Grading the Current Congress

After TARP's first attempt to pass through Congress last year, the BBFiles officially named the Congressional Session the worst Congress since Reconstruction. However, two weeks later they reconciled themselves by passing TARP attempt 2.

However there is now a chance that the current Congress could go down as the worst Congress since Reconstruction. Ron Paul (R) Texas, has actually received 300 approvals to audit the Fed. Paul proposes giving Congress the power to "audit" the Fed. I guess his reasoning goes like this: the Federal Reserve caused the current recession, we should make sure this never happens again so lets improve upon the Fed by incorporating the Awesome Congress into the Fed's primary duty of monetary policy. ..

Poor Bernanke

Here is what Bernanke has to deal with.

The BBFiles is by nature anti-stupid people... making it easy to pick on this poorly argued article on MSNMoney. When the author says that Bernanke gave the Japanese bad advice, we wonder what Japan he is talking about. Japan has had a stagnant economy since the early 90's. They have gone MASSIVELY into debt (their Debt to GDP ratio is several times higher than America's), and have printed trillions of Yen to improve economic conditions. Yet, even with this they have suffered from negative inflation for 20 years! Bernanke realizes that for the common person deflation is as bad as (or worse than) inflation. Bernanke does not want the USA to suffer from inflation or deflation and looks for a good "channel" (about 3-4%) for price changes to sit. We currently have .01% inflation, which is causing 10% unemployment. Only someone that would gain from inflation would want us to change our policy right now... maybe a gold bug. The author's good friends own gold companies, so of course this author is bias against Bernanke.

Today's News

The new reports dorve the markets today. The dollar increased over 1%, gold plummeted 4% and crude oil dropped 4% as well. All of this occurred as the most recent unemployment numbers came out with unexpected results. Jobless claims were expected to increase by about 150,000 jobs. Instead they increased by only 11,000, an amazing statistic. One year ago we were losing jobs 700,000 jobs a month. New jobs at retail stores gearing up for Christmas sales probably drove this statistic.

In the BBFiles analysis, today's numbers support the theory that the American dollar is no where close to a default and, in fact, is probably approaching a bottom. Lets examine the chain of events that has driven the value of the dollar. Before the recession began the dollar floated between 70 and 75. This is low, but not dangerous and reflected America's large fiscal and trade deficits. When the recession struck, there was a general "flight to safety" (in which investors seek the safest investments) and a lot of investors rose the value of the dollar to about 86 by buying American dollars. Then, over the last several months, investors have gained confidence and slowed their purchases of bonds, thus driving the dollar back down to pre-recession levels. But it also reflects the amount of money that has bee created to fight the recession. Therefore, the value of the dollar should be

DollarValue=(Pre-recession Value)-(Value Lost Due to Increased Money Supply)

When numbers like today are reported, investors realize that the Federal Reserve will begin reducing the money supply, so the (Value Lost Due to Increased Money Supply) will decline, thus raising the value of the dollar. Assuming the dollar is close to a bottom, the Fed can really put the dollar wherever it wants by adjusting how much money goes into the system.

Bernanke's Testimony

Bernanke began defending his tenure as Chairman of the Federal Reserve today. As usual he made the predatory Senators look stupid. Case in point: Senator Bunning (R-KY) argued that Bernanke was not qualified to oversee the financial crisis... but he couldn't even make his argument without reading verbatim from his notes, and he made several errors in his speech! Should we really listen to someone who can't even read properly?

Then Senatory Shelby asked Bernanke to explain how the Regional Presidents were chosen... after Bernanke's explanation Shelby replied "Well we understand that Chairman, but that's not the issue here..." Well then why did you ask him to answer the question, Shelby? Our Congressmen need to realize that they are speaking to a National Icon and should treat him with respect!!

Economic Data

So today is the dreaded "Cyber Monday." Apparently online retailers realize that employees will take advantage of on-the clock work hours on Monday to do some of their Christmas shopping. This is apparently a huge event... I would say that American's probably spend $32 trillion per hour on Cyber Monday.

But one might ask where the BBFiles got their data from because $32 trillion is almost 3 years of our annual income. Well the BBFiles just did what some economists do which is to make it up! We have no evidence for this dollar amount, but on the front page of MSN today there was an article bragging about how online sales have this Cyber Monday have increased by 20% over last year. What? First of all the day is not even over. The article has been posted since 3:30 PM MST. Also, large retail numbers like this are usually posted once a quarter then adjusted two quarters later. This is because it is extremely difficult to measure numbers like this, so we wonder how the author of the mentioned article could possible even have a rounded out guess, especially one as precise as 20%, before Cyber Monday is even over. People like this give economics a bad name.

A New Era?

One of the differences between America and the rest of the world is our financial system. Whenever a large firm, small or large country or any individual wants a loan, an American financial institution is usually in on the deal in some way or another. These same institutions have fostered unprecedented international growth that has resulted in hundreds of million of people finding their way out of poverty.

Yet a few years of uncomfortable economic conditions automatically gets elected officials (supported by their constiutuents) into a frenzy. They begin calling for drastic changes based upon what has happened over the last few years, instead of what has worked over the last fifty to sixty years! Obama, Frank and especially Dodd need to back off their reform proposals.

The Fed's Independance

Fourteen months ago the financial crisis paralyzed more than just the economy: it also paralyzed Congress. In a heroic act of stupidity, Congressmen embarked upon the usual he-said, she-said blame game refusing to take any action to help the economy. A single entity stepped into the vacuum that Congress left in its wake: the Federal Reserve. Congress did not know how to do with the crisis and almost made things worse by not passing the TARP legislation. The Federal Reserve acted efficiently and aggressively to right the tipping ship and has reaped solid results so far.

What kind of response do they get from the very Congressmen that were scared into a cave last September? Dodd, Frank and Obama have each proposed legislation that would strip the Federal Reserve of some of their power! Easily worse than the others is Dodds plan which seems to implicitly blame the entire crisis on the Federal Reserve. Dodd proposes taking away all of Fed's regulatory power, handing these powers over to an organization that is brand new and will look something like the SEC or FDIC. These organizations do not have the culture or history needed to properly regulate the financial system. In reality, all that needs to take place is an updating of the Fed's duties.

Free Markets: A Lesson From Dubai

As many of you have already heard, the Dubai government is in a tough financial situation. Dubai has spent a decade and hundreds of billions of dollars trying to become the financial hub of the middle east (like New York is the financial hub of America and London is of Europe). To do this, Dubai has gone massively into debt to entities like its neighbor Abu Dhabi (Abu Dhabi has one of the largest oil reserves in the world), banks, investment firms and bond dealers. Dubai has very little oil, but has used the sale of the oil it has and the debt the government has gone into to build such awesome investments like artificial islands shaped like pretty palm trees, hundreds of skyscrapers, thousands of luxury condos and five lane highways with no speed limits.

Now, the country is very close to defaulting on all of its loans. The country is in debt about $100 billion (not a lot for America, but a staggering amount for state about the size of Colorado). Unfortunetly, almost all of the development in the last ten years has been directed by the government. Because the government did not wait for demand to determine what and how to build things, they have artificial islands that no one goes to, five lane highways that have no cars on them, skyscrapers with 50% vacancy rates and an enormous housing bubble. Even if Dubai does not default on their loans (Abu Dhabi will probably figure out a way to bail them out in one way or another), who cares? Dubai is still stuck with expensive investments that are going no where. Governments can't create a financial sector, there are complex processes that go on in New York that have taken a hundred of years to build!

Countries need to learn that you can't jump to the result you want; at best governments can set up streamlining entities that assist private companies in their quest for competitiveness. When a company fails, another company jumps in and takes over where the other company left off, but fix the mistakes the previous company made! Let demand and price dictate investment, not a round table committee that has government pockets.

A Response to Krugman

While Krugman has won the Nobel Prize, James Hamilton is a personal friend of Ben Bernanke... who do you think should be listened to? Read this post and compare it to Krugman's posts and you can decide!

http://www.econbrowser.com/archives/2009/11/yes_the_future.html

BBFiles Gaining Popularity

Apparently the BBFiles is becoming more and more influential. What else could explain the recent increase in US debt debate over the last week or so? The BBFiles has been saying that there is no threat of a total default by the USA for months. Paul Krugman must have tuned into the BBFiles, here is what he has to say:

http://krugman.blogs.nytimes.com/

The Housing Slump

As one of Bernanke's good friends points out today, the housing slump was not as geographically symmetrical as people probably think. James Hamilton's blog reads here: http://www.econbrowser.com/archives/2009/11/factors_in_loca.html

Bernanke's Play

Chairman Bernanke has been criticized for using policies that are sure to induce high inflation rates. However, as this article alludes to, Bernanke has been using monetary policy to right a tipping ship and has done so skillfully. As time progresses the genius of Bernanke reveals itself more and more.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ag8UzTSPtALE&pos=4

The Future of America's Banks

In 1998 the largest American bank was only the 25th largest bank in the world. In 1999, the Glass-Steagel Act was abolished which effectively reduced the legal constraints that had been implemented against large banks during the Great Depression. Since GS was abolished, commercial and investment banks have been allowed to merge together into super-banks. Bear Stearns, Goldman Sachs, Morgan Stanley, and Washington Mutual are good examples of this class of super-banks. These super-banks have been (probably rightfully so) for the current financial crisis. When these banks failed, they were classified as "Too Big To Fail" (TBTF) and were not allowed to file for bankruptcy. In reality, their size was not as important as how interconnected they were to other institutions. If one institution failed, the whole house could come barreling down. Lehman Brothers is the classic example of why a TBTF insititution should not be allowed to fail.

