QUESTIONS THAT NEED TO BE ANSWERED

This is a reprint of an earlier article. Since none of these questions were asked at the recent Congressional hearing I hope several journalists will arm themselves with the aid of this cheat sheet before tomorrow’s Q&A with Dr. Bernanke:

1)  Dr. Bernanke, it is clear that your large scale asset purchases have resulted in substantial moves in many markets.  You are often quick to note that equity prices have surged as a result of your LSAP.  Can you please explain to the committee why you also ignore the continuing decline in home prices (the US consumers largest asset) while also claiming no involvement in the surge in commodity prices?  There is a clear contradiction in this commentary which needs to be addressed.

2)  Your commentary matters a great deal to market participants.  As you know, you can move markets substantially.  Therefore, it is possible that your commentary can create quite a bit of price instability and contribute meaningfully to market volatility.  To what degree do you believe speculation has played a role in commodity prices?  While I believe you are right to say that monetary policy and foreign exchange has not substantially contributed to turmoil abroad do you agree that there is a substantial speculative element involved in the recent surge in food prices that could be directly attributed to this belief that you are “printing money”, encouraging a “wealth effect” and sustaining asset prices that are “higher than they otherwise would be”?

3)  Dr. Bernanke, it is clear that total loan growth has not expanded since the LSAP was initiated (see total loans at all commercial banks).  It is also clear that credit conditions for homeowners and households have not been alleviated as mortgage rates and interest rates in general continue to rise.  In fact, it was less expensive to obtain a mortgage before you initiated your purchase program.  Since mortgage debt represents 75% of consumer debt it would make sense that you attempt to alleviate pressures on households.  Why has this program failed to achieve this goal of helping households more broadly and reducing the strains in the housing market?

4)  Dr. Bernanke, it is clear that the Fed’s policy tool kit works almost entirely through the banking system by encouraging the private sector to take on more debt.  At a time when household debt to disposable income remains at 115% don’t you believe you are promoting further indebtedness at the household sector – the exact same thing that caused this crisis to begin with?  If so, why should we expect such policy to result in anything other than a future debt crisis?

5)  Dr. Bernanke, I think we can all agree that you have failed to control the long end of the yield curve via your LSAP.  Had you targeted a specific rate as opposed to a size you might have had better control of the curve, correct?  This is what you do with the short end of the curve and the Fed Funds Rate.  If you had truly desired to control the long end of the curve wouldn’t this have been a superior approach?  Instead, you have allowed the market to control long rates and it has exposed your total lack of control over the long end of the curve.  Do you not see this as a fatal flaw in the LSAP since its inception?

6)  Dr. Bernanke, as you likely know, a rise in equity prices represent a nominal increase in wealth.  Do you believe it is wise to encourage speculation in equity prices when there is the potential that the fundamentals of the underlying assets might not be directly correlated to such price increases?  If this is the case, then aren’t we merely creating an environment that is ripe for another equity bubble as investors purchase equities under what is now known as the “Bernanke Put”.  Don’t you think this is putting the cart before the horse – that is, fundamentals should drive equity prices as opposed to hopeful and speculative purchases based on false promises directly promoted by the Central Bank?

7)  Can you please comment on this development known as the “Bernanke Put”?  Is this a positive development for the United States economy? The “Greenspan Put” is often seen as a significant contributing factor to the turmoil of the last 20 years.  Do you agree that your resurrection of this “put” is a negative development?

8)  Can you please comment on the ever increasing financialization of the United States?  We have become, in many ways, slaves to the too big to fail (now too BIGGER to fail thanks to your actions during the crisis) banks and their needs.  Your institution is clearly centered around maintaining a healthy banking system.  Tim Geithner recently commented that we need to be at the forefront of what is a growing global financialization.  Do you agree with his commentary?  Are you at all concerned by the increasing dependence that our economy has on the banking system?

9)  Thank you for your attempts to stabilize the US economy during these trying times.  I worry  at times that we might be asking too much of the Central Bank.  You have a dual mandate of price stability and full employment.  It is clear from recent economic performance that you have failed to meaningfully contribute to the targeted goal of full employment.  It is my contention that Fed policy is a particularly blunt instrument at the zero bound so it is not surprising that these policies have failed to make a substantive difference with regards to employment.  Do you believe this committee asks too much of the Central Bank?  In other words, do you believe you are ill-equipped to deal with such a broad mandate?

