A new super hero in town - Dollar Man

Image of Ben Bernanke dressed up in a super hero costume might be the last caricature one can imagine, it is very vivid in my mind nonetheless. He may not be an actual super hero but he has a super power, his ability to print infinite amount of dollar. In his 1999 paper, which became talk of the town in recent days due to Federal reserve announcement about Quantitative Easing(QE), Ben Bernanke abhorred Japanese central bank for not doing enough to stimulate the economy and preventing deflation. He laid out a very simple thesis, irrespective of how bad the economic condition may be central bank with its printing press can and should create inflation in the country. Acting on his own thesis, Mr Bernanke is all set to dole out dollars to defuse the deflation expectation in the market.
Quantitative Easing, is weird term to describe a simple action by Federal reserve. In this intervention, Federal reserve print currency and buys medium and long term treasury bonds from the market. The objective is to keep the long term interest rate lower and the hope is lower interest rate will encourage people to spend and corporation to invest again. Once that happens everything would be fine.
I have two objections to this happy ending thesis, first is Chicken and the egg problem and second is prevention is better than cure. Chicken and the egg, currently interest rates in US are at historic low, however corporations and individuals are not willing to spend. Will bringing down interest rate down by another 25bps help corporations and individuals over come there reluctance? I don't know, but we all know currency flow across countries is free and there is more growth in BRIC nations. If some one offer me cheap money, I will rather invest in India than in US. I wonder if Fed loose monetary policy will fuel a bubble in Emerging markets this time. Second, there is a consensus in the market, that loose monetary policy by Federal reserve were one of the biggest culprit for the housing crisis. Cheap loans boosted housing prices to the extent that mere survival of economy became questionable when it burst. However, Fed is not willing to learn from its mistakes. Mr Bernanke is inclined to offer cheap money to corporation as long as he can. The only hope for happy ending is a belief that this time it is different. I am hoping against hope that Federal reserve will be able to control the loose money and the bubble loose monetary policy have fueled by then. May be the paradigm of bubble and bust followed by Soros is the best way for investing.

Books on my table......

I can rival a tortoise when it comes to reading. There are currently three books on my table that I have been reading on and off. One, Mental floss history of the world, fascinating book, authors have tried their best to make historical facts as interesting as possible. I never knew the basic plot of the movie Spartan was true. I always thought it was fiction, partly because of visual effects (Come-on, history to Bharat ek khoj, types hoti hai). Two, Against the gods, history of risk taking by mankind. There is so much one can learn from reading history. For example, biggest contributors to the probability theory and risk management, were part time mathematicians whose full time job was to "Gamble". I am sure there will be books who will talk about virtues of Wine but if you are interested in learning how Casinos and Gambling played a great role in development of mankind this book is the one. Third and last is Fault lines by Raghuram Rajan, an exemplary author and a economist of highest caliber. Written with extreme skepticism towards Keynesian economics, this book explores the root cause of sub prime mortgage crisis. I will write a bigger article on the book in detail (don't count too much on it). I do agree with the premise, that economic problems in US are more structural. Instead, of relying extensively on monetary solutions, there should be great emphasis on policy level efforts. Education and Immigration reforms are two things that come in my mind. In all fairness, I am not denying that Fed has any choice but to do whatever it can do revive the economy. Its more on the politicians to see beyond today and take tough decisions.