The TBTF policy has been criticized since the recession began. Therefore, policymakers have begun making policy change recommendations. These have included going back to the Glass-Steagel days, breaking up all banks that are 'large', or doing nothing at all. The last several weeks have revealed which direction policymakers are probably heading. First, there will probably be constraints against large banks. Regulators could charge very high insurance fees for the largest banks that could make it so no bank could become large. Or, banks that exceed a certain size may undergo excessive amounts of regulation and monitoring. These calls against large banks have been made primarily in Congress and are gaining popularity. There is a chance that America will not have a large bank for an entire generation.

There is another train of thought that is a little more market friendly. Thomas Hoenig of the KC Federal Reserve recommends that a regulator be given the authority to step in and takeover large failing financial institutions. The instiution's management would be fired and the stakeholders wiped out, but the rest of the institution would be held in tact. This would give the management team the incentive to take limited risk, but also the incentive to maximize profit and revenue. The only constraint would be the insurance the large firms would have to pay for siezures, and this would probably welcomed by the financial system because each firm would have more confidence in the other firms they are interacting with! Hoenigs plan most closely resembles Barney Frank's proposed bill.

Economics and Politics

There are three important bills currently going through Congress that have the potential to change America's economic landscape. The first and most dangerous bill is Ron Paul's attempt to insert Congress into monetary decisions! In its current state the Federal Reserve can change the money supply at a moments notice with no political intervention. Paul proposes creating a new Congressional committee that will have the ability to examine all monetary decisions, effectively placing Congress on the FOMC's doorstep. This is a very dangerous idea. Monetary theory is very complex and Congressmen do not have the expertise to improve upon the current process. For example, in front of the Esteemed Chairman himself Paul said that the definition of inflation was an increase in the money supply!! Furthermore, Congressmen have different incentives than members of the Federal Reserve. If you know you have to be re-elected in two years or six years you will change the money supply with every ebb and flow of the market! Paul is being moved to the top of the Bernanke Arch-Nemesis List for this stupid legislation.

The next two bills are related. Barney Frank presented a bill to the House and Chris Dodd a bill to the Senate that will change how the Federal Reserve supervises banks. These are competing bills and the final legislation will be somewhere in between each of them. The BBFiles supports the Frank bill. Both bills strips the Federal Reserve of its Consumer Protection agency and creates a new CPA that will probably be led by Elizabeth Warren. Next, and more importantly, the Frank bill gives the Federal Reserve more tools to supervise the financial system. It does this by allowing the Federal Reserve Board of Governors to take-over ANY systemically important institution EVEN IF IT IS NOT NECESSARILY A BANK! (Think AIG and FannieMae). This is obviously controversial and there should be efficient constraints that restrict the Fed from becoming uber-aggressive. But, the current system is wholly inefficient and should be changed ASAP. The takeover process would be almost identical to what the FDIC does when it takes over a bank! This process will be funded by large financial institutions that will have to pay a fee as they get larger. There are many repercussions that could occur from this bill but they will not be discussed here.

The Dodd plan is quite drastic. It strips the Federal Reserve of all bank supervision authority and creates a new agency that will be in charge of regulating all financial institutions. The BBFiles is not inheritently against this, but there are several reasons we believe this is not a good plan. First, it assumes that the new agency will be able to supervise the financial system. Agencies such as the SEC, FDIC, CFTC and FHA were not more or less effective than the Federal Reserve. Next, it is important to understand that there are several things that make the Federal Reserve as efficient as it is, and the biggest factor is the relationship it has maintained with every important financial system in the world! Bernanke can go to any European regulator, Chinese bank, South American bank or Wall St CEO and gain an audience that will seriously consider what he has to say. There is no way an agency that is politically created and ran could do this! The Federal Reserve agrees that regulation reform is needed, but it has said this for years. Dodd's plan is too drastic and should be withdrawn from the Senate.

The Apex of the Vortex

The BBFiles often brags about how awesome economics is. We believe that economics is the apex of the vortex of intellectual thought because it incorporates everything from math to business to science, politics, marketing, sociology, philosophy, history, accounting, relationships, experimentation, statistics, weather, development, investment, vacation, religion and many other things that are important and interesting. To be an economist is to be a true Renaissance man! Here is another example of how useful economics can be outside of the money world:

http://www.bloomberg.com/apps/news?pid=20601079&sid=a7jg9R368WdQ

Trade Gap Numbers

The latest trade gaps numbers were released today. The trade gap widened by $39 billion. This was more than expected but probably reflected rising crude oil prices and imported vehicles from Cash for Clunkers. Because we are importing $39 billion more, money is switched from US dollars into the foriegn currency (kinda) and the dollar should depreciate some. The current drop in the dollar probably does not have much to do with the trade gap though. When compared to the carry trade, which is counted in hundreds of billions, the current trade gap numbers seem trivial! Keep in mind that the dollar is still higher than the when the recession began.

Money Flows

In order, the three largest purchasers of US debt (US Tbonds) are Japan, China, and American financial institutions. Each purchaser has a different reason for buying the bonds, but the fact remains that there is high demand for American debt and therefore the interest rates will stay low for some time.

However, as Kenneth Rogoff (former head of the IMF and current Harvard professor) points out, America's ability to show these entities that it will be willing to pay back the debt is very important. As the BBFiles has pointed out several times, America can afford to be many times more in debt than it is right now. The question is how efficient is the new debt that we are accruing?

When Bush went into debt $500 Billion a year unemployment plummeted to 4.5%! Investment and growth was high and the interest rates we paid on these loans were very low. Obama has a different problem though. With Bush's tax cuts about to expire in the middle of next year, Obama almost necessarily has to let them expire just to show the rest of the world that we are willing (they know we are able) to pay back the debt with out having the value of their investment plummet!!

So, while Conservatives are criticizing Obama next year for increasing government control, loyal BBFile readers will know that it has more to do with America's debt confidence than it does politics!

On the Minimum Wage

One of the fantastic jobs that economists are blessed with is analyzing the unintended consequences that could occur if a certain policy is implemented. There are many consequences of implementing a minimum wage. This blog discusses one consequence that doesn't seem to be discussed very often; probably because it is not politically motivated.

While most economists focus on the increase in unemployment when minimum wages increase, this blog focuses on a potential positive consequence of minimum wages. Assume that you are a company that would like to hire an unskilled worker for $5 per hour. Unfortunetly, the minimum wage is $8 per hour. According to many Libertarian economists, the employer is losing $3 per hour, unemployment rises, and the employer can transfer some of the costs of hiring the employee onto the employee (uniform costs, working holidays, using the increased job competitiveness to make him work harder). However, the BBFiles points out that reality is quite different than theories and charts. In reality, no employer would pay a $5/hour employee $8/hour. The employer will have the natural incentive of training the employee to provide $8/hour of service!

Therefore, minimum wages could provide companies an incentive to train employees, which gives the untrained worker the ability to be worth more as an employee than if there was no unemployment!!!

Jerks!

As highlighted in this article, the Chinese government is expressing its concern that some countries might exit their stimulus programs sooner rather than later. As most loyal BBFiles readers can probably surmise, this posturing by Chinese officials is based less off of economic theory and based more off of self preservation.



There are two primary ways to stimulate an economy: fiscal and monetary. The Chinese will say anything and everything they can to keep other governments from stimulating the economy via monetary policies and the will say anything and everything to keep them stimulating the economy via fiscal stimulus.



This is a blatant self preservation tactic. The Chinese own a lot of our bonds, which depreciate in value when the economy is stimulated via monetary policies. Conversly, if the economy is stimulated through fiscal deficit spending than the bonds may appreciate in value. Moreover, the Chinese know that stimulus funds will reach Chinese companies through purchases of manufactured goods coming from China. Therefore, there are three reasons for why the Chinese will automatically say the USA should not reduce fiscal stimulus and none of them should be heeded by any reasonable economist!

The Fed's Independance

According to Bloomberg, the Federal Reserve is in a struggle with Congress to maintain its independence. Kansas City Federal Reserve President Thomas Hoenig is releasing a book that outlines the Fed's politcal fight to maintain autonomy. Hoenig is reacting to proposed legislation by two members of Congress, Barney Frank (D) and Chris Dodd (D), that would force every Regional Bank President to be appointed by Congress. Currently, the entire Board of Governors is appointed or approved by Congress and the Presidents are picked internally by Fed officials. This is in essence a checks and balances system so that Congress cannot overpower the monetary system while at the same they have oversight of the Fed. According to Hoenig, and the BBFiles wholeheartedly agrees, if Congress gains too much influence in the Federal Reserve monetary policy may begin to follow the political whims of whatever economic policies would help Congressmen be re-elected. This would retard growth and ensure a very inefficient and volatile monetary policy. The BBFiles would reccommend to Frank and Dodd to drop this proposed legislation immediately.

Krugman's Blog

Today, the always partisan Paul Krugman discussed the current attitudes of Federal Reserve Regional Presidents. He disagrees with them that interest rates should be hiked sooner rather than later. In response to Plosser's argument of early rate hikes, he says the following:

I don’t know what analysis lies behind these itchy trigger fingers. But it probably isn’t about analysis, anyway — it’s about mentality, the sense that central banks are supposed to act tough, not provide easy credit.

So the person who blames almost the entire recession of Greenspan's policy of easy credit is all of a sudden arguing that easy credit should be available for the next several years? It is interesting to note that Krugman's economic attitude changed on January 20, 2009. Why is that day significant again?

BBFiles to Tarullo: Quit Talking!

