Time magazine starred Alan Greenspan on its cover in 1998 for cutting interest rates, naming him one as of three people comprising a “Committee to Save the World.” Eleven years later, the same magazine indicted him as one of three people most culpable for the great economic collapse of 2008–09. Then, in 2009, Time named Greenspan’s successor, Ben Bernanke, as “Man of the Year” for cutting interest rates as part of “an effort to save the world economy.” Guess what comes next in this sequence of praise and blame, relief and recrimination. You have to work hard not to see it on the horizon, and the reason is clear: When money is too cheap for too long, it inevitably creates a problem.
In those bygone days known as the 20th century, the problem cheap money created was consumer price inflation. In the past 25 years or so, it isn’t consumer prices but asset prices that have run away. Cheap money gushed into real estate in the 1980s, into tech stocks in the late 1990s and into housing in the early 2000s; now it is gushing into food and commodity prices. When interest rates are low and money flows freely, all seems good and getting better. But each inrush of cheap money merely sets up high asset prices for the collapse to come. And when collapse comes, it’s nearly always bigger than the one before. And to recover from that collapse, the Federal Reserve makes money cheaper still, for even longer than it did the time before.
Read Full Article »