On Bernanke's Folly

I've been asked a few times by email and in posts on the forum the following question: Were I Ben Bernanke, what would I do?

That's pretty simple, really.

See, sound lending (absent intentional distortion by governments and central banks) is based on one fundamental fact: Borrowing always has a cost associated with it.

That is, to borrow money you must always pay a rate of interest that reflects:

• The risk you will not pay.
• The time value of money.
• The inputed rate of currency debasement (inflation.
• A profit.

Lending, that is, always (absent government interference) costs more than the risk-free rate of return, which is roughly the rate of growth in the economy plus that of inflation (if any.) It has to because nobody ever lends intentionally at a loss.

Therefore, I would withdraw liquidity until this condition was established in the portion of the market that I have direct influence over (the overnight lending rate.)

I would also explicitly establish an inflation boundary for liquidity to be managed by the central bank defined as...

Read the full analysis here.