Asset manager and market Guru Michael Belkin had some Austrian thoughts on the business cycle and the Fed, as told to Kate Welling [link]. The interview is about one year old, but his comment below is equally relevant today:
My theory is that the markets and the economy have been warped by all the bad investments facilitated by the Fed. I happen to believe that free markets are entirely capable of setting efficient interest rates. But the Fed has been messing with the forces of supply and demand in the credit markets–and producing mal-investment on an enormous scale. That’s what produced the stock market bubble.
When it popped, the Fed and the Administration feared a depression—and for their jobs—so they did everything they could to inflate a real estate bubble to buffer the loss of wealth inflicted by the Nasdaq crash. They had to make people think they still had assets, somewhere. And it worked for a while. Trouble is, as I said, the housing bubble rests on affordability created by artificially cheap mortgages. And the Fed knows that the low interest rates its credit policy has created won’t last if a cyclical economic recovery really develops. This puts the Fed in the perverse position of actually rooting for economic weakness (and disguising the rise in inflation) so that it can keep pumping helium into the housing bubble.
The irony is that the negative real interest rates the Fed is creating in this process are about the biggest incentive there could be for investors not to save, but to move into riskier assets in the hope of avoiding falling behind inflation. In other words, the Fed is once again providing the fuel for another round of speculation— and bad investments.
