Didn’t think I’d see an op-ed like this in the Journal. The editors themselves hate Fed easing, and for good reason. Inflation hurts everyone in the economy except for those in debt; those who, financially-speaking, have behaved most irresponsibly. But this opinion piece says the Fed shouldn’t feel ashamed about printing money in order to get us through the housing crisis.
The author’s fundamental argument is that if the Fed just prints money, and lots of it, that the ensuing inflation will rescue the housing market and, thus, the economy. He says this would be preferable to nationalizing the housing market, which seems to be the only alternative in his mind.
Nationalizing the housing market may be a fait accompli…..but done correctly it probably doesn’t have to be a huge burden for taxpayers. Lenders who want to be bailed-out should be forced to take massive writedowns on the bad loans they want to pawn off on taxpayers. If the Treasury buys bad home loans at a really good price, taxpayers don’t have to lose that much in the long-run….
If the Fed “prints money”, the ensuing inflation would only serve the interests of those in debt by reducing the value of their debts in real terms.
Inflation happens when the supply of money increases relative to the supply of goods and services in the economy. More paper currency chasing the same amount of goods and services means each individual unit of currency has less purchasing power; it has less value. Savers lose because the dollars they’ve saved buy less after a period of inflation. Debtors win b/c the debts they owe are smaller in real terms after that same period of inflation.
Say I take out a $100,000 loan due next year. To make the math easy, let’s assume my lender isn’t going to charge interest….a rich uncle perhaps. If the value of the dollar declines 6% over the year, then $94,000 of today’s dollars will be sufficient to pay back the $100,000 loan next year.
Of course, most lenders do charge interest and if they EXPECT inflation will decrease the value of the dollars with which they’re paid back, they’ll simply charge HIGHER interest rates to offset the loss in value of those dollars.
Folks who have already taken out loans at fixed interest rates would benefit from higher inflation. New borrowers and those with adjustable rates would be forced to pay higher interest rates.
More inflation could also spark a run on dollar assets.
But perhaps the main reason this is foolish is that if the Fed lets inflation run wild now, it will just take more draconian monetary measures to get it back under control in the future. Take a look at the steps Paul Volcker was forced to resort to in order to tame inflation back in the early 80s. To beat inflation he had to increase the Fed Funds rate to 20%(!) by late 1980. It’s at 2.25% now. How many of my readers who bought a house in the early 80s recall what mortgage rates were back then? Would you believe they got as high as 18% for a 30 year fixed rate mortgage?
According to Wikipedia, raising rates that high to tame inflation “contributed to the significant recession the U.S. economy experienced in the early 1980s, which included the highest unemployment levels since the Great Depression.”
So far Bernanke has laid off the inflation lever. All of us who avoided overpaying for a house should pray that he continues to.