mdmrjsds

Is the Bernanke Doctrine a Disaster?

On Nov 15 02:03 PM bob adamson wrote:

> It is unclear from this article what Mr. Humayun thinks the US Fed
> and Treasury should have done in the weeks following September of
> 2008 when the prospect of a deep deflationary collapse was a clear
> and present danger or what he thinks should be done now. He writes

It is not what the Fed and Treasury should have done after the problems began. It is what they should have done to prevent the problems from occurring. Should not our 'experts' in the economy have seen the collapse coming months or even years in advance? I was hearing my coworkers talk about the 'housing bubble' around the water cooler in 2005 and 2006. Couldn't we have expected our 'experts' to also have known this and taken appropriate measures?

> approvingly about the benefit of the constructive destruction that
> a recession engenders and, accepting that this is a saving grace
> during mild recessions, does he really hold that the destruction
> during a deflationary depression would be limited to this constructive
> sort? Wouldn’t the sound as well as the inefficient or ineffective
> players in the economy all be caught up in the chaos of such a meltdown
> to no good end? Don’t we now have a sufficient depth of recession
> to achieve constructive destruction and wouldn’t deepening the downturn
> now simply start the destruction of factors that will be needed for
> a sound recovery?

My opinion is that no, we do not have sufficient depth of recession to start recovery. The people who have experienced sufficient pain are not those who caused the problem; those who caused the problem haven't experienced sufficient pain. In particular, we have not cleared up the debt bubble, but are reinflating it. And the same players that *caused* the debt bubble are still in place. So, to summarize, we have already experienced inequitable distribution of pain, in my opinion caused by the inaction of the Fed in the first place. And we are exaggerating that inequity with our current policies. No sound recovery can occur from here without addressing these issues, rather than papering them over. The Fed and treasury are doing the equivalent of putting a clean bandage on an infected wound. It looks OK, but it is going to cause problems later.

Is the Bernanke Doctrine a Disaster?

Excellent analysis. Thank you for the article.

On Nov 15 11:30 AM Mr. G wrote:
> The policy is designed, as I see it, as a good faith bet on stimulating
> capitalism to pull the US out of our financial crises.

I agree with you. The only caveat I would add is, 'within the limitations of their understanding'. I also think they have a bias towards the wealthy, couching the bias in language that implies it is for our own good, but a bias nevertheless. This bias is built into the system as well.

> ... If the housing
> crises finally resolves, the unemployment rate goes down, our GDP
> expands, and the current account deficit does not expand out of total
> control, FED policy may work. I keep challenging the readership to
> design a superior FED policy, but I have not seen any constructive
> comments that discusses a comprehensive policy. I would not Mr. Bernankes
> job, but so far, I have to back the play. GI

The problem is that the structure of our control system for the economy is unstable. It either is spiraling up until the falsity brings it down, or spiraling down until debt is resolved and it begins growing again. What the fed is trying to do here ( and has for several recessions) is pump enough money into the economy to keep the downward spiral from happening. But that can only work if people return to the beliefs that created the bubble in the first place (unlikely in the extreme), or a new bubble takes its place. The fundamental problem they can't escape, as the article alludes to, is that the dollar has been abused as a store of value and as a unit of account metric during the upward spiral. Thus, they are between Scylla and Charybdis. Either they allow the debt to unwind and bring the dollar back into line, or they inflate until the bubble starts over. If the US was Argentina, the second option wouldn't exist, because the currency wouldn't be the world reserve currency. For us, it does, until people gain an alternative. Thin ice.

By the way, you can see an outline of my proposed solution to this mess at
seekingalpha.com/user/...

It doesn't meet your challenge because it is not a FED policy. The FED is a boondoggle, and should be eliminated. It is part of the problem, not part of the solution. And no, it does not suggest we go back on the gold standard. That also has problems. It is suggesting that we utilize the thousand fold increase in human knowledge since the creation of the fed to design a better system.

