Monthly Archives: March 2014

Why We Need Gridlock Or, Better Yet, Complete Republican Control

Stocks keep going up. Anyone that bet against the market due to tapering has lost money. We’re still in a Goldilocks zone where any good news is good and bad news means more QE. Dow 20,000 soon. The we are doomed subset is still vocal on sites like zerohedge and business insider, their shrill cries for crisis and recession ignored as stocks keep plowing higher.

Evoking the No True Scotsman fallacy, the left says the banks would fail a ‘true’ stress test. We implore these libs to short Citigroup, Bank of America, Goldman and Aig. Funny how you have all these experts that allegedly predicted the crisis in 2007 and not one made money from it, except for perhaps John Paulson and a few others. There have only been two major US financial crisis in the past 100 years: 1929 and 2008. The odds are stacked against failure.

Liberals usually assume democratic control of the major branches of the government as being optimal for creating economic growth and stock market gains, citing the Clinton years or the New Deal and the Great Society. They ignore, however, that the Clinton surplus ended in a recession and, furthermore, stocks perform better under gridlock as shown below. Secondly, just because liberals presided during periods of prosperity doesn’t mean a republican controlled government wouldn’t have done a better job. The crash of 2007-08 skews historical market performance favor in favor of democrats. Had Bush been granted two extra terms, the bull market would have not only happened, it would have been much stronger without the headwinds of Obama’s regulation. The economy and stock market is booming in spite of liberalism, not because of it. We can thank TARP, the tireless consumer, the free market, and the Bush tax cuts. The stimulus, however, was ineffective. It’s only a coincidence the 2009-present bull market coincided with Obama’s presidency. Bush, not Obama, deserves credit for it.

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We would even surmise that stocks would perform even better under republican control of all three branches, with filibuster proof super-majorities. This is because the GOP is the party of wealth creation by giving the free market autonomy, while the libs are the party of wealth spreading and regulation. As a caveat, not any republican will do. The GOP needs to return to being the pragmatic party, like under Reagan and G.W. Bush, instead of the fiscal hawk party. Fortunately, the primary process is effective at weeding out the extreme, un-electable candidates. A combination of a solid GOP candidate, economic weakness in 2016 and or a sudden, large unexpected rise in gas and oil prices before the election could help the GOP secure the oval office.

Clinton, to his credit, passed NAFTA, welfare reform, and the Gramm–Leach–Bliley Act, but a republican would have done the same; after all, Bush passed CAFTA and supported the Dubai Port Deal. In many respects, Clinton adopted an economic policy that would be considered neo conservative today. Same for Larry Summers, who has taken a lot of heat from the left for endorsing deregulation and his controversial, but correct, comments about women being less represented than men at science due to “Differing availability of aptitude at the high end”.

But what about the argument that increasing wealth concentration among a few is bad for growth, necessitating redistribution to encourage consumer spending? There is not a shred of economic data that suggest rising economic inequality is hurting economic growth; furthermore, we have debunked the Marxist self-limiting capitalist critique on numerous instances on this blog. Consumer spending keeps going up.

Another study shows that increasing redistribution won’t improve projected economic growth:

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Also, stocks have always responded favorably to republican-lead policy like tax cuts, bank bailouts, and defense spending versus democratic proposals like stimulus and regulation. If the market is supposed to be a leading indicator, it’s interpreting supply-side economic as being better for growth than what the democrats have to offer. Let’s not forget it was the libs that exacerbated the banking problems in 2008 to get Obama elected and punish the rich. They tried to incite bank runs and crash the stock market.

The collapse of Indymac bank, the second largest bank failure in American history, began with a letter from the office of Senator Charles Schumer on June 27. He questioned the viability of the bank. When a senior senator who is in a number of influential posts regarding oversight of bank regulators directly attacks the confidence of a depository institution, it matters. Not surprisingly, the director of the Office of Thrift Supervision concluded that the collapse of the bank immediately following the Senator’s comments was not a coincidence. Director Reich concluded that Senator Schumer had ‘given the bank a heart attack’.

