Ben Bernanke, the 56-year old chairman of the Federal Reserve, has been chosen as Time Magazine’s Person of the Year 2009. He is credited with saving the economy. The Federal reserve is the central bank of the U.S. It is perhaps the most important and least understood financial force shaping America, and thus, the world economy.
Bernanke isn’t part of the Washington dinner crowd. He prefers to be a homebody, and his wife gets him to help with the dishes.
Richard Stengel, managing editor of Time, had the following to say:
History is composed not only of what happened but of what didn’t happen. The latter, of course, is impossible to really know. We do know what happened to the U.S. and world economies during the past year, and it wasnt pretty. We know the damage caused by the plague of subprime mortgages and the fallout from risky investment vehicles that bankers invented but did not understand, and we know that we ourselves probably borrowed and spent more than we should have. What we don’t know is what the economy and our lives would look like if a few individuals had not acted on our behalf and had simply sat on their hands. We don’t know what didn’t happen, but I’m convinced that the economy would look much, much worse
The following 4 individuals were runners up: General McCrystal, Nancy Pelosi, Usain Bolt, and the Chinese worker.
People have different feelings about Bernanke. What we all have to agree on is we have no clue what would have happened had another financial road been taken.
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Remember a 60 Minutes piece on Bernanke and his growing up in Dillon, S.C.
and once working as a waiter at South of the Border where he was
required to wear a poncho and large sombrero.
To be honest I don’t know if I’ll ever really understand what happened with the credit default swaps and derivative real estates markets. Therefore I don’t think I’ll be able to fully understand what COULD have happened if the two administrations, Bush and Obama, hadn’t come up with the bail-outs first and then the stimulus.
But it seems to me that if you’ve spent your whole political career arguing that the free markets should go unchecked by regulation, greed should rule the day, and THEN watched helplessly as the free markets almost destroyed the global economy due to greed unchecked by regulation, maybe you should be the LAST one pretending to know about these things, even after me. I always did suspect those banker types were up to no good, I would have voted for regulation.
And then there are those who spent their whole lives not paying ANY attention to ANY of this, were blissfully unaware of everything under the sun while Bush was in office, but then are suddenly up in arms because the President is has darker skin and a funny name. Uninformed and ill-informed social conservatives are even less qualified to explain this than the free market conservatives who’s economic theories have just been completely disproven.
I know several people( who have more money than I could ever dream of having) who say that there are just some times, even in a free market, that things need tweaking.
For the governement to have done nothing would have been irresponsible and immoral. We don’t really know what would have happened. Speculation abounds, but there is no real paradigm.
They always say that the military always tries to refight the last war. (ie: developing tactics and weapons that would have been useful in the last war but may not be useful for the next.)
I fear that Ben Bernanke is doing the same thing. Yesterday’s inflation numbers were just the latest in a long series of data points that suggest we should be raising interest rates, despite the negative impact on the job market.
Anyway, I think Time made the right call on it’s Person of the Year, but for different reasons.
Witness Too, I would like to suggest that you read more about CDOs, CDSs and the derivative market before claiming that it was a failure of the free market system that caused the current recession. You appear to be confusing lack of regulation with free market. They are two different things. A free market requires regulation to insure transparency. Many people, including myself would argue that the credit market collapse was caused by two things. Insufficient transparency which left banks unable to properly value their debt obligations and political meddling in the market that simply put, pressured banks into issuing mortgages to people who had no business buying homes. In other words, not a free market.
The political pressure insured there was going to be a painful deleveraging period (and the worst is still to come!) and the lack of transparency, particularly in CDOs, is what made it happen in September 2008, instead of some other time.
Personally, while I think TARP was a horrible bill, it was a necessary evil. Something like sawing off your own leg to escape a trap. Most people don’t understand how bad things got in September 2008, which is one of the reasons why we don’t seem to be the right things to fix the problem long term.
I don’t have the economics background to understand how bad things were in Sept 2008 but I knew they were very bad from a relative. I do know we were on the brink. I was all in favor of TARP for that reason.