If I *had* to keep the current system, my solution to the current problem would be to damp the downward spiral unwind, so it occurred over 3 to 5 years instead of as an instant crash. That is, now that the system is stable again, withdraw the support in stages and let the natural unwind take place slowly. That renews the system for a new spring forward. Will this happen? No chance, politically untenable. Our politicians are not statesmanlike enough to do what is best for the country rather than themselves. And most of them probably don't have the ability to understand these types of arguments. Their skills are interpersonal, getting elected, forging coalitions, etc. not technocracy.

After a sensible call for a jobs summit, "President Obama’s Herbert Hoover-like alter ego has re-emerged again to warn us again about the evils of government deficit spending." An argument why deficit terrorism isn't the answer.

On Nov 14 12:35 PM Machiavelli999 wrote:

> Sigh...it really is sad that these comments here is the reality Obama
> must contend with when making his policy decisions.
>

Sigh...another condescending pseudo intellectual deigns to grace us with his opinions. Thank you, thank you, thank you, your brilliance and self sacrifice in lowering yourself to talk to us is an inspiration we won't forget.

> Now, for some reality. Deficits in this current near depression economic
> cycle don't matter. Yes, we need more stimulus. Yes, we can afford
> it. Yes, the Chinese will keep buying our debt because they DON'T
> want their currency to go up and want it to stay low. It actually
> is kinda funny how everyone here is so worried about the dollar going
> down when most economic advisers in other countries that actually
> understand economics are worried that their currencies are rising
> too much. No, there won't be any inflation, because we have no demand.

And he's omniscient too! Oh, sir, you are too kind. I will treasure the pearls of wisdom you have dropped here forever. Oh, wait, these aren't pearls, these are drops of frozen spittle from your drooling mouth.

>
>
> Oh, and also. The economy is recovering. We will have job growth
> probably by March since job growth lags recovery by about 6 months
> and the recession ended in August. No, you won't stop making your
> criticisms after the economy recovered. Yes, you will continue to
> expect hyper-inflation even though it will never come and you'll
> never admit you are wrong.

I guess it depends on how you define recovering. If you consider a boxer getting up off the mat, punch drunk and staggering forward to take another pounding from his opponent recovery, then the economy is 'recovering'.

It's obvious you've drunk the kool-aid. Maybe you even went through the secret ceremony where you swore in blood on the 'General Theory' and took the oaths to never speak a negative word, never to think outside the box, and never to question St John Maynard. Congratulations!

Ten Reasons to Invest in Malaysia

You forgot to mention the overt racism exhibited by the Malays against the Chinese and Indian minority. Probably similar to the attitude of Indians in India to tribals and dalits. It's even enshrined in their laws. There is a catch phrase for it, buma putra?, meaning 'sons of the soil'. Sort of like the Klu Klux Klan. Incidentally, it is the Chinese and Indian minority that contribute the lion's share to wealth in Malaysia. The discrimination isn't as bad as in Indonesia though; there you get the feeling they would drag Chinese out of their houses and lynch them with the slightest excuse.

And on balance, Islam has to be considered a negative for investment purposes. It's said that they practice a more relaxed form in Malaysia. However, the stories coming out of Malaysia don't support that view (40 lashes for drinking a beer!), the mastermind of the Bali bombing was Malaysian, and Saudi Arabia is exporting mad dog Islam everywhere.

Cause for Concern: No Change from the Fed

I see from the comments that other people are just as doubtful as I am about the words of the Fed. I don't understand why people hang on these words. During the height of the housing bubble, BB said, 'We are not in a housing bubble.' This is during a bubble that he helped create (some of the credit has to go to Alan Greenspan). From that I conclude he is either incompetent or dishonest. Or both.

A guy is walking down the street when he sees a man on fire. He rushes over and says, "Sir! Sir! You're on fire!" The burning man says, "On fire? Let me check. My models don't show anyone on fire. Therefore I can't be on fire." The passerby says, "Oh, a macro economist. Never mind."

What really puzzles me, though, is why he is still in his job. He created a disaster and then ignored or didn't recognize it. At the first opportunity he should be gone. Finding a replacement who isn't just as bad could be a problem, but we should at least try.

We're behaving like a battered woman. We know that statistics say that we are likely to die at the hands of our abuser, but we don't flee because we are more comfortable with the known abuse than the unknown.

