Tuesday, February 10, 2009

Federal Reserve Chairman Bernanke Testimony. U.S. Liquidity Trap & Crowding Out of Private Investors

Feb. 10th, 2009.

In response to today’s topics and Federal Reserve Chairman Bernanke’s testimony before U.S. House of Representatives Financial Services Committee.

Did Fed Chairman Bernanke testify or imply between the lines that the Fed would guarantee a flat Liquidity and Money curve to prevent the crowding-out of private investments that would otherwise likely be caused by the latest massive government-backed stimulus bill (/spending bill/TARP2 bill/TARP3 bill ...)? Of course, crowding-out limits the effectiveness of fiscal policy and is caused by excessive government expenditures – per any textbook on the subject of macroeconomics and the IS/LM economic model. However, crowding out is supposedly negated by maintaining low interest rates. (See any economics book on Investment and Saving / Liquidity and Money curves and economic modeling.)

And also possibly stated between Bernanke’s lines, are we now in a liquidity trap (as we similarly/supposedly were in the 1930’s)? A liquidity trap supposedly happens when interest rates are so low that the interest rates can do nothing but increase or rise. What does the textbook say to do in such a situation as a liquidity trap? In theory to remedy a liquidity trap, one is told to THROW LOTS OF MONEY AT THE ECONOMY.

Does this sound like a possible synopsis of the current U.S. economy?

Should the average American support such a ‘stimulus bill’ as the preferred and only policy for the nation to climb out of any possible current liquidity trap? Doubtful. Forgive me, but I will not say why such is probably not a good idea, as I dont want to offend anyone with this blog. Ask me why if you wish and I may tell you, or, you could wait for my anticipated [journal] paper relevant to the topic.

But, obviously, the bureaucrats are not the best at marketing and selling their economic plans to the public. Why is that, you might ask? This is most likely so because most of us no longer trust the average politician to act in our best interests or to act in the best interest of the nation. Forgive my candor, if you would be so kind. Please pass along your comments to the issues herein.