As most of our most dedicated BBFile subscribers noticed today, there have been several headlines made concerning Feinberg's limitations on banker pay. Even more headlines were made today when Bernanke announced that the Fed would look into banker compensation. Readers, do not take these statements at face-value. The Federal Reserve's independence from Washington is of utmost importance. Bernanke knows this and wisely chooses his battles, knowing that Congress needs to stay away from monetary decisions. Unfortunetly there is a rabble-rouser in the midst. Daniel Tarullo has been fueling the fire in support of Feinberg's plan. Actually, out of the six articles The BBFiles has found concerning this topic, the ONLY Board of Governor to talk about the pay restrictions has been Tarullo! What is disconcerting about this is that Tarullo is also the only Board of Governor appointed by President Obama! Clearly Tarullo is jeopardizing the Fed's independance and Obama is undoubetedly influencing this behavior.

If Tarullo doesn't quit talking, The BBFiles will have no choice but to add him to the dreaded Bernanke Arch-Nemesis List!

three journals energy

http://profesores.utdt.edu/~economia/summer/Papers%20XI%20workshop/16%20diciembre/Carrera.pdf

http://www.cii.org/UserFiles/file/resource%20center/investment%20issues/commodities%20brief%209-11-08%20updated.pdf

http://www.vermontfuel.com/Vermont_Fuel_Dealers_Association/News_files/Index%20Speculators%20Have%20Been%20a%20Major%20Cause%20of%20the%20Recent%20Drop%20in%20Oil%20Prices%20%20.pdf

An Economics Riddle: Dutch Disease

Here is an economics forecasting riddle:

In 2007 Ghana discovered massive amounts of crude oil about 20 miles off of the coast. It is estimated that it will bring over $1 Billion of revenue to the Ghana government. The crude oil will be primarily exported. Also, Ghana will own the entire field, except for a 25% stake sold to ExxonMobil so that the mining process goes efficiently and smoothly.

Here is the question: First, if Ghana EXPORTS a lot of crude oil what will happen to Ghana's currency? Will it increase or decrease?

Second, what ramifications will the change in Ghana's currency have on the rest of Ghana's economy?

More specifically, think about the different sectors of an economy (Government expenditure, investment, consumption, and export/import). Which sectors are affected more than the others? Could the rise in Ghana's currency have dangerous implications for any one sector in general?

For more information, research Dutch Disease... which is neither Dutch nor a disease!

What Can the Stock Market Tell Us?

Over the last year the stock market has been on a wild roller coaster ride. The question is, Why is this so important?

Here is a good analogy for what stocks do: Pretend that the USA's economy is a car; the current recession is a very bumpy road (probably designed by Commerce City road developers); and the stock market represents the vehicle's shocks.

When the economy is good, there is almost no tension on the shocks and the passengers in the USA economy are driving smoothly and comfortably. When the vehicle exits the nice road and enters Commerce City, the shocks are knocked every which way and pounded into a pulp. This puts a lot of tension on the shocks and the passengers are whipped around and every once in a while thrown out of the car.

The stress put on the shocks of the car tells you how comfortable a ride the passengers in the vehicle will have. Similarly, when there is a lot of stress in the stock market, the USA's economy is put under a lot of stress BECAUSE STOCKS ARE USED AS COLLATERAL FOR INVESTMENT!!

When a corporation wants to invest, it needs to raise funds. On average, corporations only raise funds through selling shares of stock for 3% of their investments. Selling bonds is where the real money is made! Therefore, corporations tell potential bondholders that if anything ever happens to the company and they have to go bankrupt, the bondholders can take all of the stock that the corporation has. This means that when stock prices are high there is more collateral and more investment. When stocks are not worth much, nobody can invest and the economy does not grow.

Has Bernanke Printed A Lot of Money?

When politicians and political pundits want to sound smart and make headlines, they begin oversimplifying things that they don't understand. Accordingly, the last several months has seen an increase in the accusation that the Fed has "printed money."

As stated above, though, this is way oversimplified. Normally when the Fed wants to print money, it gives cash to banks in exchange for an asset like a T-Bond or fixed income security. Then the bank can spend that money however it wants by giving consumers, homeowners, and business owners loans.

Chairman Bernanke made a decision though. He analyzed the crisis and found that banks needed liquidity (cash), but consumers, homeowners and business owners should not be the end-recipient of this money because inflation could get out of hand in the long run. He therefore went to Congress and asked for permission to pay interest on the extra money banks keep at the Federal Reserve. This way, the banks would make as much money by doing nothing than they would by giving loans to the public (this is because the interest rate paid by the Fed is almost equal to the interest they would recieve in profit from a loan).

This gives the Fed a great tool to fight inflation. The Fed hasn't printed money because almost all of the cash that has been given to banks is sitting UNUSED in the bank's account at the Federal Reserve! At the same time, banks meet liquidity standards by having the money held with out issuing a loan.

Bernanke: Better Than Advertised Part II

The Federal Reserve has to maintain stable growth while stifling harmful inflation. This is a balancing act because to stimulate growth you sometimes have to expand the monetary base which stokes the flames of inflation.

Here is an extremely important analysis by Econometrician James Hamilton. It analyzes the Fed's Balance Sheet and the options it has to "un-print money."

http://www.econbrowser.com/archives/2009/09/federal_reserve_2.html

Bernanke: Better Than Advertised!

Bernanke, probably the most underpaid individual in America, really is as good as The BBFiles made him out to be. Some just might say miraculously good...


http://www.bloomberg.com/apps/news?pid=20601087&sid=ayo1J7aDXneM

How Did Economists Miss This Downturn?

Last week Paul Krugman initiated a sequence of discussions centered around how and why the current recession blind sided economists as badly as it did. Other famous economists have jumped into the conversation, including Mark Thoma, James Delong and James Hamilton. It appears as though most of these economists "blame the other guy." For example, Paul Krugman, who is a Neo-Keynsian, basically argues that he was SO busy correcting Neo-Classical's mistakes that he totally missed the recession's warning signs. Liberals seem to blame Greenspan and Conservatives seem to blame... well Greenspan also.

The BBFiles, your trusty guide to unbiased economic analysis, disagrees with most of these economists. The study of business can be split into several fields: economics, finance, management, marketing, entrepeneurship. It appears as though economists have been assigned most of the blame for this recession. In reality, though, The BBFiles argues that the products that got us into the recession, the way they were traded, and and the people that were assigned to manage them, lie far outside of the field of economics. Financial wizards created MBS's, marketers sold them to as many people as possible, management teams gave employees incentive to stimulate short term profits, not long term growth. Lobbyists influenced Congressmen, Congressmen did what Congressmen do: spend a lot of money.

All of these things, which the field of economics does not specialize in, created a perfect storm of instability that led to this recession. It was economists of several different belief systems that stepped in via the Federal Reserve and the Treasury Department and saved financial traders, management teams and Congressmen from the debacle that they created. While economists like Krugman believe that he is right and everyone that disagrees with him wrong, the BBFiles appreciates the diverse ideas and the new theories that come from debating controversial issues.

America's Lost Wealth

According to a press release from the Federal Reserve on Tuesday, American households gained about $2 trillion in the 2nd quarter- the first time it has increased since 2007. The Flow of Funds report also showed that the current net worth of American households is $53 trillion. The highest it reached was $65 trillion in 2007. In the 4th quarter of 2008 alone, the total dropped a record $11 trillion.

The Fed's Balance Sheet

The Fed's balance sheet determines how much money is in circulation. When they want to put more money into the system ("print money") they BUY assets (bonds) from banks. Since they use cash to pay for the bonds, there is now more cash in the system.

When the economy goes into a recession, the Federal Reserve can stimulate the economy by injecting more money into the system. This blog entry examines how the Federal Reserve's balance sheet has changed over the last year. Before the recession began, the Fed's balance sheet had $800 billion on it. When looking at the balance sheet, one would see that $400 billion of the total was compromised of a mixture of long term T-Bonds and other safe bond investments. The other $400 billion was compromised of super-safe T-Bonds that expired every 1 to 6 months. For decades the Federal Reserve simply repurchased these short term bonds when they expired.

When the recession began, the Federal Reserve, in as safe a way as possible, began purchasing bonds directly from banks and other lending institutions. This injected cash into the system, but did not grow the Fed's balance sheet because the Fed offset the purchases of bank bonds by not repurchasing the "super-safe" short term T-Bonds. Thus, the balance sheet remained at $800 billion but added a little more liquidity and took on a little more risk.

When Lehman Brothers collapsed, and the LIBOR-OIS spread grew exponentially, the Federal Reserve decided to expand the balance sheet. This proved to be a difficult task. The Fed had a balancing act to perform: they had to inject enough cash into the system to keep the financial system afloat; but they also had to make sure the bonds they purchased along the way could be sold off easily when the recession ended (if the balance sheet remains at $2 trillion there is sure to be inflation). Chairman Bernanke was up to the task. Bernanke and the Federal Reserve found the safest bonds on the market, then from these selected bonds, they picked the ones that would would sell the fastest once they needed to be sold.

Therefore, the Fed's balance sheet, though huge today at $2 trillion dollars!, will be "drawn down" easily. Drawing the balance sheet down refers to exiting the Fed's added liquidity. Inflation will not occur from the Fed's large balance sheet because the bonds will be sold promptly by the Federal Reserve at the opportune time.

This quick, decisive action will certainly go down positively on Bernanke's resume.

Evidence That the Stimulus Didn't Work

Three respected economists wrote an editorial in the Wall Street Journal today arguing that the stimulus failed. While The BBFiles doesn't like using strong words like "fail" (we don't have to make headlines), the article is very interesting and should be read by Congressmen in Washington.

