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Minyan Mailbag: Prolonging the Recession?

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Forcing banks to lend only worsens the downturn.

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Dear Mr. Practical,

I do my best to absorb each of your timely posts.Your concern is clear; time seems an altogether different matter. The concerted effort to "change the curve," cheapen the dollar and give an appearance of data stability is in motion.

Tim Geithner's comments about being open to SDR "evolutionary building on the current architecture rather than moving us to a global monetary union." seems to continue to push
timeframes out.

Can the engineered message from the Fed and the Treasury (along with the second derivative push) prevail until liquidity efforts seize the wires?

For decades, we've watched markets fueled other then by fundamentals. Respecting the seismic shift, could you envision a tack in risk along any timeframe?

From my humble altitude, it's very difficult to even determine who's in charge and what the rules are.

Thank you always for your time,

Minyan D.



Dear Minyan D,

The Federal Reserve has a philosophy: That the economy is based on consumption and lending. On its face, this is ridiculous, so let me explain.

It assumes that production is a foregone conclusion and that bureaucratic processes are just as good as creating production (efficiency) as market processes.

When an economy based on capitalism goes into recession, it's for a reason. It happens because capital has been misallocated, and assets have been produced that are unproductive.

Savers stop lending as they see less return for risk than warranted. Over-capacity is quickly worked off. Savers soon see a reason to lend again: there is a productive use for the capital and thus a good return for the risk. This is a hit and miss process, but it tends to work over time, just like evolution does.

The Federal Reserve does not believe that a recession, short and sweet, is a corrective process. Either that, or it has become politically unacceptable to allow any dislocation in growth, growth for its own sake. So just when the market (savers) pull back on lending, the Fed interrupts this process and artificially lowers interest rates. The fractional banking system finds more speculative uses for that money and capital is allocated to unproductive assets.

We have been going through this for many years, to the point where all this debt creation is unproductive. The longer the Fed denies the reality of the process and insists that lending gets done for unproductive things like condo-building, the worse the ultimate resolution will be.




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