10)  Have we done enough to help Main Street during this crisis?  Your policies have been particularly focused on the banking system.  I think we can all agree that you have succeeded to a large degree.  Wall Street bonuses are at record highs and the banks are raking in record profits again.  Main Street, however, remains mired in a recession.  Do you agree that you misdiagnosed this household crisis as a banking crisis and that we might be in a better position today if the US government had been more focused on helping Main Street and less focused on bailing out Wall Street?


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. 11) Isn’t it true chairman Bernanke, that all of your policies have been aimed at saving the banks, and in fact have absolutely nothing to do with the welfare of the American people?

  2. This desperately needs to show up on the desks of everyone in the House Financial Services committee before tomorrow’s hearing!

  3. Good questions. Switching gears slightly, would it be too much to ask of you to do a deep dive piece into Japan’s fiscal situation? Though I have the educational tools at my disposal to do this on my own and not be intellectually lazy, I’d be interested to see what type of conclusions you come up wiht. I’m particularly interested in you grafting your “monopoly suppliers of their own currency” can’t default thesis on top of the Kyle Bass et. al. arguments that Japan is now at a tipping point in that the savings rate is starting to decline and there is nobody to fund their deficit spending anymore. Would also be interested in your thoughts on why a country that printed ad infinitum to the sky over 20 years has had a currency that has risen incessantly vs. the dollar debasement argument in the US from such printing. I feel like your readership would eat it up also…just a friendly suggestion.

  4. 12) Can you verify that you do understand MMT, and would it be possible for you to give us a brief description of how it works, and how it affects the deficit?

  5. I’ll look into it – I have to admit though – I am not an expert on the inner workings of their monetary operations and specific functioning of the BOJ and MOF….

  6. No worries if you’re not interested – I am curious though to know if the Kyle Bass arguments ultimately have some merit or not…

  7. brilliant simply brilliant cullen. his answer to all the above questions would be. “we would be worse off had we not implemented the program”

  8. Bass’ arguements on Japan would be completely wrong under the MMT framework. I’d be interesting to hear Cullen’s take.

    His arguements on Greece and Ireland are dead on. There is simply no way these countries can get back on track and their finances will only get worse as they roll their current debt at much higher rates.

  9. Too true TPC, too true. It really showed when these morons were “grilling” the GS guys.

    So I see muhammed el ahole of PIMPCO is now starting to talk about the Fed’s actions being somewhat harmful.

    WARNING SIGN****************

    Watch for these signals, when these aholes start talking about the need to raise rates, watch out….. They will make a fortune on the interest spread amid the need for “austerity” and deficit reduction.

    First they clamor for the government tit, then they demand austerity. They kill the spread. You and I pay.

    There will be no justice until PIMPCO is declared bk as it should have been years ago, imho!!

  10. Very good questions.
    BB will have a nervous breakdown. He will need a stimulus.

    Unfortunately in order to make good investments we need to figure out what will happen more than what should happen.

    It’s interesting to see how in recent years the FED is being questioned as opposed to almost 90 years of acting like the unquestionable temple of money.

  11. On the other side of the coin?-hyperbole

    Sen Corker asked about the similarity of the Depression and the Current Crisis

    Banzai–The Depression was caused by a lack of liquidity which caused
    Deflation for several yrs on the order of 10% per year–

    Clearly–under this FRB leadership that we not be the case.

    Banzai–The Depression was also caused by a large number of “Bank” failures both here in the US and abroad–

    Clearly–under this FRB leadership we have done more than thought possible to save the “Banks” giving You and Ma and Pa “financial security”.

    Today we had “Fear”
    Banzai Ben fears the “Debt to GDP ratio”
    Banzai Ben fears “Spike in Interest Rates”
    Banzai Ben fears “Inflation”

    Today we had “Denial”
    Banzai Ben–Debt to GDP is a “Clear and Present” danger
    The US has 10-15yrs to figure it out–right?–in that time the debt service would be “extraordinarly pressing”—-for the next guy

    Banzai Ben–We must raise the “Debt ceiling” cause you have already spent the money. Congressmen you must stop spending–that was a punchline!

    Banzai Ben- I don’t see inflation being a problem — these price increase would have to last a while before we do anything about Inflation. But- when it occurs–I will bring Inflation to its knee in a matter of minutes.
    someone correct me –but it took Volcker a couple of yrs to “cure” Inflation

    And we had the “Oh Sh#t” moment

    S&P down 20.89/1.6%

  12. Dr Bernanke,

    What exactly do you have against those who drive, buy food and have savings rather than shares ?

