What Have We Learned? (II)
The laws that encouraged high-risk lending to homeowners are still in place, and Fannie Mae and Freddie Mac are still doing their best to subsidize home purchases by individuals who are financially unprepared to meet their obligations. The risks of this policy are compounded by the Fed’s decision to allocate credit on a grand scale throughout the economy.
In America and elsewhere, government officials have a lousy historical track record when it comes to picking winners and losers in the marketplace. There is absolutely no reason that the officials at the Fed are likely to do any better—which means that many billions of dollars’ worth of resources will likely end up being squandered by the Fed. A third lesson is one that will only be learned in the future, likely sometime after you read these words.
As we noted, the Fed engaged in roughly $1.5 trillion in new lending between late 2008 and 2010. In the long run, this is far more lending than the economy can possibly absorb without touching off a substantial inflation—perhaps one involving a doubling of the price level. No one thinks the Fed’s intent is to permit such a massive increase in the price level, but no one is quite sure how the Fed will avoid it, without plunging the United States back into severe recession. Stay tuned, because by the end of the course in which you are using this book, economists will have a much better idea of how this next economic drama is going to work itself out.
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