Obi Wan-Kenobi
/ 178.36.39.* / 2010-03-03 11:14
As I have noted for the last three years (and which IRA also notes in their paper) the only solution to a debt-overhang economic dislocation is to force the excessive and unpayable debt to default. These defaults bankrupt the institutions and borrowers that were imprudent, but in doing so they also clear the market. This also forces yields to rise to reasonable levels, restoring a yield curve that reflects duration and inflation risk, yet allows the capital base of the sound banks to be rebuilt, as they are able to attract deposits, especially time deposits, with reasonable yields on these instruments.
In other words, it attracts capital to the financial institutions - not debased currency or credit.
Only loaned (and thus borrowed) capital promotes economic growth.
The Fed's puerile thought process is that "all yield is the same", "all borrowing cost is the same", and "all credit source is the same." This is a chimera. The Fed is incapable of producing capital, even by printing. It can produce credit and it can debase existing money, diluting all existing currency, but it cannot create capital.