The Contagion Must Be PURGED From The System

As I stated in my previous post, central banks cannot stop free markets from working. And yet, that is exactly what they are trying to do! If the big banks and other troubled institutions would have been allowed to fail, as they were in the process of doing in September 2008, free markets would have worked it out. Yes, there would have been considerable pain, even a depression, as bad, if not worse than the one in the 1930's. Instead, our government and central bank intervened to stop this process from working itself out. By guaranteeing these failing institutions a financial 'safety net', our central bank has for the time being, prevented their collapse. However, the problems that led these failing businesses to the brink are still there. The toxic debts didn't just magically disappear, they were just transferred to a different set of books. Also, the complex 'financial instruments' (credit default swaps created from mortgage loans) that created the huge mess of toxic assets are still being used by the bailed out institutions and are creating more toxic assets! In order to 'fix' the system, the root cause of the problem must first be adressed, just like in medicine. So far, this has only happened on a superficial level. With mortgage foreclosures hitting an all time high in the first quarter of this year, and the official number of 'troubled' banks at 775 (according to the FDIC, unofically this number is much higher, try 2,000-3,000), you've really got to wonder.
OK, so our central bank is backstopping our financial system. To do this, they have to print money. a lot of money. How much is a lot? Try *trillions* with a 't'. Below is a chart showing how the supply of paper money in circulation has grown.


Notice how it ticks dramatically upward in 2008? In order to 'save' our financial system, our central bank has printed trillions of dollars of paper money that people give in exchange for goods and services, and thus in doing so, has created uncertainty throughout the world about the trustworthiness of the U.S. dollar. The central bank is playing a dangerous game right now (including other central banks around the world, i.e., the European central bank), one that could ultimately end in the destruction of our currency. Look at what is happening in Europe. They are in the midst of a full-blown currency crisis, and all their scrambling for solutions is only creating more doubt and uncertainty in the minds of the people who use the euro as currency. Do not make the mistake of thinking that America is somehow immune to these kinds of problems.

By not letting the system purge itself of the contagion, a much worse problem has been created. Europe might be able to protect itself for a while longer, but the contagion will pop up somewhere else in the world, like it did in Dubai and like it did in Greece. The world leaders cannot keep passing the buck, the buck has to stop, and it will....

Pick Your Poison...
One of two things will now happen. Either the Fed will STOP printing money to buy up toxic assets and let the failing institutions fail, which in turn will undoubtedly cause a depression, or the Fed will continue on it's present course which WILL cause our currency to collapse, leading to even worse problems... Which is it gonna be? Ben Bernanke is not immune to the basic laws of economics, his actions will eventually bite him (and America) in the ass...