Friday, November 12, 2010

Ben and Tim: Part 2

When is the last time you heard that an American President was lectured to?

Mr. Obama…it’s time to change teams.

If you want to have any chance of getting re-elected in 2012 then you better make some changes now, both in the team that you have surrounded yourself with and with the economic and financial philosophy that has been followed.

Just remember, however, that Bush nominated Mr. Bernanke for the position of Chairman of the Board of Governors of the Federal Reserve System and an appointee of Mr. Bush, that is Mr. Bernanke, oversaw the appointment of Tim Geithner as the President of the Federal Reserve Bank of New York.

Obviously, these two people, Ben and Tim, are holdovers from the presidency that caused the mess that Mr. Obama now finds himself in.

Mr. Summers is on the way out and Ms. Romer has departed. A large part of the economic team that was in place is leaving or has left.

Clean house. Start again.

The economic model your team has worked with is out-of-date and inappropriate for the current situation.

We have been told for at least two years now that the problems in the banking sector are liquidity problems. But, liquidity problems are of short-term nature and need to be resolved within a relatively short period of time. (See

The policies that are used to combat a liquidity crisis are also of a short-term nature. These policies are based upon the need to supply the market with liquidity so that asset prices will stop dropping.

Given this interpretation, the Federal Reserve, under Ben’s leadership, has supplied liquidity…and more liquidity…and more liquidity to resolve the issue.

This is a sign that the model being used by Ben and the Fed is inappropriate for the particular situation that they face.

In terms of fiscal policy, the situation is similar. The “experts” in the Obama administration, led by Tim, have called for more spending…and more spending…and more spending.

In both cases, the reason given why the policy prescription is not working is that the particular stimulus package tried has not been large enough. The solution Ben and Tim have given is to make the policy package larger. More spending…and more liquidity!

This is a sign that something is wrong!

The model and the analysis being used are not appropriate. It is time to change policy advisors and the model being used to develop economic policy.

In the financial markets, the problems that exist are solvency problems. Households are declaring bankruptcy in record numbers and foreclosures on homes continue to run at very high rates. Small businesses are also declaring bankruptcy and loan demand coming from small businesses is dropping as of the last Federal Reserve survey. Thousands of small banks are on the verge of insolvency. (See

And, guess what? The monetary policy that the Federal Reserve is following has successfully resulted in the accumulation of massive amounts of cash in the hands of large banks and large corporations. I am just waiting for the acquisition binge to begin once the economy stabilizes a little more. So much for "Main Street"!

In the economy, the “consensus” economic model that has been used over the past fifty years is still contributing to the “more-of-the-same” policies that are being followed by the Federal Reserve and the Treasury Department.

Yet, over these past fifty years the application of this model has produced the following results: the United States has moved from an “under”-employment rate of around 8% of the working population to about 25% in the current environment; these policies have also resulted in the capacity utilization in industry moving from about 93% in the 1960s to about 75% at the present time, constantly eroding throughout the whole time period; and, the distribution of income in the United States over this fifty years has moved dramatically toward the end of the most wealthy.

The foreign exchange markets have signaled to the United States that something is wrong! Over the past fifty years, the value of the dollar has declined by more than 40% in foreign exchange markets. After a recovery in the latter part of the 1990s, the value of the dollar once again tanked until we hit the financial crisis of 2008 and there was a “stampede to quality.” Once this “stampede” was over and markets and economies stabilized, the value of the dollar declined once again. And, after Ben made his remarks in Jackson Hole concerning the forthcoming quantitative easing, the value of the dollar plunged 7% in a matter of weeks.

Paul Volker has written that the most important price in a country is the price of its currency in terms of other currencies. If the value of your currency declines, this is a sign of weakness…weakness in your economy and in your economic policies.

And, here we are. Thursday November 11, 2010, the President of the United States was lectured to by Hu Jintao, the Chinese President, over the United States currency. Other world leaders, from Germany, Great Britain, and Brazil, have also reprimanded the President over the United States currency situation. (

Furthermore, given the election results in the mid-term elections held last week, the American people seem to have a problem with United States economic policies.

The President needs different advice. The President needs different advisors. Ben and Tim need to go!

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