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In response to Will Prices Rise Significantly When Velocity of Money Picks Up? reader Dave, a friend, noted that as the Fed jacked up its balance sheet, velocity has mirrored the curve to the downside.
Dave asks "Can't an argument be made that since much of the banking system is really insolvent, that the Fed increasing its balance sheet is necessary?"
This depends on what you mean by "necessary" and more importantly, who gets to decide.
I am one of those who staunchly believes that banks should fail. More precisely: Banks did fail, but taxpayers bailed them out.
Was the last bailout "necessary"?
No - not to me. The world will not end if banks fail. Bondholders would have and should have paid the price. Who are the bondholders? In general, the wealthy own most of the assets, including bonds.
However, if "necessary" means in the eyes of central bankers, then yes – it was deemed "necessary".
It's all part of the moral hazard tactics of central banks that tells the "too big to fail banks" that no matter what they do, they will be bailed out, again and again and again.
Privatize the Gains, Socialize the Losses
Last time, Tim Geithner preached to Congress that financial Armageddon was right around the corner if Congress failed to pass a resuce package. Congress did pass a packages on the second attempt. Then Geithner promptly changed the terms of it to do what he wanted with the money.
Speaking before Congress, Bernanke said the collapse of Lehman was his biggest mistake. I suggest it was his only success. Over-leveraged financial institutions should pay the price for their folly, not overburdened taxpayers in general.
The poor bailed out the wealthy. The poor continue to pay the price in two ways.
- Excessively low interest rates on deposits
- Fed actions to drive up inflation when real wages do not keep up
Not only is that unnecessary, it's middle-class destructive. It's also conveniently disguised theft.
Mike "Mish" Shedlock