Wednesday, April 2, 2008

A fictional peek into the future

I was reading an article by BusinessWeek writer Peter Coy: What Bernanke didn't say. He nicely summarized todays testimony even including parts of the question and answer session. I found it interesting that he did not include a question from Senator Ron Paul. Once again Senator Paul proved that he continues to swim against the mainstream and that he is the only one who truly understands the issues at hand. I decided to write a comment in the form of a fictional peek into the future.

Dear Coy, unfortunately you chose to ignore the most important question posed by Senator Ron Paul. But don't worry you are in good company, the honorable Fed chief in his response did the same. Just as a reminder what did Paul inquire? He suggested that business cycles have always been an important and healthy part of economies. He asked the chairman if he thinks that in todays world business cycles are redundant. The answer: "yada, yada, yada, the Federal Reserve has a dual mandate of price stability and optimal growth." Let me explain why this is so significant. Senator Paul's question goes to the heart of the problem. The Fed with its repeated bail outs of Wall Street has created an unsustainable clout of moral hazards and consequently failing risk management. They did so under the umbrella of their second mandate of optimal growth. It is important to understand that this is a bogus mandate. We face now a situation where the Fed cannot allow normal business cycles to occur because of enormous counterparty risks. Warren Buffetts famous "derivatives are financial weapons of mass destruction" have made almost every player in this high stakes game too big to fail. This will with absolute certainty end in total disaster and possibly in wars that our children will be forced to fight. Let me now answer instead of the chairman who evaded the question. Yes business cycles are important because they are the natural leveler of in time exuberant markets. The academic Ben Bernanke knows this very well, what he does not know is a way out of this dilemma. The Federal Reserve and other Central Banks will have to increase money supply indefinitely, that in turn will drive up inflation. While the official numbers will be accepted the real cost of living will pose ever higher pressures on consumers until they break and demand side economies will be forced to their knees. When this happens the financial system with all its derivatives and counterparty risks will break down. GAME OVER!!!!!

source:What Bernanke Didn't Say
Peter Coy, BusinessWeek

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