thanks for the detailed reply...it cleared up a couple issues but i'm still confused about a lot of things...i hope you don't mind if i pick your brain later

lookee what i found just now...i think bernacke is turning japanese, i think he's turning japanese, i really think so



Bernanke's Japanese edge

MARCUS GEE AND BRIAN MILNER

From Wednesday's Globe and Mail

December 16, 2008 at 10:53 PM EST

In 1999, an American economics professor by the name of Ben Bernanke addressed an issue that at the time was fascinating mainly to other economists: What do you do when you cut interest rates to the bone and nothing happens?

That was the problem facing Japan. Confronted with an economy that was down and refusing to get back up, the Bank of Japan (BOJ) had reduced rates nearly to zero, just as the U.S. Federal Reserve is doing now. Nothing happened.

What to do? Mr. Bernanke, a student of the Depression and of Japan's ??lost decade? of the 1990s, grappled with the question in a paper.

??Having pushed monetary easing to its seeming limit, what more could the BOJ do? Isn't Japan stuck in what Keynes called a ??liquidity trap'??

To the contrary, he said, ??there is much that the Bank of Japan could do to help promote economic recovery in Japan ? a more expansionary monetary policy is needed.?

What he meant was a policy of ??quantitative easing? ?? flooding the banking system with money with the aim of easing pressure on banks, persuading them to start lending again and prevent a downward spiral in prices.

That is precisely the policy that the Bank of Japan adopted from 2001 to 2006, becoming the only modern central bank to, in effect, print money while at the same time keeping rates at rock bottom.

Now, faced with a crisis of his own, Mr. Bernanke, as chairman of the Fed, appears to be embarking on a similar course ?? and no one is quite sure where it will lead.

When the Fed announced yesterday that it was cutting rates to between zero and 0.25 per cent, it noted that it was buying up mortgage-backed securities and was considering whether to buy long-term Treasury securities.

That was a strong signal that Mr. Bernanke is about to put his academic theories into practice, with trillions of dollars and the fate of the world economy at stake. Ever since a 2002 speech in Washington where he talked about what to do if deflation hit the United States, he has been musing about how central banks might pump money into a failing economy if interest rate cuts weren't working ?? then considered a remote possibility at best.

In that speech, which earned him the nickname ??Helicopter Ben,? he referred to the remark by the renowned Chicago economist Milton Friedman that governments could theoretically just drop piles of money from helicopters. That helicopter drop is now on.

Since the crisis began, the Fed has moved aggressively to thaw frozen credit markets and get banks lending into the marketplace again.

Among other measures, Mr. Bernanke has turned to quantitative easing since mid-September, essentially printing billions upon billions of dollars and pumping them into the financial system ?? at a level far in excess of what's required to maintain the Fed's target interest rate for interbank borrowing.