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Tuesday, February 15, 2011

Thoughts on "In Fed We Trust" by David Wessel

I just finished reading "In Fed We Trust" by David Wessel. The author details the drama within the Federal Reserve, the Treasury and other financial and regulatory organs leading up to and through the financial crisis of 2008-2010. Many behind the scenes revelations provide an insight into Ben Bernanke, his changing views and ultimate mantra of "Whatever it takes".
The problem with "whatever it takes" is that the collateral damage has likely been greater than the crisis that was being avoided. In fact, I would argue that at best we have merely kicked the can down the road. None of the underlying problems of debt, derivatives, pyramids, excessive speculation, financial wizardry and gimmickry have been addressed. There has been no return of focus on true economic output, balancing city, state and federal budgets and living within one's means. The recent Obama budget is based on rosy revenue forecasts, sheer make-believe. The Federal Reserve now holds more government Treasury securities than China and is set to print trillions more, since the world is awash with dollar-denominated debt and the Treasury must borrow or have budget shortfalls covered increasingly by printed dollars. So whatever it takes - wherever will it take us?

Tuesday, February 8, 2011

Failure of Keynesianism

Those who have studied the history of the Great Depression typically split into two groups. Those who think government tinkering (easy money) helped to create the bubble and further tinkering made it deeper and last longer versus those who posit that the problem was insufficient tinkering, stimulus, etc. Ben Bernanke seems to believe that a lot more Keynes is needed. Too bad that Keynes's followers seem incapable of such ardour during the so-called good times when governments and society is supposed to run surpluses in preparation for the bad times.
Anyway, we are continuing to run deficits and stimulate and print like crazy and I think this time round we will finally understand that Keynesian approaches don't solve any real problems of financial over-indulgence, impropriety, manipulation and outright fraud. In the end, only hard work, reduced expectations, lower consumption consistent with individual and national revenues and production are the key - reality, in other words, not smoke and mirrors. We are watching this grand experiment around the world, not just here in Canada and the U.S. And I thought I wasn't really into spectator sports!