Wandering around Financial Cities

Jim Rogers said Ben Bernanke is "an idiot". And he continues to be very critical of the Fed's policy making yesterday on Bloomberg, saying the Bernanke and his colleagues know nothing about Economics. They are driving high inflation, high commodities prices, and collapse of the US dollar. He thinks the Fed should not bail-out Investment banks, saying that the Wall Street firms have paid some 39 billion dollar in bonuses, and it makes no sense to bail them out when they fail with the money of the tax-payers.

Monetary policies always pose dilemmas to policy makers. Monetary stimulus like cutting rates, increasing money supply, printing more money (or dropping money from a helicopter, as said by "Helicopter Ben"), would stimulate the economy, and inflation. Increasing money supply would also inevitably mean weaker currency. Jim Rogers mention Paul Volcker, who was successful in combating stagflation in his office as the chairman of the Federal Reserve. Jim Rogers suggested using Paul Volcker's approach of limiting money supply (as opposed to lowering interest rates and printing more money) to deal with the current situation. Essentially, he suggested not to bail-out any failing investment banks, and let Bear Stearns goes bankrupt. And yes, to raise interest rates.

Banks are important part of the economy (although traditionally, we were talking about commercial banks): banks are something that you cannot let it go once you have it in your system. Imagine if there were no banks on earth in the first place, we probably would not live with any problem, except that we would be in a much less developed world. What if the Fed does not lower interest rates, does not provide liquidity to the money market, does not bail-out Bear Stearns, and limits money supply growth which drives up the interest rates? The result would probably be ending up with some banks go bankrupt, and sending the economy into deep recession, then recover after a long time.

Jim Rogers essentially suggested that the Fed should just let the failing banks to go bankrupt. After the recession has cleared up the mess, the economy would recover in a more healthy way, otherwise, the inflation will skyrocket so that eventually the Fed will have to send the economy into an even deeper recession to combat inflation.

Who is right? Ben Bernanke or Jim Rogers? Recession is painful for sure. Ben or Jim, it is probably the matter of whether you want more pain now, so that the economy recovers faster, but fuels another bubble which burst a few years later, or you want more pain now, so that we go into a deep recession now, and wait for a long time until it can really recover. But then, economy goes into cycle. It is inevitable that good time will be followed by bad time, and then good time.

P.S. Although watching Jim Rogers is great fun, I hope he can be more polite to Ben Bernanke. He was the CEO of Princeton Economics Department after all.