DIDN'T GET ANY EASIER

It really didn't, but I thought I would approach the subject from a couple of different perspectives, the theoretical and the practical.

Long ago, in a century far, far away, central banks really had two missions in life: to adjust money supply and guard against inflation. I've often said and lectured over and over to my students that central bankers were, when you got right down to it, artists of pest control and the one bug that they went after with a vengeance was inflation. Nothing would stand in their way. Some, like the Bank of England, were outspoken and actually published their inflation target. Others, like the Fed, were more subtle but the goal was the same; kill inflation where ever one finds it. They weren't perfect, but they were pretty good.

They were also staffed by pretty anonymous people. You can find a lot of folks who could tell you who Jimmy Carter was...sorry, is...but not many who could tell you who he appointed as the Chairman of the Federal Reserve despite the fact that he had an enormous impact on the final 20 years of the 20th century. They toiled in the shadows.

Then came Alan Greenspan and for some reason Dr. Greenspan rose to the level of a Hollywood star. Clark Gable he is not, never was, and yet he became one of the best know and respected personalities in the world. Until he got it wrong that is.

I don't know whether the remarkable popularity of Greenspan was causal, but the role of the Fed certainly began to change and broaden under his Chairmanship, becoming almost the fourth leg of government, influencing and directing not only monetary but economic and fiscal policy as well. Markets hung on his every word; business decisions on his pronouncements. That I could never really understand what the hell he was saying have the time and neither did anyone else if one asked, didn't seem to matter. The Fed became the Yoda of the times...to finish the reference.

The danger in this is readily apparent and now realized as there is no question that the extremely easy money policy of Dr. Greenspan's Fed clearly contributed to the liquidity bubble that begat the housing bubble that begat...you get the picture. Dr. Greenspan was not Yoda; he was just another very bright man who got it wrong as most of us do from time to time. Only in his case, as one pundit once said, "When I make a mistake, it's a beaut!"

Unfortunately, things are tough to change and when one becomes addicted to a certain mode of thought or action it is particularly difficult. The Fed's adoption of a role far greater than that which they had historically was heady stuff. By the same token, the markets--if not the nation in general--reliance on the wisdom of the institution and its members which they had themselves invented has been, to this point, unbreakable. So there sits Dr. Bernanke, draped in his predecessor's fame, caught up in a newly defined role, almost besieged by those demanding he act to right the ship of state and having at his disposal only one tool the use of which will, if he gets it wrong, destroy the traditional role of the Fed as the guardian against the inflation bug. Instead he will become He Gave the Creature LIFE! The poor bugger (every pun intended) is in a real mess.

Some years back, there was a very funny comedian by the name of Freddie Prinz, Puerto Rican by birth, whose famous line in his role as a Latino janitor was, "Is not my yob." Sadly, he took his life and a great comedic personality was removed, but Ben could learn from watching a few re-runs of Freddie. Ben, it's not your yob to fix what the politicians caused and if you try, two things could happen. both of them bad. First, you could get it right and bail the bas*&^% out which means they are CERTAIN to do it again. Second, you could get it wrong and all hell will break loose.

The common belief is that the Fed has convinced itself that deflation is a greater threat than inflation and No one there wishes to repeat the Japanese experience. As has been written on these pages if one believes that the situation in Japan was caused by a simple lack of growth in money supply because of the timidity of the Bank of Japan one simply understands neither the country or it's people or it's collective psyche. That view is a nonsense. We sit at a point of time where we may witness the greatest political turn-around in the history of our political system and surely the Fed must realize that the lack of economic growth in this country is a result of fear, uncertainty and some God-awful (IMHO) decisions made by the party in power over the last two years. The lack of liquidity palys NO role whatsoever in what we face. To begin to monetize our enormous debt at this stage would be madness. There is an election in a month. It seems to me that a reassessment of the economic mood based on the results of that election is surely the intelligent thing rather than beginning a complete assumption of a new responsibility on the part of the central bank. You will not stand for election this time around, Mr. Bernanke. This is not your yob.


We're off to see the triplets tomorrow. Back Monday when will will look into what might happen if Ben gets it wrong.