Ben Bernanke’s Elixir: Mixing Monetary Nonsense

"Stupidity is not ignorance, but the non-thought of received ideas." - Milan Kudera

The long-term impact of what Ben Bernanke is doing is disastrous for the United States.  His policies prevent the dollar value of assets on banks' balance sheets from falling, thus keeping poorly managed banks in business.  This policy is dragging down the dollar, prolonging the crisis, and slowing down the U.S. recovery.

There's no need to go into any macroeconomic gobbledygook, technical vocabularies of QEs and monetary policy to understand this.  And there's no need to delve into elusive debates about just what do central bankers mean when they talk non-stop about how they mitigate undefined "risks."   Just let's answer the following simple questions.

What is a bank?

It is a bunch of loans, denominated in dollar terms.

To whom do banks advance these loans?

There are, during normal times, three categories of borrower : consumers, commercial and industrial companies, and commercial real estate.

What guarantees these loans?

Every $100 in bank loans is funded by $92 of deposits and roughly $8 of common stock invested by the bank's owners. The $8 are available to protect depositors against losses due to defaults.  If $8 of the loans default the shareholders are wiped out unless the Federal Reserve comes to the rescue...

-Reuven Brenner holds the Repap Chair at McGill's Desautels Faculty of Management.

Read full article: Forbes, January 13, 2011