The elephant in the living room–the topic Washington won’t broach–is the dollar itself as a powerful but unused monetary policy tool………….probably the most important economic and investing variable in the last decade. The best stimulus policy is a sound currency.–David Malpass, Chief Economist, Bear Stearns, Wall Street Journal.
No less an authority than Lenin well understood the importance of a sound currency in the stability of economies and societies and, in fact, said that there is no surer means of overturning the existing basis of a society than to debauch the currency. We may not be near debauchery, but the trend is clear and the results are becoming traumatic. In the last week of February, the dollar reached a new record low against the Euro, a six-year slide during which it has depreciated 40% versus the European currency and more than 20% against a broad index of currencies. And what was Federal Reserve Chairman Ben Bernanke’s response in testimony before Congress? To point to the weak dollar as a rare bright spot in an otherwise gloomy economic picture because of its impact on exports, jobs, and the trade deficit! Further, he indicated that the Fed will do whatever it takes to stop the subprime mortgage-induced credit squeeze from becoming a recession. He couldn’t have been more clear in confirming that he has completely abrogated the Fed’s number one responsibility–the stability of prices and the value of the currency.
And more recently, evidently believing that voluntary loan restructurings arranged between borrower and lender are not enough, he strongly urged lenders to begin discounting the principal balance of distressed mortgages to their borrowers, thereby restoring equity in the underlying collateral and the incentive to remain in the home. Since when did the Federal Reserve, which has considerable responsibility for the soundess of the banking system, become the coercive supervisor of bank loan workout policy? This puts him in virtually the same policy position as Congressman Barney Frank, except that the latter would then have the government refinance all the distressed mortgages, a path to the same disastrous “solution” that we reached in the savings and loan debacle of the late 1980s with the Resolution Trust Corporation that converted a $10 billion problem into a $500 billion problem. This is madness.
The dual strategies of ignoring the restoration of the value of the dollar as a primary foundation of monetary policy and pursuing coercive credit restructuring procedures that infringe on the sanctity of contract and subsidize moral hazard are very dangerous for our economic health and will produce major unintended consequences.