10 November 2008

The (un)Thinkable is happening. Panic now. Thankfully we have the Bernanke Experimental Economics Playbook

Vol. 1: "Soft Landings..."

Dr. Ben Bernanke, in a speech on November 21, 2002 laid out a playbook of options for the Federal Reserve to run should it ever lose control of monetary policy in the face of massive deflation. Intended primarily as a thought experiment, this graph shows the Fed losing control as we speak. Witness the (relative) stability of the federal funds rate until the bankruptcy of Lehman Brothers and the reverse take-under of A.I.G.. Up until today, the effective federal funds rate has never approached its zero limit... never-ever.

We are truly balancing on the edge of economic science and there is no chart for where we are going. This is a Ph.d level, alchemy lab improvisation called "Quantitative Easing." The Federal Reserve is synthesizing a powerful medicine, but they don't know if they're missing an ingredient, and they have no idea what size dose to give. To much and the patient will OD chasing the inflation dragon. To little and he'll go into cardiac arrest.

Click here to understand what I'm talking about.

And here to read "The Unthinkable Has Happened" by Tracy Alloway, Ftalphaville.ft.com

And here to read "Obama Can Be a Roosevelt, Not a Carter" by David Blake, Ft.com

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