture of the Fed and the Treasury aimed at making more credit available. The program, known as the Term Asset-Backed Securities Loan Facility, or TALF, has bought about $27 billion in securities backed by credit card debt, car loans and student loans. In buying the securities, the Fed is providing the money that ultimately reaches businesses or consumers trying to borrow.

Despite a slow start, the program could soon expand broadly. Next week, the Fed will add commercial real estate mortgages — a vast market — to the list of loans it will buy. Eventually, officials say, the TALF program could provide as much as $1 trillion in financing.

Fed officials say they, too, are uncomfortable with their new role and hope to end it as soon as credit markets return to normal."

But the credit markets are not going to return to normal: not until the excess is wrung out of the US economy. Excess in housing, excess in consumer debt, and excess in government intervention.

What's next: the Federal Reserve coming in to backstop homeowners whose asset values are far below the purchase price during the housing bubble? It is just around the corner.

I'm going to make a not-so-bold assertion: that inflation will skyrocket before "credit markets return to normal". I have thought for a long time, even before the housing bubble burst, that the only "solution" to the bubble would be for the federal government to tolerate the rise in prices of all other assets so that inflation 'takes care' of the horrendous consequences of speculation on a massive scale. Read it, right here, in a post from two years ago. (Rummaging to find this post, I used "inflation" in the search feature at the top of the main page: it is an interesting stroll back in time, if you have the stomach or patience.)

I despair, because I don't have a clue how to protect the value of money for my family. I'm not a gambler by nature. I'm a fiscal conservative. But keeping one's money in cash is a fool's game under these circumstances. All I see are public policies committing the nation's Federal Reserve to political interference, to re-inflate the asset bubbles through speculation, or, protect industries that are bankrupt. Glimmers of hope? Show me where.