Bloomberg.com has an interview with Stanley Fischer, the head of the Central Bank of Israel and Ben Bernanke, the Federal Reserve Chairman's dissertation supervisor at M.I.T. in 1979.  The article is really about how smart investors missed the Madoff AND the financial crises.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

“You get into a way of thinking,” Fischer, who’s been a student of the world economy for the past quarter century as an academic, banker and policy maker, said in an interview at the central bank’s Tel Aviv offices. “You get into a way of accepting things that people do.”

Investors who placed their money with Madoff were lulled into complacency by his consistent returns, while those who piled into mortgage-backed securities were aided by AAA ratings that proved as flawed as forecasts of rising house prices.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

“This is going to be tough,” Fischer, 65, said. “The worst of the real side is yet to come.”

St. Louis-based Macroeconomic Advisers forecasts that the U.S. economy will shrink at a 6.5 percent annual rate this quarter and a further 4.2 percent in the first quarter of next year.

Fischer, who was first deputy managing director at the International Monetary Fund during the 1997-98 Asian financial crisis, saw a risk that today’s turmoil creates a deflationary spiral in the U.S. and world economies, in which prices, wages and demand all fall. [My emphasis added.]

There you go, the D word - no NOT Depression, THAT is not the worst word, but DEFLATION!  As I have said before, we want PRICE STABILITY not falling prices. Don't fret yet! 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

“It’s a danger at the moment,” the central banker said, adding, “We’re not there yet.”

The article goes on to compare the Japanese crisis and the U.S. crisis - there are many parallels, but as Fischer states, Ben and the U.S. are being MUCH, MUCH more proactive and "Doing Something," as I say in Macroeconomics.

Speaking of which - Stan's book (with Bob Dornbusch) is the one we use here in Shanghai.  Excellent textbook, in my opinion!
Finally, an interesting comment about the role of the IMF at the end, they need to be more active but need cash:

 

 

 

 

 

 

He voiced hope that China would follow the lead of Japan and pledge to provide some of its currency reserves to the IMF, perhaps in return for a bigger voting share at the fund.

Hmmm, I would argue that maybe China's best use of money is with their own economy, to help the world, that is.  However, his point is well put, China can definitely gain more influence by providing funds when they are most needed!