Fred Sheehan discusses whether the Fed has passed the point of no return with respect to credit expansion:
The central teachings of Austrian economics are commonly understood. It is the hieroglyphics called “economics” at colleges today that is rubbish. It will join the ash heap of history.
The Austrians taught – and do teach, on isolated campuses – that an accumulation of debt in excess of what can be paid back has consequences, either in default or inflation. To someone dropping in from 1910, that might seem so fundamental, it isn’t even worth mentioning. Oh, what that out-of-date relic has missed.
Second, Ludwig von Mises was right: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” (Chapter XX: Interest, Credit Expansion, The Trade Cycle, § 8 , The Monetary or Circulation Theory of the Trade Cycle)
We may not have passed that point of no return in 2008, even though our recently retired Fed chairman, Simple Ben Bernanke, saved his skin by making that claim over and over. If not for his nationalizing America, he continually reminded us, “the world would have ended.” I think we have passed that point today. The central bank balance sheets absorbed enough bad paper (bonds, mortgages, CDOs, Maiden Lane) to assert the solvency of the world’s banking system by 2009. Having done nothing to restore the foundations of banking over the past five years, the central banks are in no position to absorb the “final and total catastrophe.” Their credit-ability is on borrowed time.