VodkaPundit

What the Hell Is Wrong With the Fed?

Ben Bernanke’s latest maneuver ought to worry you:

The Fed pledged yesterday to lend, in return for mortgage debt, $200 billion of Treasuries to the securities firms that trade directly with the central bank. Officials told reporters later that the program may escalate from there as the central bank seeks to break the logjam in the home-loan market.

The step goes beyond past initiatives because the Fed can now inject liquidity without flooding the banking system with cash. Bernanke and his colleagues are trying to halt a cycle in which the losses on mortgage investments cause banks to cut their lending, sending the economy into a deeper contraction.

Propping up prices using government trickery is effectively no different than freezing prices by government fiat. All you’ll do in the long run is create inflation and delay the inevitable contraction — and make it worse.

Houses won’t sell because banks are afraid to lend money. Fine. So let the housing market slump. People who shouldn’t have borrowed when prices were high will be forced out of the market, and prices will come down. Cheaper housing means more affordable housing, and fewer high-risk borrowers. Then — just like magic! — banks will regain confidence, and people will buy houses again along everything that goes in them. As it is, the Fed is throwing good money after bad, and bribing banks into doing the same. At your expense, I might add.

Result? A longer, deeper slump. Oftentimes, “longer and deeper” is a good thing. But not when we’re talking about a recession.

Did we learn nothing from Nixon’s disastrous wage/price freeze?