Why The Chinese Laughed At Geithner

If a person lives long enough, he can watch everyone
forget everything they learned. 

Everyone includes Federal Reserve Chairmen, economists,
Bank of America
and even Bloomberg.com.

Federal Reserve Chairman

Ben Bernanke

thinks he can hold down US long-term interest rates by
purchasing mortgage bonds and US Treasuries.  Sixty
years ago the Federal Reserve understood that this was
an impossible feat.  After an acrimonious public
dispute with the US Treasury, in

1951 the Federal Reserve forced an

on the government that eliminated the Fed`s obligation
to monetize Treasury debt in order to hold down long
term interest rates.

President Truman

and Treasury Secretary

John Snyder

wanted to protect World War II bond purchasers by
preventing any rise in interest rates, which would mean
a decline in the price of the bonds.

The Fed understood that monetizing the debt to hold down
interest rates meant loss of control over the money
supply.  The policy of suppressing interest rates
could only work until the financial markets anticipated
rising inflation and bid down the bond prices.  If
the Fed responded by buying more Treasuries, the money
supply and inflation would rise faster.  

Since Fed Chairman Bernanke announced his plan to
purchase $1 trillion in mortgage and Treasury bonds in
order to help the housing market with low interest
rates, interest rates have risen.  When will the
Fed remember that printing money does not lower
long-term interest rates?

According to Bloomberg (
Bank of America strategists are recommending that
investors buy Fannie Mae bonds because the rise in
interest rates means the Fed will ramp up its purchases
in order to prevent rising interest rates from adversely
impacting the struggling housing market.  When will
financial gurus remember that printing money does not
lower interest rates?

Treasury Secretary Geithner is another economic
incompetent.  He told China that he stood for a
but that China should let its currency appreciate
relative to the dollar, which, of course, would mean a
weaker dollar.  He simultaneously told China that
their investments in US Treasury bonds were safe.

His Chinese university audience, being economically
literate, laughed at Geithner. 

It apparently did not dawn on the US Treasury Secretary
that if Chinese money is rising in value relative to the
US dollar, the value of Chinese investments in
dollar-denominated US Treasury bonds is falling.

Congressional Democrats are proving themselves to be as
stupid as the Republicans.  According to the
Associated Press, the Democrats have reached agreement
to appropriate another $100 billion to continue the wars
in Iraq and Afghanistan through the end of the year. 

What are the Democrats thinking?  The federal
budget for this year is already 50% in the red. 
Why add another $100 billion to the red ink, which has
to be monetized, thus causing inflation, higher interest
rates, and a weaker dollar.

The red ink that Washington is generating is a far
greater threat to Americans than any foreign

The hubris is extraordinary.  A bankrupt government
that has to send its Treasury Secretary begging to China
thinks it can spend limitless amounts in a futile effort
to control the culture, mores, and political system of
distant Afghanistan.

Paul Craig Roberts [email
] was Assistant
Secretary of the Treasury during President Reagan`s
first term.  He was Associate Editor of the
Street Journal.  He has held numerous academic
appointments, including the William E. Simon Chair,
Center for Strategic and International Studies,
Georgetown University, and Senior Research Fellow,
Hoover Institution, Stanford University. He was awarded
the Legion of Honor by French President Francois
Mitterrand. He is the author of

Supply-Side Revolution : An Insider`s Account of
Policymaking in Washington
and the Soviet Economy

Meltdown: Inside the Soviet Economy
and is the co-author
with Lawrence M. Stratton of

The Tyranny of Good Intentions : How Prosecutors and
Bureaucrats Are Trampling the Constitution in the Name
of Justice
. Click

for Peter
Forbes Magazine interview with Roberts
about the recent epidemic of prosecutorial misconduct.