The real problem isn't the chairman of the Fed however, it is that the Fed exists. Our system was designed by financial interests in order for the rich to steal from the poor. And it works great for that. Sort of like those programmers who used to take the fractions of pennies from interest calculations and put them in their own bank accounts. Except it uses inflation to steal from everyone else and give it to the banks. And the periodic blowups are also a result of that faulty design. The system is unstable because it is a positive feedback system; and it controls the wrong variable, interest instead of money supply.

Oh well, it is kind of fun to watch a slow motion train wreck like this. Something to tell my descendants about, a once in a lifetime occurrence. :-^

Don't Expect Amylin to Eat the Obesity Market's Lunch

I think there is another perspective to weight loss that hasn't been mentioned in the comments. It is off topic from your article and for that I apologize. However, it might provide some value to another reader, so I will give a short blurb.

For many people, food is their medication of choice when they feel bad. In our society (and most societies) food is part of all major celebrations and gatherings. So we associate food with good feelings. And parents use food to calm and reward their children. So it isn't surprising that when bad emotional times hit, people reach for the fatty, sweet, and salty munchies. Unfortunately, it only serves as a temporary palliative, and doesn't relieve the underlying emotional need.

There are many effective ways of dealing with that underlying emotional need. In my opinion the best of them are outside of conventional and mainstream psychiatric intervention. One of the best I have found is called EFT. Simple, fast, easy, and effective. If you are in the category that finds yourself eating to relieve/forget emotional pain, you might want to head on over to emofree.com or do a web search for EFT. I recommend you download the free eft manual, and also the free palace of possibilities manual. After that you can read some of the archived newsletters on the site to get a feel for how actual people have used it for a wide variety of issues.

It's free, what have you got to lose? Except a few pounds. And some emotional baggage. ;-)

Cause for Concern: No Change from the Fed

They're hoping the horse will talk.

Two thieves are brought before a king. He says, "Take them out and hang them". One of them says, "Wait, your Majesty. If you give me a year I can get your horse to talk. I swear it." The king say, "OK, you have your chance."

When they are alone again, the other thief says to the thief that said he can get the horse to talk, "What do you mean, you can get the horse to talk? You don't know anything about making horses talk." The first thief says, "A lot can happen in a year. The king might die, I might die, and who knows, maybe I can make the horse talk."

Prices of investment-grade commercial real estate rose 4.4% in Q3, according to MIT CRE's transaction-based index, possibly signaling an end to the sector's year-long downward spiral. "One quarter does not a trend make and we are still well below normal trading volume," David Geltner, director of research at MIT/CRE, said. "Nevertheless, this is the strongest sign of a bottom that we've had in two years."

This is just the beginning of the inflationary spiral. That is, in constant dollars (2007 dollars), these are still dropping, but because of the Fed's loose money policy, they give the appearance of going up in price.

This is the purpose for debasing the currency, and it appears to be working, both on prices, and the perceptions of people who follow those prices.

A Market with No Memory

On Nov 03 10:16 AM Tony Petroski wrote:
<snip>
> Open the Southern border as there are many more than 19 million who
> will buy those homes. Unfortunately, for a generation, they all
> vote Democratic. Still, we can handle that and then we have a Republican
> wave in 2044!

A lot of unskilled, uneducated serfs from latin america aren't going
to rescue america by buying all the houses and paying for social
security and medicare. And they bring with them the culture that
created and sustains the disastrous societies they came from, and
supplies lots of gangbangers and teenage unwed mothers and prison
inhabitants to the US. Oh, and I forgot 2 hr gang rapes.

Now, if you talk about opening the border to educated, skilled, asian
immigrants that's a different story! Unlike the latinos, in one
generation *their* children are excelling, exceeding the native born
by large margins. i.e. raising the average

I'm not saying that latinos have less *potential* than asians, I'm
saying that latino culture is a piece of ****. And if you program a
computer (human brain) with bad software, you get bad results, no
matter how good the computer is.