  13. See Eamon Fingleton in The Atlantic Monthly. He lists Japanese ever-rising export value, still rising standard of living, and more valuable yen against the dollar. The Japanese Government GDP numbers are a fuzzy false number to alleviate foreign pressure to limit their exports, like cars to the US, remember?

  14. I too would appreciate a discussion regarding Japan’s fiscal and monetary policies.

    Japan’s relatively low unemployment and high capacity utilization over the years would appear to be limiting (inflationary/devaluation) factors on their constant deficit spending, but of course that opposite has transpired. Japan appears to be the land of 0 consequences.

  15. I would ask him if he’s studied the South Sea Bubble or Mississippi Company at Princeton since we all know he’s well doctored in the Great Depression.

  16. Dr Bernanke,

    You were completely and utterly wrong about subprime mortgages and their impact not only on the housing market, but the entire economy. Why should your analysis on inflation carry any more weight than a syncophantic hack trying to keep his job? What can yout cite that displays you have learned anything from your past horrendously pathetic mistakes?

  17. At 119 minutes into the testimony (video below), Bernanke talks about the differences btw Japanese and US QE and explicitly says his goal was to inflate equity prices and corporate bonds:

    http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.LiveStream&Hearing_id=9ff8158e-fc56-495b-aa5b-e957b981da96

    Unbelievable!

    It’s also distressing that he continues to argue that “we need to get our fiscal house in order,” lest the bond vigilantes wake up. A highly intelligent but dangerous Fed Chairman is not what we need.

  18. Amazingly ignorant comments by BB. First, Japan did not implement QE in any substantially different manner. BB appears to be justifying his policy based entirely on the equity market response….

    His comments on the deficit are entirely wrong….I wonder if he thinks he is helping to fund govt spending….I’ll bet he does….

  19. The one (minor) saving grace of his testimony was his explanation of how stupid and catastrophic it would be if the Congress did not raise the debt ceiling. Other than that it was very frustrating to watch.

  20. Does BB foresee any circumstance in which fiscal deficits would need to increase from here rather than decrease? He knows damn well they will increase, and soon. Even the status quo is not enough to tread water. Deficits will expand rapidly from here. Watch the size of the next debt ceiling. Dissembling on both sides of that table.

  21. This is how Bernanke would answer question No 10 in private (shouldn’t Main St have got more help).

    Yes, of course Main St should have got more help. But the power to do that resides with Congress, and the economic illiterates in Congress are anti-stimulus. But I cannot say that too loud and clear in public. Congress is already gunning for me and Fed.

  22. There’s no political will now for higher deficits. Govt is about the get shut down because these people are fighting over $100B in cuts. The Republican house will absolutely not pass anything that involves a higher deficit from here. Obama’s tax cut was his last chance for stimulus…

  23. Excellent questions. I have my $10 ready (sorry only have a 20) and I’ll buy the plane ticket to this match. Very good work Cullen

  24. “Gross reduced in January the holdings of U.S. government and related debt in Pimco’s $239 billion” There goes 48% of QE

  25. advice form someone who’s tried;
    bite the bullet, talk to the Neanderthals in their technology terms

    fax in the list of questions; that’s right; fax it in; FROM someone’s # in their home district!!!
    their committee staff people don’t respond to anything else

  26. Good luck with that… As long as the rhetoric is something their market segment- err I mean constituents want to hear, it’ll keep getting pumped out at high volume.

    I don’t believe that there is even such a thing as political will anymore. It’s all come down to brand marketing- coke versus pepsi. Two choices that are just as bad for you with different commercials.

  27. I have admired Chris Whelan’s analysis and insight for several years. Why is he so sanguine about this debt ceiling sturm und drang ? Also your questions reflect your insight and savvy but I am astonished that you would not ask the Central Banker about the fundamental insolvency of our Big Five Banks. Why is all the talk about the EU when we hide our insolvency through Maiden Lane III shenanigans and FASB suspension of reality ? Are we merely posturing like Ireland did for the last 3 years and then saying gee Our Big Boys are Shot through and through and that is a huge barrier to any economy. Also you would wipe the floor with the Helicopter — he is a creature of posturing and obfuscation and has no experience with a real counterpuncher.

  28. These are the replies Bernanke should give.

    1. Cullen, Boosting home prices can only come about by fiscal means, e.g. Congress reducing taxes on those on middle and low incomes. Members of Congress don’t give a hoot about those people: they prefer the company (and the dollars) of bankers.

    2. My money printing will have boosted the US stock market. But I think world commodity prices are driven primarily by demand from China, India, etc.

