The Last Word On Bernanke: FAIL - The Market Ticker
in part:
you can see the problem. "Credit Aggregates" have grown much faster than has GDP. This is the definition of Ponzi Finance - that is, debt pyramiding or "credit leverage."
This is an intentional violation of The Fed's lawful mandate to properly manage the growth of credit aggregates (that, by the way, is what they're really doing - interest rates move in relationship to liqudiity, which governs the growth or contraction of credit aggregates.) Why? Because when credit expands faster than GDP over time, as has occurred here, you have an inherently unstable system that with mathematical certainty will eventually melt down.
In order for the debt to be serviced - debt that is growing much faster than GDP - it should be obvious that ever-lower interest rates are required. When the interest rate "required" to prevent massive default rates from occurring reaches zero, as we have recently seen, The Fed is reduced to the raw printing of money. This in turn debases the currency which forces risk premia higher - and thus causes real rates to rise (despite The Fed's desire to hold them at zero.) If The Fed refuses to allow the market's demand for higher rates to occur then credit - that is, lending - from other than The Fed is simply cut off as the private credit markets will refuse to accept a below-market rate of interest. Only through the force of government can that below-market rate be obtained.
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