The BBFiles does not believe that President Obama's highest advisers (Larry Summers, Paul Volker, Christina Romer and Timothy Geithner) ever believed too strongly in the stimulus plan. Congressmen, who are mostly responsible for the plan, should try to pass this argument along to their constituents.

The BBFiles believes that stimulus can work. However, there is an enormous diminishing return after teh $500 billionth dollar, and since Bush was already stimulating the economy by this amount via tax cuts, there really was no need for such a large stimulus bill. Probably about an additional $250Billion would have been more than enough.

Here is the link:

http://online.wsj.com/article/SB10001424052970204731804574385233867030644.html

A Sad Anniversary

One year ago today, Lehman Brothers was allowed to file bankruptcy. This will go down as the primary flaw in Bernanke's othrewise impeccable resume. Political will basically forced the Fed and Paulson "to let the markets work." Within 24 hours of the Lehman collapse, FannieMae, FreddieMac, Wachovia, and AIG were completely insolvent. Clearly, in hindsight, an uber-regulator should have had the authority to step in and prevent Lehman from failing.

Let's look at the USA's tab from this bad policy:
Lehman Brothers......$766 Billion bankruptcy
AIG......$250 Billion in direct cash infusions
FannieMae....$250 Billion in cash, $1 trillion in garuantees
FreddieMac... " " " " " "

American citizens: A tariff implementing president and 10% unemployment

The costs are way too high!!! The Fed needs the power to sieze systemically important companies, just like the FDIC has the power to sieze banks.

A Closer Look at the Tariff

The BBFiles has generally supported the Obama Administration's economic policies. However, Obama has given into union demands and passed a terrible tax on rubber imports, and we cannot support this mistake. Even though Bush rejected the United Steelworkers tariff request four times, Obama gave in to this bad economic policy right away.

The tariff imposes a 35% tax on all rubber imports from China. This hurts the Chinese and American citizens in several ways. First, it means that the USA can sell lower quality rubber and be 35% less competitive in the rubber industry. Second, it hurts American companies that sell low-end rubber tires. This is basically every retail tire store. Next, it puts Chinese companies out of business. Remember, these are companies that SPECIALIZE in rubber manufacturing and can achieve high quality tires for low prices.

Essentially, the 35% tariff is a hand-out to uncompetitive American companies.

Bloomberg reports this about the nation's largest union, the AFL-CIO:

AFL-CIO Reaction
AFL-CIO President John Sweeney applauded the decision in a statement today, saying it “sends a strong message that the U.S. government will take the necessary action to ensure that American workers and producers can compete on fair terms in the global economy.”

Bloomberg says this about how American companies voted, this is interesting because if the tariff supposedly helped American companies, all US companies would approve. But Bloomberg reports:

Goodyear Tire & Rubber Co., the largest U.S. tiremaker, stayed neutral. Cooper Tire & Rubber Co., the second-largest U.S. tiremaker, opposed the relief. Imposing tariffs will have “highly damaging ripple effects throughout the U.S. economy by increasing the cost of imported tires that largely comprise the low-end of the tire market,” the Emergency Committee for American Trade, which represents those companies, wrote in a letter to Obama last month.

Really! A Tariff?

Obama has officially enacted a 35% tariff on rubber tire imports from China. Hopefully this is a last terrible move that comes from Obama's administration.

The Economics of Being a Jerk

As The Bernanke Files has repeatedly pointed out, the media, journalists, and political pundits have more of an incentive to make headlines than to be accurate. If your a logical, pragmatic critic you won't make any money and will never be famous.

Well, as it turns out politicians have similar incentives. During Barack Obama's speech to the Joint Session of Congress, South Carolina Republican Senator Wilson yelled "You lie" when the president discussed not insuring illegal immigrants. This was not an off the cuff remark. Wilson said he let his emotions get the best of him. This is ridiculous, of course. Politicians know that to get headlines these days they can do two things: give an interview on Sunday, or do something outrageous. Since we know politicians aren't giving up their Washington Party day, we can basically conclude that outrageousness is the best way to get their name out to the public. Wilson knows this and succesfully captured headlines with his outbreak.

Credit Tightening- Savings Increasing!!

The Bernanke Files has written extensively about where money comes from. Today the Federal Reserve released the monthly Credit-Demand report. Demand for credit has dropped significantly. This means that, because credit is the opposite of savings, savings in the US has increased. When there is more demand for savings, bond yields go down; thus making investment easier.

In other words, from 1997-2007, the USA went into debt with China to the tune of a trillion dollars. But, savings in the USA is now UP, so we will not go as heavily into debt to China as we will to American savers!! At the same time, economic growth will slow in the USA because we SAVE money instead of borrow money that we can SPEND. Of course when Americans buy less, China makes less money. To avoid this problem, the government will SPEND more and they will SAVE less. Chinese demand for US-TBonds is being replaced by AMerican demand for T-BOnds, and everything is coming into equilibrium.

USA Drops to Second Place

According to the newly released Global Economic Competitiveness report, USA has dropped from being the most competitive economy in the world to the second most competitive economy. Replacing it is Switzerland, and following USA is Singapore. Here is what the report summarized:

Switzerland’s economy continues to be characterized by an excellent capacity for innovation and a very sophisticated business culture, ranked 3rd for its business sophistication and 2nd for its innovation capacity. The country is characterized by high spending on R&D.

The United States falls one place and is ranked 2nd this year. The country continues to be endowed with many structural features that make its economy extremely productive and that place it on a strong footing to ride out business cycle shifts and economic shocks. However, a number of escalating weaknesses have taken their toll on the US ranking this year…. More generally, given that the financial crisis originated in large part in the United States, it is hardly surprising that there has been a weakening of the assessment of its financial market sophistication, dropping from 9th last year to 20th overall this year in that pillar.

Singapore moves up two ranks to 3rd place, remaining the highest-ranked country from Asia. The country’s institutions continue to be ranked as the best the world; at a time when confidence in governments in many countries has diminished, they are assessed even more strongly than in past years. Singapore places 1st for the efficiency of its goods and labor markets and 2nd for its financial market sophistication, ensuring the proper allocation of these factors to their best use. Singapore also has world-class infrastructure (ranked 4th), leading the world in the quality of its roads, ports, and air transport facilities. In addition, the country’s competitiveness is propped up by a strong focus on education, providing highly skilled individuals for the workforce. In order to strengthen its competitiveness further, Singapore could encourage even stronger adoption of the latest technologies—especially broadband Internet—as well as the innovative capacity of its companies.

A Look Back

To this very day economists debate the actions, inactions, choices, missed opportunities and risks that President Franklin Roosevelt has become so very famous for 70 years ago. Elected in the midst of a recession, Roosevelt showed the world what his tenure would be like on just the thirtieth day of his presidency when he declared a bank holiday. In late February 1933, Roosevelt closed every bank across the nation, then he told the American citizens via radio that their deposits would be insured by the government. Even though the government had no authority to insure deposits, Americans believed him and the financial crisis subsided. Over the next several years Roosevelt would enact hundreds of initiatives in an attempt to turn the economy around. In hindsight, it is generally agreed that about 25% of initiatives did good, 50% did little or nothing, and 25% actually harmed the economy.

The Bernanke Files believes that 70 years from now, economists will be debating the current economic policies in a similar manner. Enormously expansive and creative monetary policy, $1 Trillion stimulus, health-insurance reform, increased unemployment and other government initiative's helpfulness will be debated.

Fortunetly, though, the debates will never be as famous as the Great Depression debates because of the Great Depression. Ben Bernanke is a Great Depression scholar. Because of his creativeness and guidance, our current crisis is merely a recession. A scary fact is that it could have been a depression. In 70 years, just like Bernanke argues that monetary policy, not government intervention, helped us climb out of the Great Depression, economists will be arguing that it was the Federal Reserve that incurred some of the damage but most of the stabilization in the markets. Because we learned from the Great Depression, great Americans like HenryPaulson, Ben Bernanke and Timothy Geithner will be taken for granted in the 70 years.

The Savings Glut Hypothesis

One of Ben Bernanke's most controversial theories is his Asian Savings Glut Hypothesis. The Asian Savings Glut Hypothesis shows how high savings rates in China effects the supply, demand and prices of US goods and how these three factors affect US wage rates, unemployment rates, and yields on federal debt (T-Bond Yields).

Here is a brief explanation of how Bernanke sees the interactions between Asia and America. Pretend, for a second, that there are two countries, one named China and the other named the United States. These two countries compete with each other to sell as many basketballs and basketball shoes as possible. China decides that the best way to compete with the US is to keep wages (the amount of money manufacturing employees make per hour) as low as possible. This ensures China that when a consumer is at the store looking at basketballs and basketball shoes, the balls and shoes on the Chinese aisle are always cheaper than the balls and shoes in the US aisle. Therefore, assuming Chinese made balls and shoes are the same quality as US balls and shoes, the Chinese have become more competitive than the US and consumers will buy more Chinese goods than US goods.

That is a simple, obvious concept. The complexities of the Asian Savings Glut Hypothesis occur when we ask how can China constantly keep wages low while at the same time keeping the ball and shoe consumers rich enough to afford the balls and shoes?