    3. Because banks have had their fingers burned during the credit crunch, and they are, for the moment, much more cautious. There is not much I can do about that.

    4. Yes, the recession was sparked off by excessive borrowing. To try to solve this problem by cutting interest rates to record lows so as to get stimulus via . . . wait for it . . . more borrowing is a total farce, isn’t it? MMT doesn’t make that mistake. But what else can I do? The best solution would be for Congress to feed money into Main Street pockets, as I said above. But to repeat, members of Congress don’t give a sh*t about the ordinary folk in Main Street.

    5. Yes, trying to adjust aggregate demand by adjusting interest rates is a complete farce, as you rightly suggest, since adjusting short term rates has little effect on those all-important long term rates. But again, what else can I do?

    6. You are quite right. New money should be fed straight into the pockets of Main Street (which is what MMT advocates). This would raise demand, which in turn would raise stock market prices for GENUINE reasons rather than artificial reasons. But the rich, and politically powerful, members of Congress, bankers, etc etc don’t want to see money being channelled into the pockets of those peasants in Main Street do they?

    7. Yes, the Bernanke put is a farce. Still, it keeps me employed and guarantees me a safe comfortable retirement.

    8. Yes I’m very concerned about the financialisation of the US economy. This stems from the fact that bankers control Congress. The whole system stinks, doesn’t it? If I had my way, I get an AK47 and shoot Lloyd Bankfiend, Jamie Dimon, etc. Though on second thoughts I’d rather spend a comfortable retirement at home rather than in prison, so I just go along with the system. Plus, in prison, I might have to share a cell with Bernie Madoff: that would make me vomit.

    9. Yes: expecting a central bank on its own to do anything much about employment is a farce. But I can’t say that too loudly or clearly: I might lose my job.

    10. Yes, Main Street should have got more help. But as I said above, only Congress can do that. And, to repeat, members of Congress prefer bankers’ dollars to helping Main Street.

  29. It is clear that the policies the FED implements are designed to transfer wealth from US consumers to commodity producinf countries. I don’t accept that they do not udnerstand this. It is done on purpose. Why it is done I cannot say, I basically do not know, I can suspect secret deals, treason, conspiracy theories but I have no proof. Empirically speacking the effect is clear. A debased dollar boosts commodity prices and finances the growth of many countries, even enemy countries, through carry trades that fuel a further dollar decline. I cannot accept that those that are in charge do not udnerstand those empirical facts.

  30. I really, really hope someone asks #5. Bernanke is a political creature, but this is the one question he won’t be able to punt with a meaningless soliloquy.

  31. Rick. weaker dollar makes Americans on wages or fixed income take a pay haircut that is not as easily observable, that’s all. That’s a less painfull way for politicians to restore a trade and fiscal equilibrium. Another way is an abrupt and painful period of deflation in prices, wages andrestructuring of debt. But that would be so 19-th century. Moreover, it is a political suicide.

  32. You will hear a FEMA official muttering to himself (sorry ladies) why did he ever leave the

    confines of Princeton, the disaster is now nationwide!!

  33. llya,

    I do not agree that things are so simple as you describe them. Neither the haircut on wages is small to not be easily observable.

  34. Great list..a few more:

    11. Dr. Bernanke, you frequently use the term “recovery” to justify your actions, however I believe even you would have to admit that the level of pre-crash nominal economic activity has been revealed to be substantially riddled with false economies, bubbles, and other forms of unsustainable and undesirbale activity which create malinvestment and instability. Why do you believe extreme policy should attemot to sustain what was clearly a series of previous regulatory ad interest rate errors?

    12. You stated that you are 100% confident that you have the “tools” to remove the curent stimulus, and while this may be true in a theoretical accounting sense, a necessary tool to ultimately remove the stimulus is to reset expectations of the populations in the developed world that we will need to accept a significanly lower nominal standard of living as the remaining fals-economies deflate. Most people appear to have been completely spoiled by the apparent prosperity, now feel entitled to the bubble standards, and cannot accept even moderate roll-backs in their nominal or real standard of living. How do you propose to withdraw stimulus without resolving this and why have you not attempted to do so to this point?