We've done a massive social experiment in this country using
California. About 1 in 4 residents of California are third world
serfs from Latin America at this point. And the state definitely has
that third world flavor to it now. So no, they don't automatically
reach their potential just by crossing the border. In fact they seem
to be very slow learners, taking multiple generations to realize that
their old culture is crap, and they need to get with the new program
(again, unlike Asians).

Your view is common among the PC crowd, that America can take all and
sundry and its innate power of transformation and goodness will
automatically work. (violin and organ music in background) That is,
after all, one of the myths of our country. But like any other
system, this one has limitations too. That view is just another
variation of the kool-aid that main stream economists drink, that
perpetual growth is possible in a finite system, and that the only
possible system is one of growth. Our whole system is predicated on
growth, whatever the cost.

Don't believe me? Imagine that tomorrow we opened the borders to
anyone who wanted to come to America from anywhere in the world. We
would probably have a billion people here within 3 to 5 years. Would
the system survive such a shock. No.

Am I saying that in a hundred or hundred and fifty years, when all
these latinos finally get with the program (if they do), they won't be
American? No. But that doesn't change things now, living in a
society with a large minority of third world serfs with all the
discordance that brings.

Nearly two-thirds of U.S. money managers are bullish on stocks through the middle of next year, Barron's fall survey finds. Money managers expect three sectors to outperform: tech energy and health care. They're bearish on financials and consumer cyclicals, and netural on oil. Top stock pick: Microsoft (MSFT).

In July 2008, nearly three quarters of professional money managers were bullish on stocks through the first quarter of 2009. :-^

These guys really do live in another universe. And because they control so much money, their prophecy could be self fulfilling. Until it runs into reality. Hey, maybe it won't. These are the guys Ben and Tim are playing to. They don't understand anything about the economy, and don't want to. If Ben says it is good to go, it is good to go.

Boggles the mind. They're playing with *your* retirement money.

Why Spanish Economy Needs to Return to 2000 Wages and Prices

This is another way of reporting on the flaw in world financial systems. When money is created out of thin air because there is 'demand' for it, people treat that money as if it was real (represented value). But it doesn't. So when the house of cards collapses, someone has to pay for that assumption. That is the person left holding the bag. In the article above, the debt.

Adjusting wages and prices can't fix this, there is a real loss. It is much clearer if looked at from the perspective of money as energy / thermodynamics. It is obvious then why there has been a collapse.

In the US, Goldman-Sachs seem to understand this dynamic. So they got out of the markets they created that were ready to fail and left others holding the bag. From a certain perspective, this looks much like fraud, and from another perspective, savvy investing.

Cutting all wages and leaving prices the same is a solution that makes everyone pay for the excesses of the few. Cutting both wages and prices does nothing, and cutting prices in fact is impossible because they are determined externally, by the world market.

The central banks have decided to take the course of cutting all wages. They have decided to do it under the table by inflating all currencies in unison, so that nominal wages don't decline, but actual purchasing power does. Note that, because of the way financial systems are designed, this solution rewards the financial institutions that destroyed the system. What a world!

I haven't yet decided if the political class are complicit in this or are just ignorant.

With $770B of the $1.4T in commercial mortgages maturing in the next five years currently underwater, FDIC revises its rules (.pdf) to allow banks to keep loans on their books as 'performing' even when the underlying properties no longer cover the outlay.

I read the document and this is my emotional response.

Why does this document even exist? It seems to be a rehash of rules
that any prudent lender should be following anyway.

Why is the government doing this? These lenders should be paying a
third party to monitor their portfolio and publish ratings. Just as
they do with accounting firms.

The immediate response to that is probably, 'Look at the stock rating
agencies and how they failed'. And my response to that is, if they
don't do their job they should be liable for fraud charges and go to
prison. The firm goes under because it wasn't responsible. The
investors are responsible for their decisions and not a government
regulator. That is what got us in this mess in the first place.

This is all because of the faulty design of our financial system. We
control the dependent variable (interest rates) and let the
independent variable which should be closely controlled (money supply)
float freely. And we let the people controlling the money supply
(financial institutions) be the same people that are profiting by
money supply. What a disastrous control system design! It's why we
have blow ups in the economy every 5 years or so. Of course, there is
probaly no one at the Fed or in Congress who even understands control
theory and systems theory. :-)

So, my non emotional response after reading the document, is that I
agree with those who say this is yet another way to kick the can down
the road, hoping that the inflation currently being engineered by the
central banks will kick in in time to 'rescue' these financial
institutions. Never mind what it does to ordinary people, they don't
count, these large financial institutions must be coddled at all
costs.

