Wednesday, June 5

How to Save American Finance from Itself

In a previous email Kannu, I told you that we are living in a complicated world which is getting even more complicated. The grand poobahs recognise this. Instead of simplifying they decide to add to complexity by adding giant rafts of regulation. Adding much more complexity. And that's just now. 

Here's an economics Nobel prize winner talking about his student who is the fed chief and asking for a more complex set of instruments to manage the economies and financial markets. And taking a gratuitous swing at hedgies. 

The result? Another crash is coming. Guaranteed. Before you are 25. So what can you do? Avoid debt son. As much as possible. Have your investments in good solid sectors and companies who will keep on operating despite downturns and crashes. Have a technical skill son that will always give you a job. Or if you are running a firm, then be in one which will always have demand. Keep an eye on your cash flow. Or marry a rich girl :) 

But the article is interesting from a macroeconomics perspective. It's people like these who will be running the world when you graduate and start looking for work or are working. It takes time for macroeconomic prescriptions to work it's way through the economy and hit individuals. So decisions taken today will impact you in 3-5 years time. 

I studied wave theory once. Ocean waves. The science is poorly understood even now. Which wave will just give you a ripple or give you a dunking or a great surf is difficult to know. The ocean interacts with temperature, wind, continental shelf topology, currents, gravitation, climate, seashore landscape in poorly understood ways. So what does a surfer do? Understand as much as possible. Be prepared. Take chances. 



How to Save American Finance from Itself | New Republic

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Central banking is not rocket science, but neither is it a trivial pursuit. Excellent books have continued to be written about the art and craft of central banking, from Walter Bagehot’s Lombard Street in 1873 to Alan Blinder’s Central Banking in Theory and Practice in 1998. Running a central bank is in one way a little bit like flying a plane or sailing a boat: much of the time standard responses and small adjustments will do just fine, but every so often a situation arises in which fundamental understanding, knowledge of history, and good judgment can make the difference between riding out the storm and crashing. There was no such person in charge in 1929, and the result was disaster. There was one in 2008.

In his earlier scholarly life, Ben Bernanke, the chairman of the Federal Reserve Board, had been a careful student of the general interaction between the financial system and the real economy and especially of its working out in the Great Depression of the 1930s. So he had done his homework. His decisive and innovative actions at the Fed saved our economy from free fall with a possibly catastrophic end. I once non-joked that Bernanke was the Captain Kirk of central banking: he had loaned where no man had loaned before. In a life before turning to government service, first as a member of the Federal Reserve Board, then briefly as chairman of the Council of Economic Advisers, and then returning to the Fed as chairman in 2006, Bernanke was a well-known and highly respected academic economist. (The reader should know that I was one of his teachers in graduate school at MIT, and have remained a friend.) My opinion is that, after a briefly hesitant start as Fed chairman, probably still under the considerable aura of Alan Greenspan, Bernanke rose admirably to a difficult occasion and has been generally right in his judgments and his decisions, and in his willingness and his ability to explain both.

In March 2012, George Washington University invited Bernanke to give four lectures as part of a course devoted to the role of the Federal Reserve in the economy. The lectures are now reproduced in book form, apparently from lightly edited transcripts. Each lecture ends with half a dozen questions from anonymous “students” and Bernanke’s answers. Some of the questions are smart, some less so, in which case Bernanke exhibits the professorial skill of seamlessly answering a slightly different question. We are not told anything about the audience. I imagine a lot of people wanted to hear about the Federal Reserve and the financial crisis from the chairman himself. It’s rather like hearing Admiral Nelson reminisce about the battle of Trafalgar.

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