Angela Merkel, Lone Ranger

Among all of the Heads of State, Ms. Angela Merkel is the only one with the courage to denounce the policies of the world’s most powerful central bankers, Ben Bernanke, Mervyn King, and Jean-Claude Trichet. Bertrand Benoit’s piece in today’s Financial Times describes the important ending of her otherwise uninteresting speech Wednesday.

She gave “a vitriolic attack on the world’s three mightiest central banks”—something which she has never done in the past. People who know her well confirm that it was no slip of the tongue, that she is always careful to mean what she says and say what she means. She said that she is “sceptical” about the powers of the US Fed to control the flood of purchasing media and credit they continue to create, alongside their European counterparts.

According to those who surround her, she “does not blame the implosion of the subprime mortgage market for the economic crisis. She does not see securitisation as the culprit. Rather, she thinks the loosening of monetary policy under Alan Greenspan’s Fed chairmanship fuelled the creation of asset price bubbles and encouraged excessive leverage within and beyond the financial sector.” [You and my spell checker will have to excuse the apparent typos, but I’m quoting a British text.]

She reminds me of Mrs. Thatcher back when the English Prime Minister touted the economics of the Austrian, Professor Hayek, who if he were alive today would surely agree with both ladies about the origin of our problems.

This recession is being described as a quadruple whammy: The first round seemed to come from the imaginative excesses of the residential mortgage market and the Wall Street math geeks who played with them. The second is coming now from the equally imaginative over-expansion of the commercial development financing market and is undermining some major banks’ already fragile balance sheets. The third will soon appear within the retail credit sector. And the fourth is the credit derivatives wild card.

The source of all four, however, according to Merkel, Hayek, and me, is the combined actions of the monetary and fiscal authorities, (1) whose decisions are not predictable, (2) who have too much power to distort our money supply, and (3) whose constant interventions can and will, everywhere and always, throw even the best-performing economies into havoc.

What makes this even worse is that omnipotent power attracts those who would profit from it. Just listen to the big market players—the seemingly indestructible huge banks and automobile companies—as they turn their sheepish bahs towards Washington. (Try out <a href=””>this website</a> to hear what this sounds like.)

We are approaching an interesting crux of this recession. Economists and market players alike are split into two camps: those who think the principal danger (or speculative opportunity) is depression and deflation, and those who think it is inflation. I’m in the inflation camp, alongside Ms. Merkel. I don’t know whether the coming series of monetary bubbles will take one year or ten to appear and burst; but I feel very sure they are coming.

When it comes time to pull the punch bowl away, this Fed will be no stronger than any other has been in the past (with perhaps the exception of Paul Volcker, but how short-lived his wisdom was). Our Fed governors’ task will be complicated by their lack of real control of interest rates: Just when they will want to reign in credit, the rates will go up, putting them in a quandary.

As far as I know, and in the longer run, there has never been a nation in history that has survived the chronic debasement of its monetary unit. Ironically, this time it’s Germany (or at least her Head of State) that seems to be the one ready to speak up. As Ms. Merkel puts it: “The most complicated phase will come when the crisis is over.”

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