The concept that expains this is called the Balance of Payments and will be explained further in the next blog. The balance of payments concepts simply says that money MUST go somewhere. If a consumer pays $10 for a basketball and a ball, and they cost $3 to make, the extra $7 must go somewhere. In America, the $7 would go to wage-earning employees, shareholders, banks, credit cards, etc. In China, since they are trying to keep wages as low as possible, the government creates policies to make sure the extra $7 goes anywhere but to the wage earning employees, credit cards, banks, etc. In fact, the banks are so controlled by the government that loans are dictated to go to only two places: low interest rate loans to large manufacturing companies; or to the purchase of US T-Bonds. When China buys a T-Bond, many effects occur. These will be discussed in the next blog.

Bias Economists

The Economics profession has taken a lot of criticism lately for its response to the recession.

The Bernanke Files prides itself on being a pragmatic, unbias analyzer of economic policy. The Bernanke Files believes that most of the well founded criticism of economics probably stems from the political bias and ideological rants that many pundits spew everyday.

For example, today's Paul Krugman Blog exemplifies the profession's ignorant biases. Krugman criticizes Bush for going into debt to the tune 0f $500B. Then every comment is a total acceptance of Krugman's statement, its like his audience is... liberal! So of course he is speaking down to his audience.

But, has humanity come to such mindless, thoughtless following? The Bernanke Files thinks not! The debt had to come from somewhere. The two questions one must ask to be fair are: How much did we pay for the money? (Answer: a measley 3-4%) And is the benefit we recieve from the debt greater than (3-4%+addt'l unseen costs)? Keep in mind that if we did not go into debt, employment or wages (or a combo of both) would be considerably less than it is now.

While many of these questions are semi-rhetorical, it is interesting that Krugman does not even mention the cost/benefit analysis in his anti-Bush rhetoric. When the average reader crosses this, how could he become anything but skeptical at the economics profession?

A Few Thoughts and Updates

Now that Obama has made the mind-numbingly easy decision of re-appointing Bernanke as Chairman of the Federal Reserve, a few loose ends need to be tied up. First, we are taking Laurence Summers, head of Obama's economic council, off of the Bernanke Arch-Nemesis list. Replacing Summers will be Kentucky Republican Senator John Bunning. Today, in a show of splendid ignorance, Bunning criticized Obama's decision. Then Bunning proceeded to criticize Bernanke for what Bunning called a "delayed response" to the crisis. This puts Bunning on the dreaded Bernanke Arch-Nemesis list and is a good lead into the next loose end that needs to be tied up.

The Bernanke Files argues that Bernanke's response to financial crisis was late... and occurred at the exact right time. Let me explain: to be fair, one must look at Bernanke's response in context with the Federal Reserve's day to day environment. If you a critic says, "Bernanke should have speculated about the future of the economy and put into motion drastic measures to stave off the recession," then it is only fair to say that "Bernanke should ALWAYS speculate about the future economy and put into motion measures to stave off the recession." This means that when unemployment was going from 7% to 3.9% but half way down it turned around for a month (from 5% to 5.1%), Bernanke should have closed down AIG, Bear Stearns, McDonalds and urged Congress to pass Armeggeddon resolutions mandating the purchase toilet paper and water by every American citizen.

But, the Federal Reserve DOES NOT SPECULATE- as crazy as it sounds, the Fed actually waits for facts and data to come to them, then it makes the best decision it can with the resources it has at hand. This maintains confidence in the Fed, and makes sure its decisions are not too drastic, or not enough.

In hindsight, of course Bernanke's response was late... by 20 years. Bernanke, Bush, Clinton, Summers, Bush 1, Reagan, Greenspan and every Congressmember since the 1980's could have made the sub-prime mortage backed security market less leveraged, yet none of them did because rational people don't look into crystal balls to make decisions.


Firstcongerss bunning rule second summers of arch nem

BREAKING NEWS: Bernanke Re-appointed!!!!

The Executive Branch has done little right over the last several years. Today, though, this trend paused for a moment when Barack Obama re-appointed Chairman of the Federal Reserve Ben Bernanke to another 4 year term.

Obama joins George W Bush as being members of the very prestigious club of presidents that has appointed Ben Bernanke as Chairman. Though Bernanke has a long road of him in dealing with the recession and exiting the current monetary situation, he is the right man for the job, hands down.

Bernanke has overseen the worst liquidity crunch in over 70 years. He reacted to the crisis by expanding the amount of money in the financial system. What he will truly go down in history for is his ability to add so much money into the system at the extremely low risk levels that he did; and for adding so much liquidity while keeping in mind he would have to undo the expansion shortly. These two measures have kept faith in the dollar and interest rates low- two important factors for future growth.

Stimulus vs. Monetary Policy

Monetary policy stimulates the economy by determining the amount of money that is injected into the banking system each month. Fiscal stimulus is money spent directly by the federal government on various projects.

While The Bernanke Files is not totally anti-Stimulus, it has concluded that the current stabilization of the economy had little or nothing to do with Obama's stimulus plan. Several weeks ago, before the "popular" indicators showed economic stabilization, Liberal commentators said the stimulus plan hadn't yet worked because most of the stimulus plan has not been spent. Now, after the "popular" indicators are turning around, those same commentators are saying "See, we told you so! Of course the stimulus is working." In reality, though, ONLY $25 Billion more dollars has been spent since then!!! In a $14,000 Billion economy, of course $25 Billion will make virtually no difference.

There is other evidence that shows that stimulus has done little, much less than the efficiently crafted monetary policy has done. First, if stimulus was working, one would expect people to go out buy things like clothes, toys, toothbrushes, etc. But, as was reported this week, retail sales declined by MUCH MORE THAN ANTICIPATED. Clearly, to any unbiased spectator, one would have to be skeptical of saying the stimulus plan had much, if anything, to do with the turnaround.

Conversely, monetary policy is having a large impact. Econ101 says that stimulus plans work because it replaces the "fearful" investor/consumer spending with government spending. This time, though, the Fed has crafted such efficient monetary policy that interest rates are declining (A2/P2 is way down, the LIBOR-OIS spread is almost back to normal). This makes investors invest more because they can borrow money for less than what they will make off of the money. Investors in turn employee consumers who can then spend money. The Bernanke Files believes the first step, investors investing more, is beginning to take place. Next, down the road, unemployment will turn around because of investment, not the stimulus plan.

Economics Riddle Solution

Several blogs ago the audience was asked what China did with the extra money it receives from having more imports than exports. The technical name for this extra moneythe trade gap, which is hundreds of billions of dollars.

The correct answer is that there are several things it can do, a couple of things it has done, and several things it may do to combat the recession.

First there are things China can do with the extra money. The first thing it can do, which The Bernanke Files has discussed at length, is use the extra money to pay its employees higher wages. The problem with this, of course, is that the USA buys goods from China because their wages are so low! Raising wages would hurt China's most important sector: manufacturing.

Second, China could use the extra money it receives to build up its infrastructure. Highways, ports, buildings, schools, regulators, boats, airports etc. could be built with the extra money. However, this raises two things: the demand for labor and (therefore) wages. Again this hurts their economy because China's economy is built on the assumption of low wages. Also, this kind of spending, when unwarranted, creates bubbles by producing things, like boats, that are not needed by the market participants.

Third, China can and does purchase American T-Bonds at an extroardinary rate. This serves three purposes: it keeps Chinese wages low, it diversifies China's government because the T-Bond is a very safe investment, and it gives American's more money and therefore higher wages. Higher wages and more money give American's more fuel to purchase Chinese goods! This full circle of US cash to China for goods, that same cash back to America so we can buy more goods is very important to the Chinese growth model. Actually, all high exporting countries (Germany, Brazil, India, Vietnam) follow this same model.

Finally, it can use this money to subsidize a certain sector of the economy. For example, China can lend the extra cash to very large manufacturing corporations to make sure they keep making STUFF that Americans buy. But what happens when Americans quit purchasing the STUFF, and China keeps making the STUFF?

It is also important to remember that China receives extra cash from another source: local Chinese citizens that want to SAVE money. Since China wants to stifle local Chinese citizens from buying too much (so that imports do not go too high and other reasons) they can either give the citizens high interest rates so that the Chinese have more incentive to save money, or they can ration goods (like USA did during WWII...hmm, we were the lending nation back then, think theres a correlation?), explicitly by direct rationing or implicitly by keeping wages low and credit card restrictions high.

So basically China has used its own citizen's money to, well, screw over most of the Chinese citizens. Of course, China does this because they believe that in the long run it will pay off.

The next economics riddle should be "So what happens when America goes into a recession and quits buying Chinese goods but China passes a huge stimulus bill and keeps making the goods anyways?" But, this will be such a depressing subject I will save Bernanke fans everywhere a lot of grief and just answer briefly: Nothing good.

Inflation at 0.0

The Consumer Price Index data that measures inflation was released today. Inflation is at 0.0% year over year.

Last year at this time inflation was peaking, so this months CPI data is being compared to a peak. Still, inflation hawks and anti-Fed fear mongerers have to be laughing at themselves. Inflation is not currently a problem and won't be for sometime, if at all.

There are two reasons for this. First, the Federal Reserve has very powerful tools to combat inflation. But, even if these are not enough, the Fed will most likely sacrifice low unemployment to maintain low inflation rates. What we need to be worried about is not inflation, but rather that the Fed has to back off of easy monetary policy before unemployment returns to acceptable levels.

A Whacky Few Days

A few days ago The Bernanke Files hypothesized that some important economic relationships were changing. For example, a few months ago the yields on T-Bonds went up when the market went up. This could be seen as a "flight to safety" relationship because when the markets went down investors became fearful and bought bonds.

But The Bernanke Files is hypothesizing that the motives behind movements will change as investors are driven less by fear and more by other market indicators. This change affects oil, the Dow, bonds, individual stocks and gold.

