I present this article for evaluation, a study in How We should have done things in hindsight. The first thing the Reader should realize about all this is the degree of safety enjoyed by all of these authors; having once been a Fed Governor ensures a rich salary at some academic institution, unless one falls asleep in a lecture they themselves are giving. Credentials are like Savings in this rare environment, and these individuals are at the top of the heap. The current fight at the Fed is conducted as a group of fat Cats suggesting How the charnel house should be run, knowing that they are insulated from any hazard. Everyone knows that no matter What the final outcome, their pleasantries will always be present. There might be justification for this, stating that personal affectation should not be a part of the process of decision-making. The truth, though, might state that personal stake in the outcome might hold some validity.
The bubble process can be explained simply. Prices rise, and Prices fall, and the frequency with which they channel the entire wave is important. Prices which are too suppressed for too long wind up with an inability to garner capital assets to maintain current levels of production. Prices which are too high generate excessive capitalization, and enjoin a State where financial instruments become the base of collateral for future financial instruments. This later state is the basic cause of the danger of bubbles. Any failure in the repayment process, even difficulty in meeting such repayments, endangers the entire structure. This is the reason Why the Fed should concentrate on the bubble system, and devise methods to control their expansion.
The worst aspect of the entire situation is a basic lack of control by the Fed. This mainly occurs through attempts to dilute capital reserves of Banks through holding financial instruments themselves as capital reserves; a process which defeats the entire purpose of the reserves in the first place: a medium of Cash which is unaffected by financial commitments, which can be utilized to pay a Bank’s way out of financial trouble created by failure of repayment measures. The Reader may ask Why banks would engage in such subversion; the basic rationale being the rapid growth in book values Banks can achieve through the process–truly important when Bonuses to bank executives are based on book values. There is not much else to say, except possibly that ordinary bank officers should be granted the same sinecure as Fed governors. lgl