Wednesday, August 29, 2007

Pour in the Cash

There are a number of deflationary factors behind my campaign to get the Fed to permanently inject new cash into the banking system and deal with the dysfunctional commercial paper market — as well as the general credit freeze-up.

There’s housing price deflation: The Case/Shiller home-price index is off 3.5 percent over the past year.

There’s commodity deflation: Gold prices are off nearly 15 percent from their 2006 highs. Stock prices for materials are off nearly 13 percent since July 19, while metal and mining shares are off 16 percent.

There’s the deflation of loan values, both CDOs and CLOs.

And there’s the deflation of the Treasury bill rate from 5 percent to 4 percent.

The Fed needs to stop this deflation by pouring in new cash. I call it the growth solution. Growth will solve the credit problem as the Fed moves to stabilize the credit and housing deflation we are now experiencing. And as future investment and economic growth are enhanced, the value of the dollar will get a boost.

Yesterday’s FOMC minutes showed just how badly the central bank missed the credit problem. With Treasury bills around 4 percent, the fed funds rate should be around 4.5 percent. A 5.25 percent fed funds rate, with the entire Treasury curve below that rate, is neither sustainable nor wise.