Today gives us empirical evidence that this trend may be swaying in the direction that The Bernanke Files has argued it will be going: the markets went up, but the interest rate WENT DOWN. This is opposite of what you would have expected a few months ago and supports The Bernanke Files hypothesis.

The Past Weeks Odd Movements

Since the recession began there have been certain up/down relationships between several markets. For example, when the Dow Jones went DOWN, the dollar usually went UP. When the Dow Jones went DOWN, crude oil went DOWN. When the dollar went UP, bond rates went DOWN. Most of these movements were explained by pointing out they are "protectionist plays." When the Dow Jones went down, fear made investors seek the safety of the dollar thus raising demand and therefore the value of the dollar.

But!, over the last two weeks these relationships seem to be changing. At the end of last week the Dow Jones skyrocketed up several hundred points. Instead of the dollar and oil decreasing and bond rates going down, the opposite happened. Crude oil has decreased slightly, the dollar has appreciated in value and bond rates have remained unchanged.

The Bernanke Files will be watching this turn of events very closely. While still in the early stages, these changes could signify growth, but also the emergence of inflation risks. The Bernanke Files will keep you updated on this trend as events unfold.

What to Look for This Week

The Bernanke Files is reporting from beautiful Detroit, Michigan. Well, we're assuming its beautiful- we're actually stuck in the Detroit airport for a 3 hour delay.

Having some time on a Sunday evening, we thought it would be a good opportunity to take a look at the upcoming week. First, we take a look at where the Asian markets are at. Currently they (the Nikkei) are up 24.0 points. Few Americans are aware that the Asian markets open up in Japan in the morning (local time). This means they are open at about 3:00 pm MST. This early look gives us a preliminary look at what investors may have on their mind. Because the Asian markets are open, American markets open futures trading for most of their markets as well. For example, crude oil, corn, wheat, the Dow Jones Industrial Average and many other markets are open at night. These are called the "night markets."

After taking a brief look at the Asian and night markets, we take a look at the economic calender. The economic calender provides investors with the most important events occuring in the markets this week. Good economic calenders, such as the one provided by Bloomberg, also give users other helpful information such as what the concensus is and a brief description of what each event means.

This week, an important and interesting release occuring is the International Trade report. This gives us the earliest data on what America's net import/exports are. the concensus for this month is that the trade gap will be $25 billion. This is way down from last year because wer are importing a lot less goods because of the recession.

Keep in mind that the markets always beg the question: If a butterfly flaps its wings in China, what will occur in New York. The markets are closely intertwined. As you may notice, on Monday there are a lot T-Bill auctions. These results will tell us how much it cost for the government to borrow money. But, as The Bernanke Files has pointed out, the auctions and the International Trade report are linked. Remember, if Americans import more than they export, the cash that was used to buy the imports had to come from somewhere. Of course, one of the main places the funds come from is from T-Bond sales. This is why international trade and T-Bill sales are linked. Since foreign Americans need LESS money to make up the difference between imports and exports, foriegn exporting countries need to loan us LESS money to make up the difference. Therefore, demand for T-Bill will go DOWN and prices will drop AND THE INTEREST RATE WILL GO UP. These complex relationships between different sets of data make the markets very difficult to study.

The Future for Interest Rates

While The Bernanke Files never "looks into its crystal ball" and speculates about the future, we would like to discuss what economics ripples might occur when the we exit the recession. More specifically, this entry examines the effects on interest rates.

Currently interest rates are very low. The Fed discount window is at .25%, and 10-Year Treasury Bonds yield 3.71%. This tells us several things, but probably the most important thing it tells us that investors are very wary of starting new ventures. Since the yield is 3.71%, we know that an investor believes he CANNOT MAKE MORE THAN 3.71% outside of buying T-Bonds. While in reality this is too simple (the low interest rate includes a very high premium for the extreme safety it offers), this is a good place to start.

When the economy begins to turn around, these same investors will want to be taking advantage of a strengthened economy. Unfortunately, their money will be tied up in the T-Bond they purchased for, lets say, 8 more years. They have two option: keep the low yielding bond, or they can sell the bond for cash. If the investor chooses the latter, supply of bonds will go up and the interest rate will go up also!! (Remember, if supply goes up, than price goes down and the interest rate goes up).

It is at this inflection point (the point at which almost everybody with a T-Bond realizes investing is better than holding a low interest rate bond) that we will have to worry about another slowdown in the market because INVESTMENT will be stifled by higher interest rates. In other words, there will be a small window that interest rates will move between (the window between a very low interest rate and an interest rate that stifles investment).

If Congress runs too much of a fiscal deficit and has to borrow too much money (thus selling bonds), the enormous dropping of T-Bonds into the markets will make interest rates rise out of the window pushing us back into a recession.

At this point, though, foreign countries that export goods (China, India, Germany), will see a drop in exports because the USA slips back into a recession. They will reduce their employees wages by taking profit and purchasing T-Bonds. This LOWERS the interest rate in America and, because their is so much cash going into America, credit becomes easy and a bubble is created.

Of course this is an oversimplified model, but it shows how complex of a job economists have. Remember, this is almost exactly what happened from the 2001 recession through to the 2008 recession. It is interesting that while most people blame the Federal Reserve for easy money, they are curiously and I believe rightfully absent from the model. Easy money came from Congress fiscal irresponsibility, not the Federal Reserve keeping the discount window interest rates too low for a couple of quarters.

An Economics Riddle

Here are a couple of economics riddles.

An American buys a product from Wal-Mart that was made in China. Wal-Mart charged the American $1. How much of the $1 do the Chinese actually get?



In an unspecified time period, American's buys $2000 of goods from China. In that same amount of time, China buys $500 of goods from America. Where does the difference of $1500 go?

Hint: The answers are in percents, eg: 10% goes to fixing Chinese manufacturing machines.

Get it straight, folks

As everyone knows, Chairman of the Federal Reserve Ben Bernanke can by re-appointed by the President to a 4 year term in January. As expected, the Fed-haters are making something out of nothing.

This week Bernanke went in front of a television audience and answered questions asked by the average joe off of the street. Bernanke announced at the beginning of his term that he would try to make the Fed more transparent and help the American people understand exactly what is going on in the economy.

Libertarians have perverted Bernanke's intentions... in the stupidest way possible. If your going to make a long rant about how bad Ben is, at least make it a logical argument. Look at what this blog has to say (http://blogs.reuters.com/james-pethokoukis/2009/07/27/candidate-bernanke-hits-the-campaign-trail/).

"If Ben Bernanke were running TV ads, taking polls and holding town hall-style meetings, it wouldn’t be any clearer that he’s conducting an explicit reelection campaign for another four-year term as Federal Reserve chairman come next January."

So this guy thinks Bernanke is trying to campaign to be re-appointed to the Fed. The last Chairman of the Federal Reserve remained Chairman for the most amount of time he could (14 years). Would it not therefore follow logic to say that Bernanke, a smart fellow, would take a play out of Greenspan's playbook and do the same things Greenspan did to be re-appointed.

But, and the anti-Fed author admits this in his article, Greenspan stayed as far away from the public as possible. So, by explaining things to the public, Bernanke is doing the opposite of what the last 14 year Chairman did to be re-appointed.

This is ridiculous. Clearly, if Bernanke's only goal is to be re-appointed, he would do what the last Chairman did to get re-appointed did. He isn't, so clearly there is another motive for why Bernanke is doing what he said. Anti-Fed idiots will say anything to get attention and to create suspiscion about the Fed.

This Weeks Auctions

Today marks the end of a record auctions week. The government auctioned over $205 Billion dollars of T-Bonds to private investors and foreign governments. By selling T-Bonds to the public the government is doing two things. First, it raises the supply of T-Bonds in circulation. Theoretically this would raise the interest rates. Second, by accepting cash from investors it reduces the amount of cash investors will have to invest with in the future. Combining the double whammy of rising interest rates and reduced cash for investment gives us a good picture of why governments don't like going into debt: they don't like stifling investment.

However, this weeks auctions, under the supervision of the Fed and the Treasury, yielded lower interest rates! This means that investors don't expect inflation to be an immenent problem. It also means that investors still have confidence in the US to pay back the bonds. This is a clear indicator that the Fed is doing a good job because inflation expectations are low while money is being printed to stimulate the economy.

Adversly, though, it means that there will be $205 Billion less for investors to invest with in the future. From an investor's standpoint, it also means that they believe that an investment will yield less than the meager 2-4% the bonds pay them in interest each year.

This weeks auctions show us that the Federal Reserve is doing a good job with what it has to work with. In a perfect world Congress would not be spending like they are currently doing and this would make the Fed's job of handling inflation expectations much simpler. The Bernanke Files is going on record and suggesting that Congress should begin reducing spending soon, and arguing that the Fed has been and will continue doing a good job keeping inflation low while stimulating the economy.

Reminder

Tomorrow, Friday the 30th of July, is the final day of the governments bond auctions. This week saw a record sale of treasuries auctioned to investors. Usually this steep increase in the supply of bonds would raise the interest rates. This would be bad because it stifles investment and borrowing. Also, higher interest rates signal the threat of impending inflation.

The Bernanke Files will do a full survey of this weeks auctions after the markets close tomorrow so that readers get a better understanding of what is happening in the credit markets right now.

The Great Preventer

Last week in the NY Times two top-notch economists debated Bernankes re-nomination chances. Nouriel Roubini, an economist from NYU who has gained fame for publishing a 12 step list the recession would go through before it became severe, argues that Bernanke was The Great Preventer. By taking creative steps, in Roubini's opinion, the Fed and Bernanke prevented Great Depression 2.0. The Bernanke Files agrees and would also like to point out that Bernanke can be assumed to have just as creative maneuvers to prevent inflation.