This is another consequence of the way our financial system is
designed is that during periods of inflation, financial institutions
get money first when it is created out of thin air, so they use it
while it still has the old non inflated value. The rest of us pay for
that, it is like a tax on every member of society going directly to
the financial institutions. Can you tell that the financial system
was designed by the financial institutions? ;-)

The moral hazard this creates is that it rewards imprudent risk takers
at the expense of prudent investory. If these assets were liquidated
at current market rates, those who purchased them would be those who
were prudent enough to keep their assets through the meltdown. Our
current policy leaves those assets with the institutions who caused
the meltdown through their imprudent policies. Future disaster.

The Myth of Uncorrelated Return

The market is more than a nonlinear dynamic system.

Difficulty of systems can be roughly classified, from easy to hard,
as:

static linear
dynamic linear
static nonlinear
dynamic nonlinear
stochastic
time-varying
volitional

Our ability to model, even with petaflop supercomputers, is somewhere
around dynamic nonlinear and stochastic.

The stock market is actually a volitional system. And so it will
never be modeled, because any model will be wrong as soon as the next
innovation by a market participant occurs. While all the others are
closed, the volitional system is open. Even human psychology changes
over time.

All this is by way of saying that I agree with you that there can be
no hard and fast rules in the stock market.

Understanding Cap and Trade: Why It Has Been the Option of Choice

Ha!

In China, there are 300 million people living on less than $2 US per day. In India, there are 700 million people living on less than $2 US per day. Right now, not in some future scenario. And these are the people that are not controlling their fertility, having more babies than they can afford to raise properly, thus it is certain that the problem will grow into the future. Not even considering the other billion people around the world in the same situation.

Greenhouse gases might or might not be creating a problem that will occur in 50 to 100 years time. I know, I know, the models and statistics *prove* that this is happening. Sssuurrreeee they do. If you read the details, it isn't as cut and dried as it is made out to be. And we heard the same things from the economists about their models regarding risk and pricing. Every week I see journal articles that change the picture.

So their tradeoff is between starvation, social unrest and possibe rebellion now or a possible climate issue 50 to 100 years in the future. We're freezing to death, we can burn the fruit trees and maybe starve next year or freeze to death now. Hard question. Not!

We're (meaning humanity) going to burn every hydrocarbon resource available to us, until it becomes thermodynamically unfeasible.

On a positive note, I have seen reports here on SA that the worst scenario of the climate change alarmists is not possible because there aren't enough hydrocarbon resources for it to occur.

Another possible positive glimmer is that the number of people that are impacted under projections is in the hundreds of millions range. Over the course of the last century we added more than 4 billion people, and we are going to add another 3 billion by the middle of this century. So the migrations we are talking about are small potatoes in comparison.

But the bottom line is all this carbon talk is just noise. Those billions of people struggling for existence are going to use any and all means at their disposal, despite any long term consequences.

Economists to Congress: Give the Fed a break. Heavy criticism from lawmakers is putting "the independence of U.S. monetary policy ... at risk."

I was in grad school with one of the signature headliners. He's intelligent, hard working, driven, ambitious (need I say political?). And on this he is wrong.

I suppose their position corresponds to the saying that 'if you eat hot dogs, it is better not to know about how they are made'. But the Fed is the driver of the American economy. Congress outsourced its responsibility for the currency, but that doesn't absolve it of culpability. It is necessary that the inner workings be exposed, at least to Congress.

The Fed is not the private reserve of bankers and economists, it is the right of the general population to have some view of the inner workings of the Fed if they are interested.

"the independence of US monetary policy ... at risk". How can it be independent when it is controlled by financial interests? I would have much more sympathy for the 'leave the driving to us' argument if the US didn't experience a financial crash every 5 to 10 years. i.e. we're incompetent, but trust us.

So, audit the Fed!