Irony Alert: FED Attempts to Find Bubble’s Source
Irony alert! The Federal Reserve, which has long been the source of most bubbles, is going to complete its own internal investigation as to why speculative bubbles form. Unfortunately, the early answer from the FED is that regulations can end bubbles. They couldn’t be more incorrect.
FED Acceptance
Kohn, the Vice Chairman at the Federal Reserve has already indicated that the Federal Reserve understands the importance of interest rate policy and the profound importance it has on the market place. Despite knowing that the FED may create its own endless problems, Kohn seems content that the ultimate solution for ending bubbles is to restrict the flow of money within a free economy.
Regulations Never Work
Already the FED, SEC, and FINRA, all government agencies or programs that work closely with the government have began a war on speculation. The SEC slapped restrictions on commodity holdings within ETFs, FINRA ran several articles about how leverage products ruin the market, and in a last ditch effort in 2008 from the FED and the SEC, short selling was barred. While they may have identified the weakness of a free economy, they haven’t found a solution. Money flows where it pleases!
Building a Dam
Sure, government agencies can build a legislation dam that seemingly limits the amount of money that can flow into a sector or an individual security or fund but they simply can’t regulate everything. Plain and simple, if there is money to be made somewhere, and there is cheap credit to finance it, there will be a line of entreprenuers willing to give it their best shot. Whether buying oil speculatively to sell when prices are higher or starting a homebuilding firm to take advantage of low corporate debt rates, money will find an investment, regulations or no regulations.
International Markets
Nevermind that money has a mind of its own, what about the international markets? Last I checked the SEC has zero international influence and stands absolutely zero chance of regulating the flow of money overseas. So, while you and I, ordinary investors, may not look overseas to skirt regulations, the power players will. What’s to stop Goldman Sachs to ship $20 billion overseas to buy oil contracts they can’t buy in the US? Nothing. Not a single thing.
The True Solution
The only way to end speculative bubbles to to end the financing programs that keep them growing. When you have rates as low as .5% from the FED, even the lowest yielding investments become extremely profitable. Funds shift to long term investments like real estate development and infrasctructure because even with near zero profit margins low interest rates make it all possible. That is, of course, until interest rates soar and profitability is wiped out. Then you have the collapse, defaults, and ultimately the same problem you started with. Want to end bubbles? End the Fed’s monopoly on the price of money. It’s a surefire solution.
You nailed the problem. The issue is not under-regulation (at least of ethical activities) but overregulation by the government to influence who the winners and losers are. Generally the government picks the losers and funds them to keep them alive.