Anna Schwartz, a retired Professor from Chicago (boo, hiss, remember: Chicago schools of economic thought are synonymous with Libertarian, Fed-hating ideology), argues that Bernanke and the Fed failed to foresee the recession, failed to warn investors and failed to communicate their anti-recession plans to the public. But, uh, hello, are any of these things in the Fed's job description? Absolutely not. As is turns out, Schwartz was Milton Friedman's partner and has a general bias against the government, the Fed, and convertible money (money not backed by the gold-standard). Sorry, Schwartz, but you have to have a better argument than that the Fed didn't look into the crystal ball and prevent the future from happening.

China Calls For an International Currency

The current global economic regime utilizes the US dollar as its 'reserve currency.' Reserve currency simply refers to the currency that foreign central banks purchase with their extra revenue. Lately, the Chinese and Russian governments have called for a new currency to be used for reserve currencies. They argue that when central banks diversify into reserve currencies, they should purchase SDR's (special drawing rites) instead of US dollars. Theoretically, countries would try to quit using the US Dollar for excess reserves if they thought the United States was going to go bankrupt.

An SDR is simply a bond (an IOU) that is issued to governments that give more money to the IMF (International Monetary Fund) than they have to. For example, the United States has over $2 Billion of SDR's. The SDR is weighted by the US dollar, the Japanese Yen, the Euro and sterling silver.

Most economists believe that China and Russia's push for a different reserve currency is all talk and no bite. Economists point out that if China and Russia actually believe that the United States is going to go bankrupt they could simply quit buying US bonds with their reserves and instead purchase the Japanese Yen, Euro, silver, and less amounts of the US dollar. By doing so, China and Russia would achieve the exact same diversification as purchasing an SDR.

Instead, economists believe that the call for a new reserve currency is political posturing. Next year the IMF is meeting to determine the NEW weight of SDR. If the Russian and Chinese governments can get their currencies into the SDR there will be many advantages for their countries. It is believed that these governments are trying to question the US dollar just enough so that IMF countries will see a need to diversify the SDR with Russian and Chinese currency.

BRIC Nations

Brazil
Russian
India
China

Emerging market investors have emphasized the growth of these four countries so much that they have given them a special name: BRIC.

Hypothetically, these countries are on the brink of becoming fully developed countries and have large populations. Therefore, they are ripe for investment. When the US invests in other countries company's it is called FDI (Foriegn Direct Investment). Policy makers in BRIC countries compete for FDI by streamlining the investment process, giving tax-breaks to investors and middle men, and making infrastructure (ports, shipping, roads, airlines and regulation) more efficient to make FDI more appealing.

Each of the BRIC countries has unique advantages and disadvantages for FDI. Brazil has several advantages. First, it has some of the largest oil and natural gas reserves in the world. Brazil is also rich in coffee, soybeans and other natural resources. It has been de-regulating its financial sector since the 1970s and has a healthy stock market (the Bovespa). Brazil also has a large population that is focused on industrializing.
Brazil has several disadvantages as well. With a large population comes many challenges. The education system is poorly funded and does not specialize in a specific area. The government is involved in a lot of corruption. Inflation worries seem to haunt the Brazilian central bank and it is difficult for entrepeneurs to open a business. Overall, however, Brazil is poised for strong growth as it continues to focus on trade relations with China and the United States and continues to deregulate its economy.
Russia's primary strengths are its education system, natural resources and industrialized regions of the country. Impeding its potential for growth are bad relations with surrounding countries, unstable currency, inflation fears, and corruption in the government. Brazil has great potential for growth, but also is very risky due to the risk of default from the government that constantly drives investors away.
See future posts for Indian and Chinese strengths.

A New Bernanke Arch-Nemesis

Ron Paul, the psycho-libertarian, has been added to the Bernanke Arch-Nemesis list today. His ignorant questioning of the Chairman begs the following question: How did this guy get through Eco 101.

Answer: He probably didn't: Professor Bernanke had to inform Paul that inflation is the rise in the price of goods. Paul, for some reason unbeknown to me, thought that inflation was a rise in the Fed's balance sheet. After an awkward moment when everyone thought Bernanke was going to break out laughing, Bernanke informed Paul that he was wrong- even though I did sense a humorous tone in the answer.

Bernanke Calms Inflation Expectations

Today, July 21, Bernanke reported to Congress. This hearing was expected to be a challenge for Bernanke because he had to balance the markets expectations. On the one hand, some investors believe we have printed so much money that inflation is imminent. On the other hand, some believe the economy is still too fragile to quit stimulating the economy. Bernanke had to keep inflation expectations low while making sure others believed the Fed would continue growing the economy.

So, how did he do? The Bernanke Files gives him an A.

Why? Let's look at the numbers:

Remember, if bond interest rates go lower, INFLATION EXPECTATIONS ALSO GO LOWER. Here is the graph of what the rates did today:

Bond .....Change in Rate
5-Year ...... -.032
10-Year ...... -.030
20-Year ..... -.013
30-Year ..... -.026

As this data shows, interest rates clearly went lower today. Bernanke subdued any rational inflation expectations.

The Truth Comes Out

The truth continues to seep out... great Americans like Henry Paulson are being persecuted by a bunch of cowards whose IQ's are inversely related to their egos (and their egos are famously high).

Today, July 16, Congressmen and Congresswomen railed Paulson for the action he took to fight the largest recessionary forces since 1933. Defending himself against accusations from Bank of America CEO Ken Lewis, Paulson made many enlightening statements. Initially, Paulson threw the Committee a curve ball when he admitted to telling Lewis that the Federal Reserve had the authority to relieve Lewis of his position if he enacted MAC. MAC (Materially Adverse Change) is a clause that says that once a company agrees to purchase a company, it can only back out of the deal under certain circumstances.

One could tell this was a curve ball because each Senator asked the same question: "Did you threaten to fire Lewis if he enacted MAC?" But this question needed to be asked only once because Paulson admitted to... what exactly? Well he informed Lewis that the Fed had the authority to remove him... a law that Congressmen approved! Clearly they did not expect Paulson to be so honest and so innocent at the same time. Of course the Secretary of the Treasury can inform someone of the law- that's his job. Clearly this blame game needs to end and Bernanke and Paulson need to be cleared of wrongdoing. As Ken Lewis himself said, "They were forceful, but I don't believe they acted illegally."

Some may think that even if Paulson only informed Lewis of the law, he should not have done even that. But think about it. Lewis, a terrible CEO in my opinion, SIGNED A CONTRACT to purchase Merrill Lynch. The conditions stated in the MAC clause, which is a standard clause that many mergers utilize, did not include worsening market conditions. This is because it takes a long time for mergers to go through (six months or so), and it would be stupid if a side could back out once they realized they made a bad investment. Additionally, it was several days from the time the contract was signed to the time Lewis questioned the deal, and the those several days could have been spent finding a new partner for Merrill Lynch.

Anyways, the Senators continued to embarrass themselves. One Senator from Ohio berated Paulson for how bad things were in her state. Paulson said that he realized things were bad, but said they would have been worse had TARP not passed. To this she answered, "If that's your answer, its not good enough." To this Paulson could easily have responded: "Well that's fine, but where was your plan? Where were you when I was planning and making the hard decisions? Show me one sentence from a plan that you put forward to save your state." He could have gotten up and walked out of the hearing in disgust, if you ask The Bernanke Files. Lets analyze this for a second. First, if she is mad that TARP didn't work, wouldn't it make sense that she had a plan that was better? In reality, she didn't have a plan and still doesn't have a plan. None of the Congressmen do. They will continue to attack the smart officials that get the job done... that is until another shock hits the system and they go running back into their little holes, hoping intelligent people like Paulson, Bernanke, Geithner, Hoenig, Kohn, Plosser, Fischer, and (dare I say it) Bush Jr can jump in and save them once again.

TARP Effectiveness: A Challenge

One job that economists enjoy is predicting what effects certain policies will have. This could be the effects of a policy from the government, or a policy enacted by a small business owner. Either way it is very important to look at the effects from as many sides as possible.

For example, when Congress passed the TARP legislation they basically agreed to purchase enough shares of certain banks available stock so that the investors THAT HELD BONDS WOULD BE BAILED OUT... the stockholders were not bailed out.

Let me explain. Large companies need to invest. 30% of the money they use to invest comes from selling bonds, not from profit or from the stock market. Bonds are popular purchases because they accrue a constant interest rate over several years and because they are much less risky than stocks. The reason stocks are more risky is because they "protect the bonds." In other words, if a company is headed towards bankruptcy, every penny of every stock becomes worth $0.00 before any bonds can be defaulted upon. Therefore, bonds are safer than stocks. In return for this protection stocks, obviously, have more potential for profit.

To clarify, use this analogy: pretend you are an archer in a medieval army. You, as an archer, wouldn't stand in the middle of the battlefield. You stand behind the frontline (the swordsman and shield-bearers and cavalry, etc.) The infantry, in other words, protects you from attacks. The archers are like the bonds of businesses, and the infantry is the stock market. The archers (bonds) are more important than infantry (stocks) and are therefore heavily protected.

TARP, in essence, did NOT bailout any shareholders (unless you consider stocks going from $100 to $2 a bailout). They injected just enough cash into the stock market to make sure the BONDHOLDERS were not touched. For that to happen, remember, they simply have to keep stock from going to $0.00.

