The Labor Department reported that wholesale prices rose 9.2% in the last 12 months – the worst inflation in 27 years. Did you get a 9% raise this year to keep pace?
Meanwhile, U.S. banking regulators seized mortgage lender IndyMac on Friday and closed the doors after withdrawals by panicked depositors led to the third-largest banking failure in U.S. history. This is the fifth bank that’s failed this year. There are at least 150 additional banks that are at risk of failing.
The Federal Reserve also announced steps to create more inflation to shore up failing mortgage giants Fannie Mae and Freddie Mac, whose shares have plunged as their losses threatened their financial survival. Freddie Mac owed $5.2 billion more than its assets were worth, making it insolvent under fair value accounting rules. One estimate shows that bailing them out will cost each of us $16,000. Of course, the government won’t directly charge you for this. They’ll indirectly charge you by further inflating the money supply. If you think 9% inflation is bad, just wait until this happens.
The dollar fell to a record low against the Euro.
The Bank failures and inflation are the result of the same failed policies of the Federal Reserve System. Over the last couple decades, the Federal Reserve board kept interest rates artificially low. This lead to irresponsible behavior on the part of lenders and borrowers alike. Now the bill is coming due. We are going to pay for it, one way or another.
So, what’s the answer?
Freddie Mac and Fannie Mae need to be allowed to fail and the market needs to deal with the correction. Both companies were created by the government. Fannie Mae was created by Franklin Roosevelt in 1938. It was privatized in 1968. The government created Freddie Mac at the same time to provide some competition to Fannie Mae. U.S. taxpayers shouldn't be punished to bailout these government created companies.
The Federal Reserve System also needs to be replaced. How do we replace it? The late Nobel Laureate Milton Friedman advocated replacing the Fed with a computer that would be increase the money supply by 4% a year. Ron Paul advocates replacing the Fed with a gold standard, which is constitutionally mandated. Both of these approaches would work a lot better than the arbitrary system we have now.
However, long-term the right answer is to get the government completely out of the money business altogether by moving to a system of competing currencies, which was advocated by another great Nobel Laureate – Friedrich Hayek.
Regardless of where we go from here, it should be clear to everyone that the Federal Reserve System has been a miserable failure and needs to be changed. Don’t hold your breath.