As for interest rates, rising interest rates are like kryptonite to stocks. Can we afford a laggard stock market at this point in time? There has to be something good out there. Rising interest rates just make it even harder to borrow money. We need to loosen up the credit markets.
I agree that political meddling was part of this. On the other hand, no one held a gun to anyone’s head. Plenty of people got real rich off of the sorry business practices. I would like to throw greed into the mix.
Rising interest rates are going to hurt the stock market, and reduce economic growth and lengthen the lag time before unemployment begins to drop, but it needs to be done to try to prevent hyperinflation. Hyperinflation is the real problem, not the current recession. Taking a hit in the stock market (say 10-20%) is nothing. You’ve already taken a bigger hit than that in the past six months. You just haven’t noticed it if your assets are priced in dollars. As an example look at this graph:
http://allfinancialmatters.com/wp-content/uploads/2009/08/crudevseuro.gif
The green bars are oil in dollars, blue is oil in Euros. Notice how the price of oil in Euros has remained relatively constant over the past year, while the dollar price has been moving up? That’s the deterioration of the dollar and it is an indicator of inflation to come.
This is just one of many troubling signs of inflation. Inflation during a recession is a big problem, since the natural tendency is for deflation in a recession. We might have been able to avoid a double dipping recession if the Fed had started raising rates earlier in 2009, but at this point we are almost guaranteed a double dipping recession in 2010. There is way too much money our there and the Fed needs to raise interest rates to start reigning it in and restore some base level of support to the dollar. The dollar is getting hammered for a number of reasons, but the most significant of them is the Fed’s interest rate policy.
Bernanke lowered rates too low and has kept them low for too long. The credit markets didn’t freeze because of interest rates, they froze because they had an unknown but substantial amount of bad debt to deal with. Our low interest rates are actually hurting lending since it reduces the potential profit off a loan, reducing the level of risk a banker is willing to take to earn it. Higher interest rates could actually help banks repackage some of their CDOs with better performing debt and clear some of their garage out.
It’s painful medicine, but interest rates should be at least half a point higher right now and on the way up. Australia has raised rates. ECB hasn’t because of Greece, but even they are reducing the credit available to banks which is essentially a retail rate hike. Heck, even just a head nod to indicate that rate hikes were coming soon would help. Instead Bernanke is talking about rates staying stable until 2011!
Did you read where there is serious talk that Moody’s may downgrade US bonds off AAA? That’s a far bigger problem than a 10% unemployment rate or a 20% haircut in the stock market. A strong economy creates jobs, not the other way around. Until we get our fiscal house in order, economic growth rates are going to be weak and unemployment will remain high (8+%). The Fed and Treasury both seem to be treating symptoms not the cause. That’s understandable in the Treasury Dept, since it’s a political animal, but the Fed is supposed to know better.
I must confess that this is a very frustrating issue for me because I am torn between what makes me a lot of money personally, and what is good for the country. The weak dollar has been very good to me in the past three or four years but I don’t want to be the richest man in Zimbabwe. The Fed needs to stabilize the dollar immediately and then can start strengthening the dollar as the economy improves. (I do understand that fiscal policy has to bend somewhat to political requirements, but not as much as we have.)
(As always, none of this should be taken as investment advice. You should not make investment decisions off this post any more than you would any other anonymous posting on the Internet.)
Why was 9% Nancy on the list?
“What we all have to agree on is we have no clue what would have happened had another financial road been taken.”
You’ll wish that the GOVERNMENT had a clue when the multitude of temporary fixes (such as printing money with great abandon, virtually on a wim, for instance) finally hits the wall. NOTHING has been “fixed”…we just haven’t seen the worst yet.
I’m sorry, I don’t see the advantage in hoping for the worst, especially with regard to our national economy which affects everyone regardless of party affiliation. Ultimately if the economy were to collapse again and we found our 401k’s going back in the Bushward direction, what cause would anyone have to celebrate?
Celebrate because a few more far right candidates would defeat normal Republicans in the primaries? What good would that do for our daily lives? More angry tirades on the House floor, if and only if they win the general? For what? To encourage more angry tirades in living rooms and at Thanksgiving dinners?
