The United States Federal Reserve Bank just can’t help itself. It has an apparent love for bubbles, bubbles, bubbles. As soon as one bubble shows signs of deflating the Fed gets busy and creates another.

First it was the Dot.Com bubble that was created by the then Chairman of the Fed, the one and only maestro bureaucrat, Alan “Bubbles” Greenspan of irrational exuberance fame. What a spin master. It was Mr. Greenspan who created the bubble after the Asian currency crisis of 1997 and 1998. World financial markets were flooded with liquidity as Alan and the Fed panicked and turned on the cheap credit money making machines to flank speed, damn the consequences.

The consequences made a lot of people think that they were rich. At least for a while. Who would have thought that a great deal of that excess liquidity rammed into financial markets would find its way into the stock market and fuel the Dot.Com bubble? Certainly not Alan Greenspan. What an era. Twenty something hip techies with a business plan jotted down on a napkin could raise billions over a three martini lunch.

Well, it was fun while it lasted. The downside wasn’t so pretty as investors and hard working people who had invested in their companies 401K plans suddenly found the value of their holdings not only approach zero but in some cases hit zero, all within a year or two after the Fed created bubble popped.

After the 9/11 tragedy the Fed once again panicked. This time our esteemed Bubbles guy, good old Alan, brought rates down to 1% and kept them there for a very long time. Oh boy! Another bubble is created. This time a good bit of that excess cheap money found itself into real estate markets. Up , up and away prices went. After all home prices can only go up and up and especially in California, and Florida, and Las Vegas, Nevada, then go up some more, right?

What a party, an orgy really. Homeowners across the nation, thinking they were rich, began to suck billions and billions out of their homes in the form of lines of credit and home equity loans secured by the homes that were increasing in value in the bubble real estate market at the rate of 15%, 20%, 25% and more a year. 

This  was a great game. You could use your home like an ATM machine and run out and buy a new SUV and a huge flat screen TV. And millions of Americans did just that and more.  Surprise, surprise. The combination of larger loan amounts using homes as security and a mass spending spree has caused Americans to now have less equity in their homes than ever before.   And this dubious record was achieved during a boom period mind you.   

Zoowie! Now that was a really fun party. Its creation lead directly to the sub prime mortgage bubble expansion and the derivatives boom.  Party on dude!

Now that party is over. For good. The real estate bubble deflation may yet bring down big chunks of the world financial system as the value of the collateral behind all of these financial instruments, the value of the homes, heads further South in a depressed and deflating real estate market.. 

Unfortunately, no bubble in the history of world finance has ever ended well. Most have ended with complete disasters.

Enter Ben Helicopter Bernanke as the new Fed Chairman. To be fair to Mr. Bernanke no one in the history of the Fed has stepped into the Chairman’s position to face a bigger mess than the one created by Greenspan. But our energetic Bernanke money creator is determined to prevent the unpreventable, a recession in the US economy. Being a very creative guy Bernanke has pulled out all of the stops, including giving stock brokerage firms and investment banks access to the Fed discount window.

And get this. Not only is the Fed accepting as security those sorry toxic waste sub prime mortgages and derivative instruments with no real market value as they are so illiquid they can not be evaluated except by a broken computer model make believe program, but the Fed as of last week is now accepting as collateral student loans, car loans (yes, you read that right, car loans,) and whatever else poor performing loans that the banks may have in their disastrous portfolios.

Has the Fed come to this? Just a huge dumping ground for loans worth much less than the funds that the Fed is letting the banks borrow using the junk loans as security. Is this wise policy? Or is it a policy so stupid that it risks the very survival of the Federal Reserve Bank? Hmmmmmmm. We shall soon know.

In addition, we will soon know about the consequences of the most dangerous of all the big Mama bubbles in the history of the world, the food bubble. A large amount of the excess liquidity created by helicopter Ben’s Fed is finding itself invested in commodity markets. While there are certainly other factors fueling the record advances in rice, wheat, corn, soybeans, and other commodities, both hard and soft, huge amounts of newly created money, or what passes for it today, is helping to send many commodities to record levels.

One of the other factors is the US government’s bone headed push to expand ethanol production. Since in the US ethanol is made from corn the demand for corn and the fuel of all that excess liquidity swishing around, is pushing corn prices ever higher. The weather is also kicking in as it has been too cold and wet in many corn producing areas for the farmers to get this years corn crop in the ground. Corn is also diverting acreage from other crops sending those crop prices higher as less of them are planted. By the end of this Summer old hands at the commodity game will not be able to believe their eyes when they look at corn prices. What a bubble the corn bubble will be.

Another commodity bubble has already expanded rapidly and has reached the hyperbolic curve stage. Rice is a key food commodity as billions of people around the world, especially in Asia, depend upon rice as the staple must have food in their daily diets. With rice already selling for more than five times last year’s prices billions of people are facing a severe food shortage. Food riots have already broken out in over 30 countries around the world and the worse of it is surely yet to come.

The food bubble is a bubble that the Fed must act to bring under control. When billions of people, many of them living on less than $1.00 a day, can not afford to eat rice, wheat products, and other staple commodities the stage is set for mass civil unrest and violence.

The Fed may love bubbles but I fear it doesn’t really understand the process where liquidity created to combat one set of problems can flow into other areas and create havoc with the world’s financial, real estate, and commodity markets. The food bubble is underway and is dangerous to the world’s financial and physical health.

Perhaps, Mr Bernanke, you should let one of the natural events in a capitalistic system , a recession, occur and naturally let it clean the excesses out of the system.

I have no doubts that the Bernanke food bubble is going to cause much more trouble in the US and around the world than a recession ever could. Before it is over the food bubble will make Helicopter Ben truly infamous.

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!