Sunday, February 15, 2009

Steve Forbes on The Economy

Economists and politicians should read this. Below are excerpts of the interesting article written by Steve Forbes.

Steve Forbes vs Greenspan & Bernanke. Read on!

Hamilton Got It Right - Why Can't We?
by Steve Forbes, EDITOR IN CHIEF

1. Greenspan truly began to think he was a monetary philosopher king who could fine-tune economic activity by manipulating short-term interest rates. Greenspan's Louis XIV "I am the state" proclivities were intensified when he fell under the sway of a strange theory of Ben Bernanke's.

2. Bernanke joined the Fed as a governor in 2002 and posited that the world was plagued by "excess" savings. China, India and other countries were saving too much money. Preposterous!

3. Trying to create a strong dollar by controlling the money supply itself is hopeless--these days there are numerous definitions of money supply. The task is made even more difficult by the phenomenon of "near money," such as airline mileage rewards. Then there's the problem of "velocity," that is, how quickly money is used. If everyone is clutching cash, velocity goes to near zero, a situation we are experiencing today. In a Germany-style hyperinflation, volatility goes berserk as everyone gets rid of rapidly depreciating money, as if it were a hot potato or a bag of toxic spinach.

4. Nor are inflation indexes useful guides to monetary stability. There is usually an enormous lag between what a central bank does and the impact of its actions on the marketplace. In other words, if too much money is printed, it will be several months before that's reflected in the prices you pay at the supermarket or gas station.

5. Policymakers and pundits will wail that stabilizing the dollar now would be untimely, that we'll need to print a lot more to deal with the financial crisis. They're wrong. Dollar instability is prolonging this crisis. A credible, strong greenback policy, combined with getting rid of the craziness of government-imposed mark-to-market accounting rules on banks and insurance companies, would quickly end our financial system's troubles.

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(Credits to Forbes)

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