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Politics : Welcome to Slider's Dugout

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To: RonMerks who wrote (8740)	3/26/2008 1:39:51 PM
From: Chaka	of 50729

And thats why I dont understand all this talk about DEFLATION! Bernanke has devoted his life to studying the deflation of the great depression and how to prevent it. Sure, he has researched it academically but, as I am sure he will gladly admit after the last few months, theory and reality often diverge. There were policy mistakes made in the 1930s but it was not because the Fed then were idiots. For example, you might want to read: Why Did the Fed Raise Rates in October 1931? web-xp2a-pws.ntrs.com Sure the Fed can inflate away as long as "long-term inflation expectations remain anchored". A crisis (e.g. a sudden dollar plunge) can easily snowball into run-away inflation and the Fed will be forced to raise interest rates just as the Fed did in 1931. Note that I am not saying that the Fed will raise interest rates or that we are going to end up with 1930s style depression. All I am disputing is the pervasive magical belief/faith in the Fed. The Fed has its role in a crisis (such as what happened with BSC) but as a panacea to what ails the financial world today, not even close...

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