Fed will be buried in debt

Mike Rozeff reports:

The Fed is taking up mortgage debt, bad paper. But the Fed (and foreign Central banks) cannot possibly absorb all the bad or deteriorating debts in the world onto their own balance sheets. These debts grew at very high rates for a long time, and their amount is huge. To take them up by creating money will unleash an enormous inflation.

The Central banks can at best hold them at preferentially low interest rates in order to bail out banks. These banks then will face a prolonged credit crunch and be reluctant to make other loans. The financial system will seize up over a long period. Better to have a brief and purging panic now, as in the 1800s.

There is news today that rates on credit default swaps are jumping in Asia. That signals increased risk premiums on corporate and other bonds overseas. Central banks cannot absorb all the many credits that are faltering worldwide.

Instead of trying to keep rates down and asset prices up, the Central banks need to step aside so that asset prices can decline far enough that their returns become attractive to those who can supply real capital. Let the Panic of 2008 proceed to its end. Then a recovery can begin that is built on real capital, not market manipulation.

The false theory that the Fed can stave off recessions and control the economy (wasn't fine-tune the term?) is once again being put to the test. Greenspan thought it could, and seemed amazed at how easy it was. But one swallow does not make a summer.