[UnderseaLcpl]

Originally Posted by Platapus

I often wonder where the loyalties of the Fed Chairman lays.

I'm only a few steps behind, questioning what is apparently either his arrogance or ignorance, and maybe both. I guess I shouldn't just doubt Bernanke, though. The Fed itself has a pretty awful history of handling crises quickly and/or effectively, making one question the rationality behind its raison d'etre.

I find it hard to believe that the Fed or anyone in it would be intentionally destructive, which I assume is kind of what you're saying, here.* Someone of his background and percieved worth is unlikely to be intentionally malicious because such behaviour just doesn't fit such a person. For that reason, my guess is that he either doesn't really know what he's doing, which is very probable given the difficulty of directing an economy to do anything other than what it wants to do, or he is arrogant enough to believe that he actually is the first man in the history of the world to be able to "fix" an economy that is mostly based upon free exchange without modifying major parameters. The last guy who thought he could do that was Keynes, and his economic theories have long since fallen off the grid. Even revised Keynesianism is so heavily revised as to not much resemble Keynesianism at all.

A third possibility is that he and the Fed are hamstrung by politics. It may be a combination of all three factors, none of which is desireable in an entity regulating monetary policy. In any case, Congressman Paul has been trying to push a bill to audit the Fed and provide effective Congressional oversight for like two years now, and has seen little progress from anyone other than grassroots supporters. Hardly any cosponsors. This leads me to believe that the Fed does have strings that are being pulled, though not in a controlled or centralized fashion. You know how it goes; Congressmen a, b, and c want d,e, and f done for reasons g, h, and i, and have supporters who also want agendas j through q pushed and they all have friends in the Fed and people promise things or imply things and reputations are at stake and from there it just devolves into a giant Mongolian cluster-frak that in itself resembles some Lovecraftian nightmare economy.

Bernanke's statement has, however, restored some investor confidence, causing the DOW to surge by 125 points or so in one day (this is what a surge is now, ) but it is important to remember that he has only restored confidence in two types of investors- those who don't know any better, and those with the saavy to make a short-term buck. I can't count myself amongst either, but it should be known that once investor confidence drops off (which won't take more than a catastrophic event or a few bad earnings reports in the coming quarter, or failing that, the shrewd guys dumping their garbage stocks) the DOW will plunge again, likely below 10,000 (but then I always look for the worst-case scenario)

What I can promise is that the more involved the Fed becomes, the more erractic the economy will behave as it tries to adjust for the Fed's misguided over-corrections and restore some semblance of a normal economic cycle.

*I could be wrong on this, but I hope you won't mind if I expound my argument, as I feel it is both topical and important.

Originally Posted by The ThirdMan

When Fed rates are hovering around 0% how much can he, Bernanke, and the Fed do?

Quite a bit, actually. The Fed does more than just set the benchmark interest rate, it also lends money to the treasury and purchases bonds (which are both kind of the same thing, only not) The Fed can decide which loans or bonds are good, and which are not, giving them some measure of control over both congressional appropriations and policy, especially in a defecit situation.

This is about bad government policy and business being afraid to move, not fed policy.

The three are intertwined with each other as well as other factors. Taxation, regulation, currency inflation or deflation, tariffs, quotas, laws..... all of these are part of the same beast, and any one of them can act as a tentacle to strangulate business to the point of negative economic growth. Business is afraid to move, you're right about that, but Fed policy is also a factor.