BEST OF DOUG NOLAND

December 20, 2005

We live in an extraordinary period. This experience is certainly providing even greater appreciation for the power of asset inflations and booms to captivate society and beguile policymakers. To be sure, Credit Bubbles must absolutely be reined in as early as possible - before the risk of popping them becomes more than policymakers can bear. Amazingly, the historic windfall profits being lavished on Wall Street and the energy sector (among others) are trumpeted by the optimists, when they should be recognized as byproducts of pernicious Credit inflation and Dysfunctional Monetary Processes. The third quarter’s 9.1% rate of non-financial debt growth and the 14% pace of household mortgage Credit expansion garner virtually no attention from the economic or analytical community. And $200 billion quarterly Current Account Deficits are now promulgated as proof of our robust economy outpacing our feeble trading partners. The well-oiled and inspirited propaganda machine functions superbly from Wall Street to Washington D.C.

When it comes to masterful propaganda, none compare to our departing Federal Reserve chairman. His recent speech, "International Imbalances," is one of the most convoluted and disingenuous analyses he has delivered in his 17-year tenure – and, of course, no one calls him on it. Our massive Current Account Deficit and our Untenable Foreign Debts are the greatest danger to the well-being of our society over the coming years. We should demand of him a discussion of these most important topics in language assessable to ordinary citizens and lawmakers. Not unpredictably, Mr. Greenspan has devoted great resources to concocting sophisticated justifications and rationalizations that place his Most Unfavorable of Legacies in doctored favorable light.

A lengthy book should be written exploring Mr. Greenspan’s ‘analyses’ of the U.S. Current Account and other imbalances. It really is the greatest work from the Master Obfuscator, deserving of considerably more time than I have this Friday afternoon and evening…..

When I read Greenspan and Bernanke I become quite frustrated by what I believe is convoluted and dangerously suspect analysis. Mr. Greenspan states that "being able to rely on markets to do the heavy lifting of adjustment is an exceptionally valuable policy asset," when it should be clear by now that markets are demonstrating greater propensity for self-reinforcing excess than necessary adjustment or self-correction. Mr. Greenspan ends his "Imbalances" speech warning of the dangers of federal deficits and protectionism. Yet these are predictable Credit Bubble outcomes emanating from inflationary distortions and wealth redistributions that his policies have cultivated.

And from Greg Ip’s (Dec. 7) Wall Street Journal article, "Long Study of Great Depression Has Shaped Bernanke’s Views:" "The lessons of Fed bubble-pricking in the 1920s and the Bank of Japan’s in the 1980 is that ‘asset price crashes have done sustained damage’ only when the central bank failed to respond, or ‘actively reinforced deflationary pressures.’ Mr. Greenspan had reached the same conclusion."

Well, I don’t buy it for a moment and furthermore am aware of no historical episode of a major Credit Bubble not ending in some degree of problematic collapse. It is becoming increasingly incontrovertible that the Greenspan/Bernanke "post-Bubble" view and policy prescriptions have been disastrously misguided. They have instead been actively reinforcing ongoing Credit Bubble inflationary forces. And the sad irony is that they have assured just the type of major monetary system breakdown Professor Bernanke has spent his career convincing himself and others that an aggressive Fed could avoid.