The fox guarding the hen house?

I give my opinion after this quote. 

This was taken from The End of Cheap Money
"Economists have pointed to various causes for ultra low interest rates, which are a function of the supply of money (from savings) and the demand for money (from investment in productive assets). Fed Chairman Ben Bernanke suggested in 2005 that a "global saving glut" led by the likes of China was funneling excessive savings into the United States -- which helped inflate the housing bubble by keeping long-term interest rates low. "

Why would we believe Uncle Ben now? He was also spewing rhetoric about the mortgage melt down being contained in sub prime and alt a loans. He was way off the mark and his willingness to make this sort of commentary cost millions of Americans their life savings.

How about thinking about the reality of the money flow and that the low interest rates create a cycle of growth. Interest is the creation of new money. It can take the place of the fed dropping money from helos and it increases available money. Finance drives the capitalist system and our pseudo "free" market capitalism will whither without it.

 Image via Wikipedia

 Increasing interest rates will bring the economy to a halt very quickly. We have made the decision to live and die with consumer spending. We really have little choice now because the obsession with growth will not allow companies to manufacture items in the US when they can have it done in china for 1/10 of the price.

Encouraging people to save will not increase the money supply enough to drive the economy. The tiny bit of interest banks are paying for savings accounts will do nothing to increase money supply or consumer spending. If the economy must learn to live with higher interest rates and tighter credit there will have to be massive deflation of all products.

Image via Wikipedia 

Lumber is the perfect example. If housing prices are to be in the proper price range to allow affordability at much higher interest rates, prices of all housing material will have to come down drastically. It is hard to get something like this to happen. It is just like shutting the barn door after the horses are out.

We have lost the main ingredient to American prosperity. Our government let the people down by allowing the financial companies to manipulate the system to their benefit. Instead of looking out for our interests, the government has decided the smart thing to do was to get in bed with the CEO's of all the companies that drove the economy into the ground. Now the deck is stacked in favor of a few and supported by the White House.

The reason we had growth in jobs and an increase in money supply was because of the housing industry. This industry created jobs for millions of people, it generated the need for mortgages which created interest that increases money supply and leads to easier access to funds which allows more people to pay more interest. The housing collapse had nothing to do with people that couldn't afford homes. It had everything to do with the fraud and manipulations by those in charge of the system. This was all done with a wink and a nod to the government. Image via Wikipedia

The government has become one with the financial system and they seem hell bent on doing nothing for those people who deserve the help. If we keep seeing the behavior of the banks being allowed regardless of the damage they do we will not recovery from this major recession. The housing industry was the driving so many industries that they can not be replaced. The government knew it was important for more people to buy homes because it was the only thing giving them a return on their money and a tax break. They blindly went along with anything that drove the industry higher but they failed to see the abuse and fraud going on with mortgage backed securities. They didn't see the obvious or they didn't want to see it because the money from lobbyist and campaign contributions easily converts politicians to elitists.  Politicians have developed their own sense of entitlement and it has become the norm in Washington.