Economic Bubbles and the Fed

From Ron Paul’s weekly column at The Ron Paul Institute:

Federal Reserve Chair Janet Yellen recently predicted that, thanks to the regulations implemented after the 2008 market meltdown, America would not experience another economic crisis “in our lifetimes.” Yellen’s statement should send shivers down our spines, as there are few more reliable signals of an impending recession, or worse, than when so-called “experts” proclaim that we are in an era of unending prosperity.

Yellen’s statement underlies the general attitude of government economic managers who believe that even though crashes have become a normal part of the Keynesian mixed economy, they wouldn’t happen under the right leadership. It’s the same delusion that the communists suffered from: if only the right “top men” were in charge, everything would’ve been fine. The problem is that if the car is broken down, it doesn’t really matter who’s driving.

Yellen also seems to be underestimating the impact of student loan and federal debt. Student loan debt outpaced personal credit card debt in 2010 and shows no signs of slowing down. Student loan debt already totals over $1 trillion dollars. That wouldn’t necessarily be a problem except for the troubling trend of student loan defaults. More than 8 million borrowers stopped paying their student loans and defaulted student loan debt is up over 14% in 2016 alone.

This is the same trajectory the housing bubble took before it crashed in 2008. For years, the government, operating on the theory that every American should own a home, used Fannie Mae, Freddy Mac, and artificially low-interest rates to extend easy credit. Banks, knowing that questionable loans would be covered, began lending to unqualified borrowers, known as sub-prime lending. Millions of these borrowers, who wouldn’t have qualified for loans under traditional market circumstances, began defaulting and “pop” went the bubble, along with the U.S. and world economy.

Federal debt issues are even more pressing. Already over $20 trillion, the federal debt is largely ignored by our politicians. Dr. Paul writes, “Despite claims of both defenders and critics of the president’s budget, neither President Trump nor the Republican Congress have any plans for, or interest in, reducing spending in any area.” A full two-thirds of the federal budget is spent on three mandatory items: Medicare/Medicaid, Social Security, and interest on the federal debt. Those percentages will increase as the baby boomer generation continues to retire and the debt continues to increase.

Given the federal government’s total lack of desire to cut real spending, as well as the Fed’s penchant for monetizing the debt, the prospects of limitless prosperity seems far-fetched at best and dangerously naïve at worst.


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