How The Federal Reserve Can Avoid The Next Bubble

The responsibility for this Nations current economic disaster resides squarely on the shoulders of the Federal Reserve.  ‘Boom & Bust Cycles’ are a monetary phenomena, which means that they are created and sustained by Fed policies.  Our contemporary crisis of expanding credit and its attendant collapse was parented by the Federal Reserve.

There are many who share this belief:  Allan Meltzer, David Malpass, Frederick Hayak, Ludwid von Mises, Milton Friedman and Ann Swartz have written extensively on this subject.

I thought it necessary to bullet point in summary form the way out of our current crisis:

1.  The Federal Reserve must not monetize the deficit.  (This means that Congresses spending habits must not inform either Treasury or Federal Reserve policies therefore destroying our currency.)

2.  Implement an exit strategy from quantitative easing (printing money.)

3.  Give intellectual and political force to maintaining the independence of the Federal Reserve.  (Government entities such as Freddie & Fannie became extremely politicized in Congress: THIS IS THE ORIGIN OF OUR CRISIS!)

4.  Calculate asset prices; discover bubbles by the Taylor Rule (the relative measure of both inflation and the output gap.)  Witness the birth of a new bubble in real estate in China and throughout Southeast Asia.  This is the result of Federal Reserve policies of easy money; for any increase in commodities, stocks or a narrowing of credit spreads is indicative of a bubble.

5.  Aggressively supervise the entire financial system.

6.  Create an insolvency regime for ‘to-big-to-fail’ (TBTF).

7.  End TBTF.

8.  Have Congress demand higher capital requirements of banks.

9.  Regulate the ratio of leverage (borrowing) among large financial institutions, this will help institutions discern an appropriate relation to illiquid financial instruments.

10.  Give the Federal Reserve greater regulatory backbone.


About William Holland

Systematic Theologian/International Relations
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