Liberal Media Bias in Coverage of Auto Recalls

General Motors announced that it is expanding a recall of compact cars due to an ignition problem, and has raised the number of deaths resulting from the problem to 13. The recall now affects 1.37 million vehicles built between 2003 and 2007. Similarly, between 2009-2011 Toyota recalled 9 million cars due to unintended acceleration; estimates of the number of deaths vary from 20-40.

The intriguing part of of the GM or Toyota recall is not the recall itself, but the response from Washington and the media, notably with coverage of GM’s recall much more muted than that of Toyota’s. The Toyota recalls were a media circus with non-stop coverage of every scintilla of detail as it unfolded. According to news analysis by the Project for Excellence in Journalism, which analyzed weekly output from newspapers (The New York Times, Washington Post, USA Today, and others) as well as network television (ABC, CBS, NBC, and others), the Toyota recalls were the #5 most reported story on U.S. news for the week of January 25–31, 2010, at 4% of all coverage. The following week of February 1–7, 2010, the story reached #2, at 11% of all news coverage. On February 10, Toyota dealers in the five-state Southeast region pulled all advertising from ABC stations in protest of “excessive” reporting on the Toyota recalls. On March 5, the Associated Press described “relentless media coverage” of the recalls from news outlets.

It even went as far as reaching congress. The House Oversight and Government Reform Committee and the House Energy and Commerce Committee held hearings in February 2010. The CEO, Akio Toyoda, issued a statement on the house floor, apologizing profusely and defending the integrity of his company. Thirty-one, or about half of the Democratic congressional members involved in the hearings had received campaign contributions from the United Auto Workers union, a major stockholder of Toyota’s top U.S. rival, General Motors. In 2010, four bipartisan US governors wrote a letter to congress, citing the conflict of interest because of its huge stake in GM. The letter mentioned the media’s aggressive and skewed coverage and how Toyota’s recalls weren’t any worse than other recalls at the time.

A liberal media bias and could explain why Toyota was raked over the coals while coverage of a Ford recall in 2010 was non-existent or why there has inaction from congress over the recent GM recall, although they have launched a probe. Furthermore, GM knew about the ignition switch problem as far as eight years ago and failed to tell regulators. Will it make it to the house floor? Will execs be forced to testify? Fat chance.

Whether it’s Toyota, Herbalife, Wall St., or the Bay Area tech elite, Liberals have an anaphylactic reaction to success. When they detect it, their antibodies goes into overdrive and they attack by threatening with regulation, media coverage, class warfare, and protests. Occasionally, the attacks get physical. They are losing, but nonetheless, a persistent bunch. Like Bill Ackman, another liberal, they need to be put out of their misery like the injured cockroaches that they are. As quoted by Marcus Cicero:

A nation can survive its fools, and even the ambitious. But it cannot survive treason from within. An enemy at the gates is less formidable, for he is known and carries his banner openly. But the traitor moves amongst those within the gate freely, his sly whispers rustling through all the alleys, heard in the very halls of government itself. For the traitor appears not a traitor; he speaks in accents familiar to his victims, and he wears their face and their arguments, he appeals to the baseness that lies deep in the hearts of all men. He rots the soul of a nation, he works secretly and unknown in the night to undermine the pillars of the city, he infects the body politic so that it can no longer resist. A murderer is less to fear.

Immigration and the Liberal War on Success

Yesterday, isteve posted an article about Alan Greenspan endorsing more h-1b Visas. Like most articles on this subject matter it generated a lot of discussion, the majority expressing opposition to more visas. However, being a free market capitalist I wrote:

But if more high tech immigration isn’t allowed and retraining the workforce isn’t feasible due to limitations of IQ, that means economic regression is the only outcome. We cannot have it both ways. If we’re IQ realists we have to accept the majority of unemployed Americans won’t be able to meet the increasing cognitive demands of work, leaving immigration as the only alternative to fill the skill shortage.

Some responded the that majority of jobs being replaced don’t require a high IQ to perform.

I think, Grey Enlightenment, you (and other pundits) overestimate the IQ requirements for these jobs that Greenspan and Gates wish to outsource to India, China, and the Philippines.

Another thought immigrants were cognitively mediocre and would make America less safe.

