Thursday, October 27, 2005

 

Mistake To Protect Dollar: Bernanke

The Washington Post had this in a story on the new Fed nominee. "Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve."

"After Bernanke joined the Fed board in 2002, as the economic recovery remained sluggish and job cuts continued, he vocally supported Greenspan's strategy of lowering the benchmark rate further and holding it very low until mid-2004, when it was clear that both job growth and the economic expansion were solid."

"Bernanke also warned in a November 2002 speech that the Fed would act aggressively to prevent deflation, which had devastated the economy during the Great Depression that followed the 1929 stock market crash. Bernanke earned academic renown for his research on the Fed's role in causing the Depression."

"After the 1929 crash, the Fed mistakenly raised interest rates to protect the value of the dollar, which was then pegged to the price of gold, Bernanke wrote in an October 2000 article in Foreign Policy. The higher rates contributed to surging unemployment and severe price deflation. The Fed then made things worse by not acting to counter the credit crunch that resulted from the collapse of the banking system in the early 1930s."

"'Without these policy blunders by the Federal Reserve, there is little reason to believe that the 1929 crash would have been followed by more than a moderate dip in U.S. economic activity,' Bernanke wrote."

"In late 2000, looking ahead to the possibility of a sharp fall in then-lofty stock prices, Bernanke concluded, 'history proves..that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.'"

"And in words that might come to mind if housing tanks, he said the economic effects of falling asset prices 'depend less on the severity of the crash itself than on the response of economic policymakers, particularly central bankers.'"

Comments:
I think the Fed and the general government have a misconception that devalueing the dollar will cause inflation of wages.

Manufactureing will see it as a catalyst to compete (with Asia and India) without raising wages.

Get ready for class seperation.

The move over the last 20 years towards the Stock price of Company X being all that matters won't end.

R&D budgets are down, corporate compensation is up.

Just another 10mph towards the train wreck(ie American/Global economy-wreck).
 
OC Bear,

Hope you're wrong,and that we will see a move toward more R&D and creativity. Nice to see you posting on Ben's blog.
 
I hope I am wrong too.

Just hard to see the next boon for the tech community. Vista alone is not enough, and the economy can no longer fall back on manufactureing.


Cheap or free energy would be the ticket. We are probably 10 years away minimum , just for cheaper energy-from fuel efficiency.

Next 2 decades will be interesting. The only thing constant is change.
 
The financial house of cards that is the US seems at more risk than I can remember. When the current congress went on a spending spree without opposition, it was the final straw. Having sent all our jobs overseas, how can we defend the dollar now? If we get Volcker sized interest rates it will kill consumer spending, and that should take out China as well.

We have to start publicly challenging this 'inevitable' globalization.
 
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