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The Fed and the Markets

Although I have been critical of the Fed for not worrying more about inflation, there’s no doubt that its main concern should be to avoid a financial meltdown that could lead to a depression or a breakdown of the financial markets. My main complaint is not with the Fed, but with Congress and the Administration for cutting taxes on the wealthy so drastically while waging very expensive wars in Iraq and Afghanistan. They are shuffling money by the handfuls from lenders in China to Republican war profiteers, including Dick Cheney.

The Fed may have prevented the onset of a major financial crisis due to the subprime mortgage situation. Nevertheless, America is still sitting out there — exposed because of its huge indebtedness. Runaway inflation will reduce the size of the indebtedness over time, but not in the short term (hopefully). Therefore, we remain at the mercy of the Chinese and the Arabs, our largest creditors. It’s unlikely that they want to destroy the US for financial reasons; they would stand to lose a lot of money by doing so. But if the political/military situation goes downhill, they might try to destroy the US economy for geopolitical reasons. China is now feeling a lot of international pressure over Tibet, as well as the traditional US pressure over Taiwan from the Republican right. There is some small risk that China could retaliate by dumping all of its US dollar investments, triggering a collapse in the dollar’s value and perhaps pushing American interest rates into the stratosphere.

Alan Greenspan claims in the Financial Times that he’s not responsible, and he’s not the worst culprit, although the FT columnists have some legitimate gripes about his performance. But one thing he did which was very bad was to come out in favor of the dangerous Bush tax cuts because he claimed he was afraid that America would end up paying off its debt. In retrospect his claimed fears had no merit, and were no doubt expressed to please the political powers, Bush and company. By sacrificing his integrity for political expediency, he ensured his share of the blame for America’s financial debacle.

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