Living Debt Free: Not the Government!
Living debt free has been an aspiration traditionally pursued by many Americans (and others). People simply don't want to be beholden to others.
For governments, though, the opposite has been the case for many years now. And, of course, the government creates debts on our behalf. Ultimately "we the people" owe the money. Thanks government.
Sometimes a government official speaks out. Angela Merkel recently did. She's Chancellor of Germany. She has strongly criticized the central banks of the U.S., UK and the European Central Bank. They are fighting the financial and economic crisis with inflation - by creating debt. She claims that their actions will cause yet another great crisis in 10 years.
The Wall Street Journal summarized it like this: "Some private economists -- and a few inside the Fed -- say the Fed's aggressiveness is increasing the risks of an outbreak of inflation and creating the unwelcome perception that it will bail out big financial institutions when they take big risks that turn out badly."
Let's look at what's really going on here.
First, Merkel's comments don't really say much. After all she's a politician. The idea of a crisis every 10 years isn't anything new. So besides grandstanding to make herself look forceful, what has she added to the mix here? Nothing I can see.
Second, the Journal's conclusion is disturbing. In the past the Fed has followed policies that produced inflation as well as moral hazard. (Moral hazard here means that the Fed, by implying it is prepared to lend money to banks if they get into trouble, gives the banks the green light to pursue imprudent activities.)
Most recently, for various reasons, the Fed's inflationary policies didn't produce as much price inflation as they might have in the past. But they did produce the asset bubbles in real estate, the stock market, the derivative market and on and on. Now those bubbles have burst and we're in crisis.
They also created moral hazard by openly stating that they would serve as a lender of last resort to banks, meaning they would rescue them. That might not have been so bad had the Fed monitored the banks' activities to see that they didn't act imprudently. But they didn't. So banks got themselves into trouble (as many of their executives earned fortunes) and the Fed stepped in to save them.
While some of us pursue the noble ideal of living debt free (and while some of us accomplish that goal), our government creates debt in our name - debt that we and our children will be responsible for. That's bad enough.
But when you throw in the issues of financial crisis and moral hazard, you're talking a real toxic brew. Meanwhile, the Journal article implies no lessons have been learned. We're not going to resolve anything.
The deficit spending, and government creation of debt will lead to yet another crisis. Financial institutions will once again pursue imprudent activities knowing the government will bail them out. Don't you find that disturbing? I do.
For governments, though, the opposite has been the case for many years now. And, of course, the government creates debts on our behalf. Ultimately "we the people" owe the money. Thanks government.
Sometimes a government official speaks out. Angela Merkel recently did. She's Chancellor of Germany. She has strongly criticized the central banks of the U.S., UK and the European Central Bank. They are fighting the financial and economic crisis with inflation - by creating debt. She claims that their actions will cause yet another great crisis in 10 years.
The Wall Street Journal summarized it like this: "Some private economists -- and a few inside the Fed -- say the Fed's aggressiveness is increasing the risks of an outbreak of inflation and creating the unwelcome perception that it will bail out big financial institutions when they take big risks that turn out badly."
Let's look at what's really going on here.
First, Merkel's comments don't really say much. After all she's a politician. The idea of a crisis every 10 years isn't anything new. So besides grandstanding to make herself look forceful, what has she added to the mix here? Nothing I can see.
Second, the Journal's conclusion is disturbing. In the past the Fed has followed policies that produced inflation as well as moral hazard. (Moral hazard here means that the Fed, by implying it is prepared to lend money to banks if they get into trouble, gives the banks the green light to pursue imprudent activities.)
Most recently, for various reasons, the Fed's inflationary policies didn't produce as much price inflation as they might have in the past. But they did produce the asset bubbles in real estate, the stock market, the derivative market and on and on. Now those bubbles have burst and we're in crisis.
They also created moral hazard by openly stating that they would serve as a lender of last resort to banks, meaning they would rescue them. That might not have been so bad had the Fed monitored the banks' activities to see that they didn't act imprudently. But they didn't. So banks got themselves into trouble (as many of their executives earned fortunes) and the Fed stepped in to save them.
While some of us pursue the noble ideal of living debt free (and while some of us accomplish that goal), our government creates debt in our name - debt that we and our children will be responsible for. That's bad enough.
But when you throw in the issues of financial crisis and moral hazard, you're talking a real toxic brew. Meanwhile, the Journal article implies no lessons have been learned. We're not going to resolve anything.
The deficit spending, and government creation of debt will lead to yet another crisis. Financial institutions will once again pursue imprudent activities knowing the government will bail them out. Don't you find that disturbing? I do.
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