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Just Shoot Me

Bala, 28, Gordon Gekko in the making, pseudo-intellectual, cynic, bibliophile, obsessive compulsive ranter...

Why he is called helicopter Ben?

August 17, 2007

Q: Why is Ben Bernanke called Helicopter Ben?

A: In 2002, when the word "deflation" began appearing in the business news, Bernanke gave a speech about deflation. In that speech, he mentioned that the government in a fiat money system owns the physical means of creating money. Control of the means of production for money implies that the government can always avoid deflation by simply issuing more money. (He referred to a statement made by Milton Friedman about using a "helicopter drop" of money into the economy to fight deflation.) Bernanke's critics have since referred to him as "Helicopter Ben" or to his "helicopter printing press". In a footnote to his speech, Bernanke noted that "people know that inflation erodes the real value of the government's debt and, therefore, that it is in the interest of the government to create some inflation."

True to his nickname, he has helicoptered in to rescue the markets. Tsk Tsk, all ye dyed in the wool libertarians and free market evangelicals out there.. i pity you..

Q: Why Global markets are in such a mess?. Is Leverage that dangerous?
A : Leverage is a double edged sword. As to how we got to where we are now -

....today any wealthy individual can take $1 million and go to a prime broker and leverage this amount three times; then the resulting $4 million ($1 equity and $3 debt) can be invested in a fund of funds that will in turn leverage these $4 millions three or four times and invest them in a hedge fund; then the hedge fund will take these funds and leverage them three or four times and buy some very junior tranche of a CDO that is itself levered nine or ten times. At the end of this credit chain, the initial $1 million of equity becomes a $100 million investment out of which $99 million is debt (leverage) and only $1 million is equity. So we got an overall leverage ratio of 100 to 1. Then, even a small 1% fall in the price of the final investment (CDO) wipes out the initial capital and creates a chain of margin calls that unravel this debt house of cards. This unraveling of a Minskian Ponzi credit scheme is exactly what is happening right now in financial markets....


Q: Can i read more about this Sub-Prime Crisis?
A : Prof. Stephen Cecchetti has a great FAQ over here. Go read it.

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posted by Bala, 6:51 PM

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