Friday, February 19, 2010

Does This Bus Stop At 82nd Street?

Ben Bernanke, the Fed Chairman (oops, just lost Rasa on this post), charted a course to take a road trip to Terra Del Fuego, at the southern tip of South America.  He confidently strode to the parking garage, strapped himself into his Beemer and drove for a block and a half.  Then he realized that he was using a map from 1932.  He went back to his apartment and found there was no map to where he wanted to go.

Bernanke has shown supreme confidence that he can suck $1 Trillion out of the banking system at will (the banking system usually has about $2 billion in excess reserves--the two differ by a factor of 500).  To say that no one has ever faced such a task is akin to saying that I have never beaten up the Toronto Maple Leafs.

In taking the first move to return to normalcy, Bernanke cut the rate at which the Fed lends to banks.  Markets dove.  Bernanke said, " That is not it at all. That is not what I meant at all."

So the first glitch happened on Bernanke's first action.  The surprise was delivered by rational expectations theory.  That is, people watch what you do, figure out what you will do next, and make plans accordingly.  People know Bernanke is going to start sucking money out of the system.  They saw the first sign.  They sold.

Bernanke said, "No, no, not yet!"

But people watch what you do.

Bernanke has lingered in the chambers of the sea
By sea-girls wreathed with seaweed red and brown
But human voices woke him.

Terra Del Fuego, here we come!


Apologies to T. S. Eliot

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