A few days ago I caught Steve Hanke, professor of applied economics, giving a talk to the Johns Hopkins alumni club downtown. The title of the talk: "The Fed's Bubble Machine." Readers of Hanke's Forbes column know that the upshot of a Hanke analysis is often where to invest. The recommendation from the bubble talk: Buy gold. He is also invested in oil, and he thinks the Chinese currency, the renminbi, will also appreciate. The economic prognosis: "I think we're in for a very tough period of time. This is going to take several years to work itself out."

An economist of the "Austrian" school and a monetarist, Hanke blames Alan Greenspan for blowing up the money supply beyond what the economy could productively invest, thus setting the stage for the Nasdaq crash and the housing crash. And inflation.

But he doesn't define a bubble by looking at asset values. Instead, he looks at aggregate demand (as measured by nominal final sales in the GDP accounts) in the U.S. economy over time. "Nominal final sales that are significantly above the trend line is a bubble in the economy."

The Fed's response to the 9/11 attacks and the stock market meltdown of 2002 -- reducing the Fed funds rate to 1 percent -- was "the mother of all liquidity cycles," Hanke said.

One problem with the housing bubble, he said, was the disappearance of traditional banks and loan officers from credit process. With brokers selling loans directly to Wall Street, "there was really nobody monitoring the credit resk. There was nobody evaluating the credit risk in the first place."

The U.S. is in danger of entering a period of stagnation such as Japan experienced in the 1990s, he said. In Japan banks stopped issuing credit into the real economy and stocked their balance sheets with government paper instead. In the U.S., "credit channels are completely plugged up because banks aren't making loans," Hanke said.

Inflation is already high, he said. And the government has a perfect motivation to stoke inflation further -- to inflate away the trillions in debt that it owes. "The certainly don't want to increase taxes to pay it off."

Hanke is amused that credit reform plans would give much more power to the Federal Reserve. "They were responsible for regulating banks" during the mortgage bubble, he said. "They couldn't even do that."