So here is the challenge for Fellow Bernanke Fans: What future effects does TARP have on banking stocks (stockholders), bonds (bondholders), and bank CEO's and executives.

Here is an example from an MIT professor named Simon Johnson (www.baselinescenario.com). Johnson argues that CEO's of the future will not have an incentive to take excessive risks independently (like many pundits now argue), but they will have incentive to take excessive risks that all of the other CEO's are taking. This is because they realize that while they're bank may not be systemically important by itself, if all of the banks mess up than the government will bail them out so the economy does not go into a recession.

While I generally agree with Johnson, we know this is somewhat oversimplified. He is 100% correct if CEO's retire every couple of years, thus being able to sell their stocks at a high price. However, if the laws are changed so CEO's can only sell a certain amount of shares each year after retiring (and presumably close to none before retiring) than they will have an incentive to grow their company over the long term.

Anyways, if you can think of any effects that TARP may have on bonds, stocks and CEOs let us at The Bernanke Files know!

Bond Yield Basics

This week (7-03-09) there were several US Government Bond auctions. These are important to watch because the results from the auctions can give us a good idea of important economic indicators such as inflation, US deficits, and the US government's credit worthiness.
Here is how we examine the results of bond auctions. Bonds are denominated in two ways: the price and the yield. If the price goes up then the yield goes down, and vice versa. The easiest way to examine a bond is by the price. If you see that the price goes up (or the yield goes down) than you know that either the demand for the bond went up or the supply went down. This follows the same supply and demand idea as any other product you may purchase. So lets say the price does go up and the yield goes down. What implications could this have? First, it tells us that more people want bonds. These "customers" of the US believe a) that the US government will be able to pay them back and b) that inflation will not increase too much above the yield that they recieve the bond.

The Bernanke Files and Inflation

The Federal Reserve is constantly trying to successfully maintain acceptable levels of inflation and unemployment. Unfortunately this a balancing act because an excess of one is often the result of attempting to achieve the other. This is a difficult, thankless job for which the Federal Reserve receives much criticism. If unemployment levels go too high the Federal Reserve is blamed, if inflation goes too high the Federal Reserve is blamed.
However, we at The Bernanke Files have unbiasedly examined the plight of the Fed and the job that they have done in their unending balancing act. We conclude that, in general, the Federal Reserve has maintained realistic levels of both unemployment and inflation. More importantly, though, we have also found overwhelming evidence that shows that the Federal Reserve has learned from its mistakes! In the 1970s, after the Federal Reserve maintained policies that would lead to inflation, the Federal Reserve realized their mistake and reversed their position. This occurred on October 9, 1979, five months after Carter replaced Arthur Burns with Paul Volker as Chairman of the Federal Reserve. Inflation subsided, but unemployment skyrocketed. This occurred because of Volker's belief in the Monetarist Experiment which limited the printing of money. Investors didn't like this policy and reacted by not investing, thus driving unemployment to over 10%. By 1982, though, Reagan and Volker and Reagan realized the Monetarist Experiment emphasized inflation too much and ignored unemployment altogether, so they once again reversed their position by printing money until the cows came home. By the late 1980s inflation and unemployment have evened out.
The point of this little story is that while the balancing act the Fed must attempt on a continual basis is difficult, they are the right person for the job. The Bernanke Files looks at how efficiently the Federal Reserve has responded to this crisis and concludes the excessive inflation is nothing to worry about! Chairman Bernanke implemented never before seen policies to offset a potential Great Depression II, and it would be naive of us to say that he doesn't have as good of a playbook to offset inflation when the threat occurs (and we believe it will once the economy begins to recover).

An important indicator

Since this recession began with a freezing of the credit markets, indicators that measure the health of the credit markets are extremely important. In October 2008, Alan Greenspan made a speech arguing that the credit markets would not return to normal until the LIBOR-OIS spread returned to "normalcy." This post will attempt to explain what the LIBOR-OIS spread is and its importance/background to the current recession.
Essentially what the LIBOR-OIS spread does is measure the difference between the interest rates that banks can borrow from each other for and what they can borrow from the Federal Reserve for. LIBOR stands for the London InterBank Offering Rate. Each day, economists in London call about 50 banks spread throughout the world and ask them how much they charged (what the interest rate was) other banks to borrow from them. This "interbank" market is very important because banks can borrow from other banks to maintain healthy Reserve requirements. With out the interbank market, banks would be like you and me and the average business would be without banks: always in danger of being unable to invest or even to pay bills.
The OIS stands for the Overnight Index Swap and measures the interest rate that large banks are charged to get a loan from the government. It is just another tool to ensure the health and well being of financial institutions.
Whatever the difference is between the LIBOR and the OIS measures the willingness banks are to lend to other banks. If Bank A thinks Bank B is going out of business tomorrow they will not lend them money or they will charge them very high interest rates. So if LIBOR sky rockets, something in the economy is screwing with bankers confidence and this is never a good thing.
The average LIBOR-OIS spread (spread being the difference between the two) was .1% for the 18 months leading up to the recession. For example, the LIBOR was at 2.9% and the OIS was at 2.8%. A huge exogenous shock occurred on September 8, 2008: Lehman Brothers was allowed to file for bankruptcy. This sent the LIBOR to 6%, while the OIS remained constant (at about 3%). That means that the LIBOR-OIS spread went up to 3.00%- ten times the average spread!!!
At this point, the failure of Lehman Brothers, everything went awry. Within a few hours, AIG was on the brink of bankruptcy, WAMU went bankrupt, Wachovia went bankrupt. The stock market plummeted and people finally started paying attention to how bad the mortage backed security market really was.
It was also at this point that Bernanke started enacting drastic measures to increase lending. Using the LIBOR-OIS spread as a gauge, he implemented a plan that would increase the Fed's balance sheet (and thus the money supply) to increase the financial systems ability to lend money to other institutions.

Creating Money

There are several ways the Federal Reserve can print money. The federal government cannot print money, though they are often accused of doing so. This blog will discuss the implications of how money is printed.
In 2008, the federal government (and by this I mean the President's office and Congress) ran a $1 trillion deficit. This means they spent $1 Trillion that they didn't have. This doesn't mean that they printed $1 trillion. To pay for the deficit the government goes to the Treasury and asks them to print $1 trillion in bonds. The government then has to sell the bonds in exchange for cash to pay for the $1 trillion deficit. Remember, though, that cash used to pay for bonds is already in existence. The government is taking money from one group of people and giving it to another group of people. The monetary base does not grow.
The Federal Reserve can print money and this done in several different ways. What most people think of when they hear that the Federal Reserve is printing money is actually called "monetizing the debt." This occurs when the Federal Reserve prints cash and pays for the bonds the government printed to fund their deficit.
The Federal Reserve can also print money in other ways as well. They can utilize OMO's (Open Market Operations) to print money. This occurs when the Federal Reserve buys bonds from private dealers (banks, hedge funds, etc.). A multiplier effect occurs when OMO's are utilized. Another way the Federal Reserve can create money is by lowering the Reserve Requirement. When the average person deposits money into a bank, the bank profits from the deposit by loaning the money to other people. However, to ensure safety for depositors, banks can only loan a certain amount of the deposit, usually about 80%. The remaining 20% is the reserve requirement and is fairly innefficient because it just sits in the bank constricting supply of loans thus raising the price of loans.
To put these in perspective of the current recession, I have accumulated some of the stats for what has occurred to the money supply over the last several months. Only about $35 Billion have been monetized. Currently, the Fed will escalate these purchases until they reach $350 Billion. The Reserve requirement has been unchanged since the beginning of the recession. The most interesting money creation that has occurred over that last year has been the OMO's that have occurred. The Fed's balance sheet has expanded from $800 Billion to over $2 Trillion dollars. Initially, the Fed offset all purchases of private bonds (they purchased bonds from private companies like Lehman Brothers) by selling an equivalent amount of short term government bonds. Once they realized that the credit markets had siezed up, they began expanding the balance sheet (which expands the money supply) by purchasing bonds from private banks. This added money and therefore liquidity to banks, allowing them to loan more money to borrowers in an attempt to stimulate the economy. Inflation is almost sure to follow if the economy recovers before the Fed has time to unwind the purchases from the OMO's.

The Grilling of the Fed Chair

James Hamilton, a renowned economist and econometrician, recently defended Chairman Bernanke from the angry, condescending attacks waged against Bernanke by several Congressmen. Being a close follower of Hamilton's blog, which can be found at www.econbrowser.com, I paid close attention the responses made by other Hamilton followers. I was immediately struck by the number of responses that were created. An average Hamilton post recieves 10 replies. This post had hundreds of replies!! I closely examined as many of them as I could and found that the vast majority were Bernanke-haters!!!
One can draw many important conclusions from comparing the amount of anti-Bernanke replies to the average amount of regular post replies. First, it shows us that people in general recieve more satisfaction from unfairly criticizing things they don't understand than they do from contemplating difficult economic theories and replying with a well-thought out response. I believe this is called Monday morning quarterbacking in the sports world. It also gives us good insight to those who are criticizing Bernanke, and might even suggest that their ethos is lacking. I say this because if you can't even come up with an intelligent response to issues that have been clearly presented and explained, why would you think that you could come up with a plan to battle the worst economic downturn in 70 years?
This leads me to the main point of this blog: Bernanke was the man with a plan. Others (inlcuding Congressman) were not. These other people became insecure and did what the average person does- belittles those with a plan to make themselves feel bigger. The repliers and Congressmen have this in common. They have no idea what they are doing, they subconciously realize this and therefore compensate for their shortcomings by tearing others down to their level.