Even if we assume your assertion to be true regarding the inability of Americans to meet the increasing cognitive demands of work, what makes you think the skill shortage (which would really be an intelligence shortage) would be met by importing foreigners? Most of the high tech immigrants who come here have fairly mediocre intellects. They just work for less. And if we changed our immigration laws to only allow the truly super smart to immigrate here, how do we maintain control of the country? Or would that matter to you?

To which I replied

Another option is to raise wages to attract American talent, but this is easier for larger companies with big budgets than smaller ones. Let’s say you run a small research company and you need a programmer to code a custom string theory or protein folding simulator (the most complicated job I can think of off the top of my head). Let’s say only one American has the qualifications but charges six figures but you found an Indian that will do it for five. You can verify both will produce the same quality of work. If you have only five figures in your budget, what choice do you have? The American can do it for five figures and have the job, but it’s not worth his effort and he will work elsewhere. That leaves the job unfilled and the economy cannot realize its full potential. Maybe that simulator holds the cure to cancer or the origins of the universe, but we’ll never know. Or I have a software company and I can hire a team of Chinese to make the program for $100,000 or Americans for one million. Now I have to raise my prices by 10x.

The issue here is a free market (which many readers on isteve profess to supporting) and immigration control are not mutually inclusive. Many of these readers oppose the fed, QE, and TARP on the grounds that those violate the free market, but oppose immigration initiatives, like raising the h-1b visa cap. But you cannot have it both ways. This is the same contradiction that caused Murray Rothbard to split from Patt Buchanan. By 1995, Rothbard had become disillusioned with Buchanan, believing that the latter’s “commitment to protectionism was mutating into an all-round faith in economic planning and the nation state”. If you support a free market meritocracy where the best and the brightest can get ahead, it behooves you to support immigration. To say that many jobs don’t require a high IQ to perform doesn’t mean they won’t in the future as the easier jobs become automated. The United States is only 1/20 of the world’s population. As job requirements become more complicated, employers will have no other option but to look outside of America to fill technical positions, simply because based on a normal IQ distribution, there won’t be enough smart Americans fill the spots. It’s just statistical reality. Let’s assume in my example a string theory simulator requires someone with an IQ of 200 to create (~1/million). That means only 330 Americans can do it versus almost 4,000 potential foreigners. That is an extreme example, but the point is that restricting labor options restricts innovation and the ability of the economy to reach its full potential.

Another rebuttal is that immigration makes America unsafe. This is countered with property laws, CIA, FBI, NSA and local police, which already exist. But the same group that is suddenly concerned about America’s safety want to end the NSA because it violates the 4th Amendment. Like oppositions to immigration, they are picking and choosing. They want a free market, provided it doesn’t impede high wages and full employment for all able-bodied Americans. They want the borders closed to thwart threats, but screening for threats contained in email, phone conversations, skype, or Facebook is strictly off-limits.

But what about Americans being turned away from buying allegedly inferior foreign goods? While many surveys show that Americans will pay more for ‘made in America’, what Americans say versus what they do are entirely different. Like professional wresting being fake, it’s an open secret that Apple manufactures all its popular electronics overseas. Has that hurt sales? Absolutely not. The left wants to believe that it does, but the empirical evidence suggests that Americans just don’t care where their stuff comes from as long as it works and it’s a good value. People prefer Apple products because they are superior to the alternatives. Many liberals and some conservatives like those on isteve and zerohedge believe that ‘made in America’ fulfills a non-pecuniary, egalitarian higher cause; in reality, it’s just bad economics and doesn’t reflect reality regarding consumer preferences. With regard to foreign made goods being inferior, Consumer Reports shows that US autos rank less than Asian manufactures in reliability and test scores:

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This is part of a broader theme of the liberal war on success. The left wants regulation when things are going well (higher wages for Walmart workers, for example) but ‘let em’ fail’ when things go badly (the banks in 2008). Let’s take Tesla, for example, which is being criticized over tax subsidies even though they account for 5% of the sticker price. Rich people are buying Tesla because it’s a great product. The subsidy only plays a small factor in the purchasing decision, if any at all. The liberal NYT has been smearing Tesla for years, most notably when reporter John Brody, during a test drive, ran the Model S battery down to nothing and proceeded to write a excoriating review, blaming tesla instead of his own malice/incompetence. Nonetheless, the stock has surged 400% since the story. According to the libs, Facebook is successful because they are benefiting from cheap labor at the cost of everyone else, not because Facebook provides value for a billion people. Small business also uses foreign labor, but because they aren’t as successful, they aren’t yet in the cross-hairs of the left.

