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The Fed's Low Interest Rates and Asset Inflation Risk

In "The Fed's Asset-Inflation Machine"(op-ed, Feb. 7), George Melloan has articulated the shadowy truth about our two latest Fed chairmen: Alan Greenspan was smart but not strong; Ben Bernanke is neither particularly smart nor strong.

Putting aside Keynesian fantasies, the only escape from our economic doldrums would be a Volcker/Reagan-style policy of interest rates rising until the financial bubbles burst, interest rates fell and growth resumed. That policy could be political suicide because of the temporary hardships it causes; the Reagan recovery kicked in barely in time for him to win re-election in 1984.

After the 2014 elections, when he's less constrained by his base, President Obama could install a competent Fed chairman and restore economic growth through tight money and low tax rates, with or without Chinese-style "state capitalism."

Michael E.C. Moss

The Woodlands, Texas

The next big bubble is growing right before our unseeing eyes: the bubble in Treasury debt. Unlike homes or farms, this "asset" can be produced from thin air by our which auctions it and the Federal Reserve which buys it. The Fed now holds $1.7 trillion in Treasury debt, comprising more than half its assets.

Holders of the other $9.9 trillion in Treasurys have been trained since infancy to consider this paper risk-free and super safe. They do not consider that settlement of these debts can be accomplished in only two ways: future taxes or currency devaluation. As Mr. Melloan alludes, the devaluation route has already been selected, though none dare speak its name.

What event might burst the Treasury bubble? A selloff by a major holder, a sudden spike in inflation, another federal fiscal crisis or an auction failure could trigger a Treasurys panic. The problem is that there's no place to which $9.9 trillion can quickly move. If the demand slackens, holders (including the Fed) will largely be stuck with the declining paper. The Fed could easily lose more than the $100 billion Mr. Melloan cites.

Steven Teeter

Campbell, Calif.

One cannot substitute money for unavailable goods. It is dearness only that gives everything its value. Prices are not determined by utility but by scarcity.

Governments have always believed that they could fix prices ad libitum without regard to the real determining factors. There are only three possible prices for anything: the market price, too high or too low. The market price brings supply and demand into balance.

The law of supply and demand does not care what we think. If the price of something is too low and the government thinks it is too high, everything that the government does will exacerbate the problem. The only thing that anybody can do to bring down the price of anything is increase its supply.

What the government is doing to lower the price of medical care is in fact raising its price. It is throwing money at the demand side and restricting the supply side by putting price controls on medical-care professionals. What it is doing to raise the price of houses will succeed in spades because the law of supply and demand is telling us that the price of houses is already too high.

Bill Burbage

Cayce, S.C.

Mr. Bernanke knows exactly what he is doing. Now that both the Great Recession has been proclaimed over and the nascent recovery is progressing, Mr. Bernanke is assuring, via an extended and aggressive low interest-rate policy, that there will be no following occurrence of either deflation or depression. What then explains such a lengthy accommodative strategy with so few positive, tangible results to show?

Mr. Bernanke's dilemma was either to vastly expand the money supply with ample amounts of credit or, if not, then to risk the specter of a potentially catastrophic Great Depression II.

Dohn Addleman

Medford, Ore.

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