For the Love of writing...
Saturday, November 13, 2010
  Flawed 'Models of the World'

Fed Chairman Ben Bernanke comes from the elite Princeton University, a noted economist and a scholar of the Great Depression. His forte is the study of the Great Depression and the reasons behind it. And all of his study and research reveals that the Fed didn’t ease liquidity back then in order to simulate the economy. So he has this theory that inorder to avoid anything like the Great Depression the Fed has to come in and print money with the intention of withdrawing liquidity at a later date when things stabilize. So our helicopter Ben, with his present understanding of how the world works thinks he knows the solutions to the current problem.

Let’s go back a couple of decades when the mystic Alan Greenspan too created a model of the world stating that bubbles in an economy need not be punctured by any action of the Fed, and that the markets take care of themselves. He let the markets be and we had what we now call the Great Crash of 2008. In a testimony to the US Congress a few months ago Greenspan acknowledged that the world did function slightly differently from what he had assumed and it is that ‘slight difference’ that put the world on the brink of the Great Depression 2.

What is the probability that, Ben too, a couple of years later, acknowledge before the Congress, that the world did indeed function slightly differently from his assumed model and only printing money can’t be the complete solution? Very high? Why?

Because there are millions of parameters in the equation of the perfect functioning of the world and you cannot possibly take care of each one of them. This is better understood when stated as the butterfly effect. However, there are several broad contours, that should be taken care of and then the other smaller things fall in place. So what are those contours?

Debt. Risk. Fair trade practices.

The US has to acknowledge the problem of debt of the nation to other nations and of the individual citizens to lending corporations. You cannot solve debt by debt. The world forced austerity measures on the Greeks when it is the US that should be adopting those measures. Forget Austerity. The US can atleast stop unnecessary expenses. The US soldiers in Afghanistan are burning such a deep hole in the budget and whose house are they trying to save from fire when their own homes are literally on the verge of fire.

Risk taking is inherent in human behavior, otherwise the human race would not have progressed as much as it has today. However, an important attribute of risk taking is that those whose bets go wrong should be allowed to fail and quit. Here we have Ben throwing good money after bad money by bailing out the large banks who engage in nothing more than speculative activity. He would rather throw that money to the smaller guys which help in the churning of the wheels of the economy by making loans to the small and medium sized companies. As of 5th Nov 2010, 146 small and medium sized banks have failed and 305 have failed since the crisis began in 2008. Here is a detailed list of the name of the bank along with its last date.

When I say fair trade practice I mean more specifically of the yuan and the Chinese policy to peg it against the dollar. This issue being so complicated calls a complete article for itself and I shall have it ready in a few days.
All said, the risks are too great for Ben to bet on his own model of the world and ignoring popular economics.

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