If you don’t understand macro-economics, if all the ideas you held dear turned out to be bad policy, why be angry about it? How about forming some new ideas? Where are the Republicans who say “Let’s DO put our country first”?
The know-nothings on TV constantly predict that America will collapse again while each day of recovery and economic growth makes us question why they are so bent on panic. Why? Why is a state of panic more comfortable to this angry and very vocal minority? Or is it just that they’ve been trained to feel a hankering for panic, but if left alone they’d prefer a calm and tranquil existence? I feel sorry for people that watch Glenn Beck and don’t realize he is a deranged clown.
Unlike you… you’re not a deranged clown are you?
Hi Ms. Cheney. Where have you been? I so hope you are wrong.
What was the alternative? I am not sure that was much better. In fact, I think it would have been worse.
Of course, we are both speculating.
“I’m sorry, I don’t see the advantage in hoping for the worst, especially with regard to our national economy which affects everyone regardless of party affiliation.”
HOPING FOR THE WORST?? You are delusional! NOBODY hopes for the worst, except for anarchists and totalitarians/potential dictators…”the worst” is exactly the chaos they need to ascend to ultimate power. Obviously folks don’t remember my predictions before all this started (and I was right) and my further predictions of how this would end (and I hope to God that I’m wrong…but I don’t think I am). You’re an ass, Witness Too.
Hi Moon-howler…haven’t been well. Regarding alternatives, I spoke often of them…but it’s a little late for that now. People were far too interested in the temporary fixes that would provide the illusion that things were getting better…you know, like the artificial real estate bubble that everyone so thoroughly enjoyed.
I didn’t enjoy it. Things are the same over here at Howler acres. I didn’t buy or sell and I certainly am glad. I hope you are better now. AWC.
I’m sorry to say, Witness Two, that you are nearly on my internal ‘ignore’ list. Between your pejorative rhetoric (‘Bushward direction’) and your extreme mischaracterization of the statements that AWCheney and I have made, I am near the point where I will simply ignore your posts without comment.
But for now, I will respond to some of your points. I assume your comment about ‘hoping for the worst’ is directed at me because I have made investments that benefited from a weak dollar. First off, you do understand that the present weak dollar was started under George W. Bush and that Bernanke was appointed by Bush.
Secondly, and to the larger issue of profiting from policies you don’t agree with, it is akin to opposing widening a road in your neighborhood. You can oppose the construction of the road, but once it is built, do you detour out of your way to avoid using the road? Of course not. The road exists whether you use it or not and you are only hurting yourself not using it.
My investments are the same way. I wasn’t exactly the first person to discover we had a weak dollar policy. It was news in every business magazine or paper for most of the 2000s. Should I have buried my head in the sand and ignored it, or should I try to make the best of a bad situation? I am doing what I can, namely advocating a monetary policy that I believe is is better for the country while I take advantage of the opportunities that currently exist. I’m not exactly going to change the monetary policy of the US by myself. Moreover Ben Bernanke is a very smart guy. He has access to far more information than I and has more experience in judging it. He has reached a different conclusion than I have about what the economy needs. I am among those who believe he is wrong and have invested accordingly. Time will tell who is correct.
Lastly, are you honestly trying to say that our monetary and fiscal policy right now aren’t aimed at job creation/preservation & economic growth vs. a strong dollar and battling inflation? Bernanke testifies to Congress that deflation is the threat, not inflation. Everybody in the Administration is talking “jobs, jobs, jobs”. Find me one speech from the Administration talking about strengthening the dollar. You may agree with the current monetary policy or disagree with it but to claim that we aren’t in a weak dollar period is akin to insisting that the Sun rises in the south and sets in the east. Did you look at the graph of the price of oil in dollars vs. Euros? If you have an explanation for that disparity that doesn’t involve the dollar weakening, I’m all ears.
I don’t mean to be harsh, but I would strongly suggest you do a little more research on monetary policy before making future attacks. If for no other reason than your attacks will carry more weight if they are more heavily driven by facts and reasoned opinion than invective.
(As always, none of this information should be taken as investment advice…Any opinions are my own…You know the drill.)
