Bernanke admits to the liquidity trap

Discussion in 'Wall St. News' started by W4rl0ck, Sep 18, 2008.

  1. W4rl0ck


    Economist recounts talk with Fed chairman
    By Joshua Boak | Chicago Tribune reporter
    September 17, 2008

    NAPLES, Fla. — Several months ago, economist David Hale had a private meeting with Federal Reserve Chairman Ben Bernanke, who was trying to ward off a recession by lowering interest rates and increasing the money supply in the economy.

    The problem with that approach is that the value of the dollar plunged against foreign currencies, causing crude oil prices to skyrocket because oil is pegged to the dollar. It affected food prices, gasoline and family budgets.

    "Ben, you are playing a very unique role in world economic history," Hale recalled telling Bernanke, an expert in the Great Depression. "You are the first central bank governor of the United States to preside over a recession with no decline in commodity prices."

    Bernanke could hypothetically limit inflation in commodities by raising interest rates, a policy that would restrict the flow of money but potentially lead to an avalanche of bank failures. At a financial conference in Florida on Tuesday, Hale, a Chicago-based economist for investment managers, hedge funds and multinational companies, paraphrased the Fed chairman's response.

    "We have lost control," said Hale, quoting Bernanke. "We cannot stabilize the dollar. We cannot control commodity prices."