Monday, September 20, 2010
No Bogus Triple-A Bonds Anytime In The Near Future
Yesterday, I was reading my Sunday New York Times, the Sunday Business Section, and what do I find? A professor of economics suggesting that the best way out of the recession is for the Federal Reserve Bank to inflate the money supply and that they should shoot for a target of a 3% annual inflation rate. Naturally, this professor acknowledged that seniors and others on a fixed income would most likely protest this idea. Hell, yes, I would protest this idea because it is pure stupidity.
Either this economics professor has never done anything other than being a student or a professor because if he had spent just a little time working in the capital markets, he would realize what a suggestion of 3% inflation would mean.
Why not fix that which is broken instead of coming up with cures that only compound the disease? The last thing we need is 3% inflation, as this is not going to facilitate the movement of credit from borrowers to investors.
Why not fix the credit system? This is where the problem is, in my opinion. Because Wall Street minted billions of dollars of bogus triple-A bonds before the financial crisis and the market meltdown, the rest of the civilized world is not in a hurry to buy anything more than our U.S. Treasury notes and bonds. This move by investors to buy quality has driven down nominal interest rates, and with inflation at a low point, interest rates on Treasuries have reach some very low numbers. But, reigniting inflation is not an answer in my book, and if this professor understood the responsibility of a central bank to all the participates of the monetary system, he would not be throwing the idea of 3% inflation around so cavalierly. I have written in the past that monetary policy should not be carried out with only the banks in mind, but there should be consideration for all members of the monetary system.
Fix the credit rating agencies and be surprised what that would do to open up the movement of credit again. But, the investors around the world and especially the large pension funds here at home must believe in the ratings that are placed on the new bond issues. No one is going to be investing in bogus triple-A bonds anytime in the near future.