Bernanke Cries "It's all China's Fault!"

[Crewleader]

Economics / Credit Crisis 2008 Jun 08, 2008 - 03:52 AM

By: Mike_Whitney




"In the financial sphere, the three longer-term developments I have identified are linked by the fact that a substantial increase in the net supply of saving in emerging market economies contributed to both the U.S. housing boom and the broader credit boom. The sources of this increase in net saving included rapid growth in high-saving East Asian countries and, outside of China, reduced investment rates in that region; large buildups in foreign exchange reserves in a number of emerging markets; and the enormous increases in the revenues received by exporters of oil and other commodities. The pressure of these net savings flows led to lower long-term real interest rates around the world, stimulated asset prices (including house prices), and pushed current accounts toward deficit in the industrial countries--notably the United States--that received these flows."

Whew. That's a pretty long-winded way of saying the Chinese are to blame for everything that's gone wrong in the markets for the last 10 months. But is it true?

Ask yourself this, dear reader; do "savings" cause massive equity bubbles or are bubbles the result of low interest rates and rotten monetary policy? It is universally agreed that Greenspan created the housing bubble by dropping rates below the rate of inflation for 31 months following the dot.com bust. This sparked a multi-trillion dollar speculative frenzy in real estate. Artificially low interest rates distort the market; bubbles appear. "Savings" had nothing to do with it; Bernanke is just trying to dodge responsibility by blaming the Chinese. It's the old "dog ate my homework" routine.

The Fed is also responsible for the surge in oil prices. As Frank Shostak points out in his recent article "The Oil Price Bubble":

"There is a high likelihood that the massive increase in the price of oil that we are currently observing is the manifestation of a severe misallocation of resources — a large increase in nonproductive activities. It is these activities that have laid the foundation for the oil-market bubble, which has become manifest in the explosive increase in the price of oil. The root of the problem here is the Fed's very loose monetary policy between January 2001 and June 2004. (The federal funds rate was lowered from 6% to 1%.)"

http://www.marketoracle.co.uk/Article4994.html

[ohioINC]

1. If your loose someone will take advantage of you

Damn Bush, China screwed us hard.

[AndyTiedye]

2. Nothing to Do With "Helicopter Ben"'s Monetary Policy, Noooooooo

[On the Road]

3. The Fed Targets Interest Rates

and controls the money supply, which both have an affect on asset prices. But there are many factors.

Savings rates? They absolutely create bubbles. One of the unintended consequences of the rich getting richer is that there trillions of dollars of savings looking for a good place to invest. People don't put large sums of money under mattresses. If there's a surplus of money in fixed income, rates drop. During the 90s, money went into the stock market looking for a better return, followed by real estate, followed by gold, oil, and other commodities.

And the Asians? Biggest savers in the world. A lot of people save half their income. There are millions of rich Chinese and Indians now.

It's not the only factor, but it it's been an important one.

[SergeyDovlatov]

6. real savings do not create bubbles

Bubble is something artificial that is expected to deflate.

Artificially low interest rates do create bubbles, since to maintain them, feds need to pump more money into the economy. However at some point inflation starts manifesting itself and fed have to shrink the money supply which will cause the burst of the bubble.

Now, without fed tinkering around with the interest rates, rate of savings indicates people preference for spending money now vs deferring the consumption for later. Savings are available for capital investment. Some investment will be wise, some will be stupid, but, in general, there will be no crazy "let's invest in some crazy things while the credit is cheap" attitude.

People preference for immediate vs deferred consumption is much more stable then policies of the federal reserve.

[AdHocSolver]

4. Bernanke is spouting nonsense. The Fed is heavily responsible for the stock market bubble and...

the housing bubble and collapse.

The Fed (starting with Greenspan) has kept interest rates artificially low to foster the speculation in these markets. Because people were getting such low interest rates on their insured savings, they were gulled into taking their savings and invest it in speculative stocks and real estate.

The very act of their throwing money at stocks and real estate drove up the prices ("price inflation"), even though the long term likelihood of most of them realizing a profit on their "investment" was nil. These investors were willing victims of a classic Ponzi scheme in which the monetary gains accrue totally to the insiders who bail out before the scheme collapses, as in the Enron scam.

By keeping the interest rates artificially low, the Fed was complicit in supporting these Ponzi schemes, and also in making it easier for corporations to amass the funds to build factories overseas in Mexico, China, and India, and send jobs there.

As for gasoline prices being high, it is totally due to the monopolistic control of oil production by the oil companies and the oil sheiks who control OPEC. It has nothing to do with "peak oil", nothing to do with the demand for oil from China, and nothing to do with some "secret speculators" driving oil prices. (By the way, the "speculators" are the same people who run the oil companies manipulating the oil markets which they totally control.)

Want to put a stop to rising gasoline prices? Demand Congress start an antitrust investigation into price fixing, and have the oil company executives be made to testify under oath.

Another reason why gas prices are so high is that OPEC and the oil companies foresee the economic meltdown to which the U.S. is headed. When the depression hits, there will be a lot fewer people driving and demand for gasoline is going to drop precipitously. OPEC and Big Oil are charging big prices now while the people still have the money to fork over. Profits will drop when the depression hits.

[Summer93]

5. Same ol same ol

Want to put a stop to rising gasoline prices? Demand Congress start an antitrust investigation into price fixing, and have the oil company executives be made to testify under oath.

Remember when the tobacco guys testified and blatantly lied about smoking not causing death. It was accepted then and now is just a replay - same stragery different actors.

[Karl_Bonner_1982]

7. This is what we get for relying too heavily on monetary policy

Monetary policy is a blunt tool for managing the economy. For those of you who know the IS/LM model, when the LM curve is rather "flat" compared to the IS, then a monetary expansion creates a massive plunge in interest rates with only a small effect on output. On the other hand, if we had used fiscal stimulus in 2001 (unemployment benefits, spending on infrastructure, public works projects) then we would have gotten a large effect with only modest interest rate increases.