loss, and possibly through its actions avert a very nasty cycle of bankruptcies
and defaults. In the worst case, those defaults will come anyway, with the Fed
absorbing some of the losses along with everybody else. But the way that the Fed
would absorb these losses is by being forced to create more money. And, the
argument might continue, if we had a financial crisis of the magnitude that
produced a loss on the offered collateral, we d be in a situation with a serious
risk of deflation, precisely the circumstances in which we d want some extra
money creation. Win-win. Or so the thinking may go. But I hope that Bernanke has
also pondered the following What would happen to foreign exchange markets and
foreign demand for U.S. assets under the second happy scenario?
There certainly
is plenty of historical precedent for financial crises you can t inflate your
way out of southeast Asia in 1997 comes to mind as one recent example. I don t
know quite how an Asia-1997 scenario would come into play: One of the big issues
then was that companies in Southeast Asia had borrowed billions of dollars that
they couldn t repay when local currencies crashed against the dollar which doesn
t apply in the U.S. today. But it s certainly the case that there are risks to
this course of action that none of us, including Ben Bernanke, fully
understands. He and his Fed colleagues simply see the risk of inaction as even
greater, and they re probably right about that. Update: Paul Krugman takes on
the topic with charts, and Steve Randy Waldman says the Fed has become Wall
Street s genial pawnbroker. Microsoft On the web Ventures Not as Rewarding as
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business is getting a $6.2 billion non-cash, non-tax deductible cost in
opposition to the goodwill in its Online Providers team for your fourth