    13. Who are your must-read commentators who you look to for perspectves that enlighten or challenge your own? As examples, some of mine include John Hussman, James Grant, Jeremy Grantham, Satyajit Das, Jim Rickards, Chris Whalen, Martin Hutchinson, …people like this…

    12. Following up on Cullen’s point 9, you appear to have hidden behind an unreasoanble and unachiaveable “mandate’ of promoting full employment and your very narrow definition of inflation appears to exclude almost everything but wages. However, wages in the US are already substantially uncompetitive on a global basis. Further, devaluing the dollar to increase competitiveness has more problems than I can go into here…so, my specific question is, shouldn’t you be advocating policies that reduce nominal dollar wages in order to increase labor competitveness and employment? If not, why not?

    I have plenty more when you get rhough with those…

  35. “it is clear that total loan growth has not expanded since the LSAP was initiated (see total loans at all commercial banks”

    Bank Credit of All Commercial Banks (TOTBKCR) Economic Research – St. Louis FRB

    This data comes from the BOG’s H.8 release: Selected Assets and Liabilities of Commercial Banks in the United States. In juxtaposition, the Board comingles ATS, NOW, & Share Draft accounts, etc. (in all DFIs), when reporting the money stock, but not when reporting CB credit.

    (TOTBKCR) Bank credit originally represented the system’s (commercial bank), credit creation. However, the DIDMCA of 1980, gave the nation’s savings and loan associations, mutual savings banks, and credit unions the same capacity to create new money & credit. In other words, the DIDMCA created the legal framework for the addition of 38,000 more commercial banks to the 14,000 we already had, and in the process, the abolition of 38,000 intermediary financial institutions.

    Therefore to only use (TOTBKCR), is to understate the growth of bank credit in all DFIs.

    In the commercial banking system, loans & investments, equal bank deposits. You can look at that relationship 3 ways:

    One is that when a CB makes a loan to, or buys securities from, the non-bank public, it creates new money & credit, i.e., loans create deposits.

    Or two, from another, more sophisticated angle, there are many different factors, which can, and do, alter the volume of bank deposits, including: (1) changes in currency held by the non-bank public, (2) in bank capital accounts, (3) in reverse repurchase agreements, (4) in the volume of Treasury currency issued and outstanding, & (5) in Reserve Bank credit, etc. Taken altogether, the principle items which alter the total volume of bank deposits are peripheral (net to zero). I.e., the credit creating ability of the CBs (as a system) is responsible for all new bank deposits (loans & deposits come into being simultaneously).

    Or three, in 1966 “a new measure, the BANK CREDIT PROXY, was developed by the FOMC during the year in order to get current information about the operating guide more frequently. This measure infers changes in member bank loans and investments (assets) from changes in member hank deposits (liabilities).”

    “Deposit data are available weekly on a daily average basis, whereas bank credit data are available less frequently. The Federal Open Market Committee’s strategy remained essentially unchanged for more than three years, from Sept 66, when the committee first began including a bank credit proviso clause ion its directive until Dec 1969″

    So, the loans & investments associated with the growth in ATS, NOW & share draft, accounts (originating from the nation’s savings and loan associations, mutual savings banks, and credit unions), are thus erroneously omitted from St. Louis & BOGs figures.

  36. “At a time when household debt to disposable income remains at 115% don’t you believe you are promoting further indebtedness at the household sector – the exact same thing that caused this crisis to begin with?”

    Damn good point. Household debt went from 45% to 68% between 1965 and 2000 (as a percentage of gDp), and then to 98% in 2009. The Case–Shiller index (which rose from 77.74 in 1995 & peaked @ 189.93 in 2nd qtr 2006). The latest 20-city figure stands at 140.86. That’s still almost double. We literally haven’t created a job since between 1996-1998. We have approximately 132 million jobs same as back then. Another shocking figure is the number of people on food stamps. It is STILL INCREASING EVERY MONTH and is at a record. It is something like 45 million people or 15% of the US population is on food stamps.

    Further indebtedness is incomprehensible to me. Consumer’s balance sheets continue to hemorrhage. Gas & groceries have drained disposable income. And much higher taxes are unavoidable. A declining exchange rate will make manufacturing inputs & consumer products even more expensive.

    Congress needs to change some laws to help the unemployment rates. As an example, the credit card industry isn’t any different than yesteryear’s loan-sharks. That’s just one reason why I don’t like Paul Volcker. His administration opened up “unlawful debt” collection. “In 1980, BECAUSE OF INFLATION, Congress passed the Depository Institutions Deregulation and Monetary Control Act exempting federally chartered savings banks, installment plan sellers and chartered loan companies from state usury limits. This effectively overrode all state and local usury laws.”

