Why is the Federal Reserve Punishing Prudence?

Prudent: Wise in handling practical matters; exercising good judgment of common sense. Careful in regard to owns own interests; provident. Careful about one’s conduct; circumspect.
-Webster’s Dictionary

Prudent Man Rule: An investment standard adopted by some US states to govern the action of those responsible for investing money for other people. The fiduciary is required to act as a prudent man or woman would in regards to investing monies of others.
-Bloomberg Financial 

Ever since 1995, the Federal Reserve and other authorities have been assisting in the birth of the largest debt bubble in our nation’s history. The money supply has grown exponentially, weak businesses have been formed (and have failed), the consumer is leveraged up to his eyeballs, regulation is poor, and savings have dried up. Furthermore:
 

• The brokerage/investment banking industry has been pummeled beyond recognition;
  
  
• Lifelines have been given to everyone from poorly run banks to poorly run auto manufacturers;
  
  
• Esoteric securities have been “relocated” from the balance sheets of reckless banks and brokers to the US Treasury, FDIC and Federal Reserve.
  
  
• Investors worldwide watched $30 trillion of stock market equity disappear in the past year;
  
  
• Home prices have cratered by better than 25%;
  
  
• Unemployment on every front is rising;
  
  
• Tax receipts are down, and state governments are suffering;
  
  
• The debt market -- except that artificially supported by the government -- is closed.
  
  
• Earnings estimates for the S&P 500 are down 60% year-over-year.
  
  
• Stocks (using the Dow as a proxy) are at the same level they were 10 years ago. 
  
  
•  Industrial production around the globe is imploding.

I could go on and on and on and on, but there's really no point. I could show 25 graphs or more of what is wrong with America’s economy, and, for that matter, with much of the broader global economy and global markets.

Here's the magic question: If there's so much bad news, is it fully discounted in prices? And if so, why are the Fed, FDIC and the Treasury Department so desperate to drive interest rates down to zero, buy troubled assets, and ruin what used to be an efficient debt market in mortgage-backed securities, corporate bonds and preferred stock?

There seem to be 2 distinct markets that have developed for debt: The one that the US government stands behind (with all of our money), and the one that exists in the “free market.”

Before I show a few examples of why prudence is being penalized -- and why I believe it will a deadly trap for those that fall in it -- allow me to share with you the most recent release from the Federal Open Market Committee, to give you a sense of their desperation.

FOMC Statement, December 16, 2008

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.

The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

I believe that what I’m witnessing in the financial markets is distasteful, dangerous and socialistic. Think for a moment about where the Fed is heading with their policies. It’s the opposite of a free market, totally alien to laissez-faire - in fact, it seems to have been borrowed wholesale from Ayn Rand’s Atlas Shrugged.