crisis: How The Fed Caused The Boom & Bust

Frank Shostak explains the case against Greenspan, Bernanke and the Fed.  Quotable:

The boom gave rise to various nonproductive (bubble) activities that emerged on the back of the loose monetary stance of the Fed. The increase in money supply led to the diversion of real funding from wealth-generating activities toward various nonproductive activities.

(Note that these activities cannot stand on their own — they cannot fund themselves. They are funded by diverting — by means of new money created “out of thin air” — real savings from wealth-generating activities.)

From June 2004 through September 2007, the Fed adopted a tighter stance, which slowed the diversion of real funding to nonproductive activities.

As a result of this, various nonproductive activities came under pressure. (Without real funding, these activities are forced to go under.)

Now, when money is injected, it doesn’t instantly affect all the activities in an economy. The money starts with the first recipients and then moves to other recipients. It moves from one market to another market — there is a time lag.

This means that various nonproductive (bubble) activities are spread across all the markets — the boom is everywhere. Once the Fed tightens its stance it starts a bust, and this weakens various nonproductive activities across all the markets. The severity of the bust is dictated by the size of the boom.

(The percentage of nonproductive activities — the product of the boom — determines the severity of an economic bust in a particular sector of the economy.)

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2 Responses to crisis: How The Fed Caused The Boom & Bust

  1. spencer says:

    Wow– and all these years we have been listening to you explain how the boom was the fantastic results of the Bush tax cuts.

    What caused you to change your mind?

  2. Greg Ransom says:

    Spencer — who are you talking to?

    Not me. Not Frank. Are you just gassing us?

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