Wednesday, February 18, 2009

Thoughts on Bernanke's Speech....

The text of the speech can be found here (UPDATE: Video here, starts at 4:45). I'll post my thoughts in the order I heard him address them.

The Market Ticker has done a great job covering the liquidity swaps between the Fed and foreign governments, specifically addressing the risk to which the Fed has now exposed the US taxpayer. Bernanke says:
These so-called currency swap facilities have allowed these central banks to acquire dollars from the Federal Reserve that they may lend to financial institutions in their own jurisdictions. The purpose of these swaps is to ease conditions in dollar funding markets globally. Improvements in global interbank markets, in turn, promote greater stability in other markets, such as money markets and foreign exchange markets ... In the case of the liquidity swaps, the foreign central banks are responsible for repaying the Federal Reserve, not the financial institutions that ultimately receive the funds, and the Fed receives an equivalent amount of foreign currency in exchange for the dollars it provides foreign central banks.
Well, what if any of these countries go the way of Iceland? We get stuck holding their paper and they get to hold onto American dollars? When shit really hits the fan, countries are going to look after their own people first, and be hesitant to repay America with the last remaining paper asset they have (the $$$ we lent to them before the swaps fell apart). As pretty are foreign currency can be (much prettier than our boring green bills), it might only be good for aesthetic purposes. America right now is the tallest pygmy.

The Fed's 'enhanced communications' announcement was give and take. I like the idea of redoing their website and making it more friendly and transparent (assuming their stick to the promise), but I'm not to big on this part:
To supplement the current economic projections by governors and Reserve Bank presidents for the next three years, we will also publish their projections of the longer-term values (at a horizon of, for example, five to six years) of output growth, unemployment, and inflation, under the assumptions of appropriate monetary policy and the absence of new shocks to the economy. These longer-term projections will inform the public of the Committee participants' estimates of the rate of growth of output and the unemployment rate that appear to be sustainable in the long run in the United States, taking into account important influences such as the trend growth rates of productivity and the labor force, improvements in worker education and skills, the efficiency of the labor market at matching workers and jobs, government policies affecting technological development or the labor market, and other factors.
Ok, I appreciate the offer, but your projections haven't been too stellar lately. I don't expect people to predict the future and it's nice to have a map on where we may be going. But please don't tell me you have any idea what's coming next. The Executive Branch (i.e. Geithner) signaled that the Treasury has no idea what to do next. And extending your forecasts doesn't add any reassurance. Here's my extended forecast: People are resourceful; we will get out of this eventually; quit taking our money. Bernanke ended his speech with 'extraordinary times call for extraordinary measures'. I agree 100%. So how about doing something truely extraordinary: Quit promising to save us from ourselves. I'm not calling on anything radical like switching back to the gold standard, but how about some good ole American, buckle down when the going gets tough, entrepreneurial risk taking. Set the rules, get out of the way and let Americans help each other out voluntarily.

In the question section, Bernanke did make one great point. He said that we need to find some area to offset this spending. While I am biased towards tax cuts over spending stimulus, I recognize that tax cuts alone won't solve our problems. They need to be accompanied by long-term spending decreases. Whether it be from SS or Medicare/caid, HUD, Department of Education, the military, or whatever, America has overextending itself and we need to get back to Clinton-era surpluses. To me it's almost unfathomable that we had a budget surplus in my lifetime. I understand the theory behind deficit spending, but why let the government take exceptional risks with our money. My parents gave me a piggy bank when I was little and taught me to save; it's about time we give the government a piggy bank and force them to save. Afterall, it's our money.

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