One last point: I want to make it very, very clear that my statement about being ‘the richest man in Zimbabwe’ is a reference to the severe economic problems in Zimbabwe driven by it’s recent bout of hyperinflation. It was not intended as a racial comment any more so than a comment about Japan’s Lost Decade or the ‘Argentina solution’ are comments about people from Japan or Argentina. (I don’t think things would ever get that severe anyway. It was rhetorical hyperbole, but of an economic, not racial nature.)
Formerly, explain how you figure out which investments are good for this type of economy, please.
I’m going to have to be really generic here for obvious reasons. At an abstract level, if you think the dollar is going to decline in value, you want to buy something with dollars today that has a value independent of the dollar. That way in the future you can sell it for a larger number of dollars down the road.
There are millions of different ways to do this. Everything from buying stock in an overseas company that does their transactions in another currency to country-based mutual funds or ETFs to commodities and currency trading. I’m ignoring all the abstracted instruments like derivatives, futures, etc. Beyond that, you treat it like any investment.
Let’s us a foreign stock as an example. Find a company that is performing well in an industry you think has room for growth in a country you are comfortable investing your money in. You may pick a winner or not, but at least you are protected against the automatic hit of a declining dollar. For illustration purposes, we’ll use a company in Japan that makes widgets. You buy in at 100 Y to the dollar. The company’s shares are valued in Yen and they generate their earnings in Yen. (For this example I’m assuming the company has minimal sales in dollars) The stock goes up say 20% over the next two years. Meanwhile the dollar goes down about 10%. Now you decide to cash in. The stock is worth 1.2x what you paid for it in Yen but 1.33x what you paid for it in dollars. Compare that to an American who invested in an American widget company with the same performance. He would have 1.2x vs. your 1.33x. (And feel sorry for the Japanese investor that bought stock in the American widget company. His investment that grew 20% would only realize an 8% gain when he converted the dollars back to Yen.)
This causes money to flow out of the US and be invested in foreign markets and companies and makes it very hard to attract foreign capital into the US equity markets. The capital that should be funding US companies is funding companies overseas. (Again, I am oversimplifying and ignoring multinational companies and foreign firms listed in US markets but you get the gist of it.) That’s great for US investors investing overseas but bad for the US economy since it makes it more expensive for US companies to raise capital. It depresses the US equity markets (aka the stock market) because there is less money chasing US equities and forces marginal companies (like the old GM) to have to try to get capital wherever they can. (And the credit markets aren’t exactly great for high risk companies these days!) A weak dollar can help push a marginal company over the edge by cutting off access to cheap capital.
Thank you for your explanation. Let’s use an example. ishares ETF EWZ.
Brazil emerging nations. Would this be one of those investments even though it is bought in the United States?
Sorry for the delay in responding. The Formerlies were out of the area this weekend and I spent most of yesterday trying to get a path cleared to get INTO our house. Reverse cabin fever can be worse than regular cabin fever.
Anyway, as to your question about EWZ, of all the ETFs out there, you would have to pick one that I have a position in. But it’s almost Christmas, so I’ll spare everyone a huge desclaimer and just say that if you haven’t figured out that nothing I say should be taken as investment advise by now, there’s not much hope of it sinking in this time.
As to the specifics, yes, EWZ is a foreign ETF, and your initial investment in dollars would buy shares in companies valued in reals. If the dollar depreciates against the real, then your shares valued in reals will see disproportionate gains in addition to whatever gains they see through natural growth. (don’t forget the disclaimers from before that apply particularly to a resource extraction based economy like Brazil. Many of the companies in EWZ have dollar exposure because a large amount of their business is with the US.) But in a general sense, you are correct, foreign ETFs allow you to hedge against a declining dollar with a lesser degree of risk than currency trading.
I picked one of my sweeter positions to ask about. Thanks. I tend to overdo foreign investment. Thanks.
Pretty good of me to hit a bull’s eye, wasn’t it?
Glad all the Formerlies made it back safe and sound and weren’t locked out of their driveways permanently. We kept the homefires burning for you.