Let the Economy Take its Natural Course

Are you a buyer of stocks in this market? I know I’m not. A lot of my favorite Chinese stocks have pulled back significantly, but I’m not worried. If there is any good news out there it remains China’s economic growth.

Last year, when the stock market dropped because of the fallout in the housing sector, Fed Chairman Bernanke rode to the rescue with interest-rate reductions. Seemingly with little regard to inflation, the central bank acted more quickly than ever before to appease Wall Street investors. I can’t recollect a time when the central bank ever acted so fast to help Wall Street feel better about itself.

I have to say that I’m worried about the direction that policy makers are taking of late. The economic system must be allowed to correct itself, instead of being managed by those with the power to print money. I know it hurts, but I believe it is the only way for the economy to return to a solid platform for long-term growth. We’re already in a rising commodity price cycle and now every equity investor in the world wants the U.S. to keep decreasing interest rates. I’m just not convinced that this is the right monetary policy at this time.

The system has to be allowed to correct itself with minimal intervention. Wall Street created the subprime mess by offering the capital to mortgage companies who sold home loans to people who couldn’t afford them over the long run. Wall Street then securitized those mortgages and sold them around the world. Now, they’re crying because the housing market turned (and deservedly so after a major bull run in real estate prices) and defaults grew exponentially.

Wall Street and the lawyers always seem to win in the end. I’m worried that the rest of us will be left holding the short end of the stick. The Federal Reserve is acting like a parent who runs to his or her child every time after the slightest scratch. The Federal Reserve’s actions are breeding dependence and bad behavior. What may seem like monetary stimulus now just might contribute to a new and powerful inflationary period over the coming years. If this happens (commensurate with the current commodity price cycle), interest rates will have to rise dramatically and we will be much worse off than we are now.

It’s time for the central bank to return to its roots of creating an economic environment that favors long-term price stability and not short-term solutions to appease Wall Street investment bankers. Short-term thinking by those that have the power to print money is definitely not a good combination. It’s a recipe for disaster.