    I guess this rule was in the same spirit, at that time, as interest rate deregulation (REG Q CEILINGS). But, if deleveraging & bloated consumer balance sheets are overriding considerations, establishing much lower credit card ceilings would seem to be helpful. To me, if the Federal Government can take my property to build a highway (for the greater good), the Federal Government can use the eminent domain concept to nationalize portions of the finance industry. I.e., we live in a predatory society (with mostly financial predators), and the dominant predators have enslaved their captors.

  37. question 5). i read on some blogs that the fed is writing put on ust. that looks like a attempt to control the long end of the curve. is that true? i would like to know the strike….

  38. The same blogs that have been calling for the end of the USA for the last 5 years? The hyperinflationists have been so wrong it’s amazing that their audience is still growing.

  39. I’d like to ask Bernanke – If you want house prices to rise, why don’t you just go out and buy ALL the foreclosed houses from the banks? Why beat around the bush by buying Treasury Securities when you can just buy real estate and rent it out over a long enough time horizon for the Fed to turn a profit? Why doesn’t the Federal Reserve simply become the nation’s biggest landlord for the next 50 to 100 years?

  40. Clearly, BB is smart. He scored 1600 on his SAT.

    My belief is that this is precisely why he is screwing things up so much. His intellect has engendered unadulterated HUBRIS. This is more dangerous than simple ignorance, it’s ignorance of ignorance.

    No human being on the planet, past or present, can fix a broken economic system. Not only is the system too complex and inherently chaotic (path dependent), it tends to respond to artificial manipulation by producing greater imbalances.

    Anyways, if you have never seen this compilation of BB clips leading up to the melt down, it’s well worth the 5 minutes.

    http://www.youtube.com/watch?v=9QpD64GUoXw

  41. Dear Sir,

    I believe the term “Bernanke Put” was derived from a tongue-in-cheek play on the term’s implied football expression; namely – the “Bernanke PUNT”. :-)

    …and as you have pointed out, he has missed the goal posts and may very well be heading the US towards (at worst) a new Fed induced bubble, and at the very least, Stagflation.

  42. Well, though I agree he’s in a bit of quagmire, I think there are several much more inventive solutions that could have been proposed. For example, why couldn’t the FED have initiated a program where they would pay purchase the equity in mortgages that would otherwise default at the S&L level in the form of PIK HELOCs (I know that’s not quite right, but I don’t know what to call it…) from pools of applicants at each bank, but defer interest payments for five years, and then make them equivalent to the interest inherent in the individual loans to avoid punitive austerity. At the same time, the FED could use their accomodative stance to leverage S&L banks to discourage any sub-prime lending and let us simply pay it down where it remains while encouraging prime lending for all participating banks until it looks like we’ve turned the corner on defaults. And in the mean time, as they’ve taken the pressure off of ibanks to be the transmission vehicle of their policies, they could have restructured the industry much more effectively because we wouldn’t depend on their lead in an economic recovery and they wouldn’t be taking record losses from all of the MBSs and derivative products held on balance sheet. Lehman may not have needed to even go bankrupt and instead of strengthening and consolidating financial power, they’d have pushed it back towards main street and increased competition.

    I know I’m a dreamer, but this may have stabilized the housing market, stimulated lending, etc. Ideally, the economy could recover and people would have been able to afford their mortgages, while the bank would be able to raise interest rates. If it doesn’t work, and there’s still deflationary pressures, then who cares? The FED still meets it’s operating expenses through the debt service from it’s reserves (which would ideally be under or around 1T in this scenario). The worst thing that could happen is the money they created by putting a few zero’s in a new checking account -i.e. out of nothing – simply disappears and you can always ramp up QE again to spur (though the wrong type of) inflation. Because you’re not raising reserves and loose cash at ibanks, you’re likely to skirt their means to artificially bubble up asset prices (and maybe the rest of the world would hate us a little less for letting our status as a reserve currency fuel serious inflation in emerging markets and parabolic price discovery in commodities). Main Street is stable enough to drive a fundamental recovery. And the treasury gets a huge claim on the re-emergent private sector to bolster general revenues 3-7 years down the road as the FED pulls in repayments on top of it’s income from debt service which would already exceed it’s operating costs; it would beautifully offset the necessary deficit spending we need to pull out of a balance sheet recession. Of course, I do agree this proposal would have had the political influence in this country up in arms… But I think it’s time they realize the only way wall street can maintain renewable and stable success is if the main street leads the way. This false dichotomy of mutual exclusion, or any misguided reliance in a balance sheet recession on the “wealth effect” of manipulated asset prices is self-destructive in the long term.