Revisiting Correct Predictions

How is it possible a small blog has a more accurate and longer running track record than professional pundits, with their adulation, media appearances, and books? Looking back through the post archives, with few exceptions, all of our predictions came true. This is because we only care about the hard economic data and, secondly, the tendency for optimism or the status quo to prevail, also known as social inertia. With these criteria, making accurate predictions is easy.

Many succumb to the Marxist fallacy that with increasing inequality and falling real wages, no one will be able to buy the stuff and capitalism will eat itself. Looking at the data there is no evidence the consumer’s propensity to spend has been hurt by inequality. Secondly, we can offer an argument based on empirical evidence that capitalism won’t cannibalize itself the future, too. The Marxist critique implies wealth is a finite resource like gold and once the 1% obtain it all there’s nothing left. This is wrong because wealth is constantly being created; for example, in the span of 15 years Facebook, Twitter, and Google sprung into existence creating half a trillion in wealth. It assumes that there is a fixed number of consumers with static purchasing power. This is contradicted by rising nominal wages the booming middle class overseas and the Pareto Principle that top 20% of income earners engage in 80% of the consumption. Because the highest of income earners have seen the most rapid and greatest increases in wealth, it means consumer spending can keep rising even if everyone else’s income is flat, in agreement with the economic data. That’s why we need policy that creates wealth and encourages consumption, instead of wealth spreading and class warfare.

The left, including Peter Schiff and Nicolas Nassim Taleb, predicted since 2008 that there would be QE induced hyperinflation and treasuries would crash; we predicted the opposite and were right. They overlook America’s excpetionalism. The rest of the world is encumbered with high inflation, corruption, uprisings, and crisis – resulting in a flight to the safest of asset classes, US treasuries. Subsequently, yields fall. The smallest provocation can trigger a knee-jerk flight to safety, such as a hiccup in Europe or a bad job number. Not for forget, since 2002 foreign governments have been buying our debt like crazy. This doesn’t mean we’re enslaved to them; instead, it’s a symbiotic relationship where both sides benefit. This is in keeping with Steven Pinker’s argument that globalization and modernity increases prosperity and reduces conflict. The left wants to hurt economic relations by imposing sanctions on sovereign, successful countries like Russia and ignoring real threats like Syria, North Korea and Iran.

We predicted in 2011 that the 2009-present bull market would continue; indeed, the major indexes have been making new highs ever since. Furthermore, we conceptualized an economic system where increasing concentration of wealth was not only inevitable, but optimal for economic growth. Social inertia – tendency for the status quo to stay the same is now being taken seriously. Just a we predicted years ago, increasing inequality looks like it’s going be permanent and not transitory. We go even further, predicting that the second gilded age will not end a Great Depression, but in most likelihood continue indefinitely because the economy is larger and more stable than in the 20′s, and policy makers are adept at fixing crisis with quick, effective bailouts and monetary policy, as we saw in 2008.

Economic showman, Robert Shiller, says we’re in a housing bubble again. Anyone that says we’re in a bubble without addressing the evidence that we’re not, should be ignored. Unlike in the early 2000′s, we have a web 2.0 boom, permanently low interest rates, and massive influx of private equity and foreign buyers. The last housing bubble mainly affected areas the with most rapid buildup, such as like Las Vegas, Northern and Southern California, Florida and Arizona. Prices in those areas will remain depressed for a long time. Areas with no buildup like Palo Alto, Manhattan, Aspen, and Carmel By The Sea had much smaller declines and are at historic highs. While it’s possible that prices could fall, the prediction of least resistance tends to be the correct one.

In 2011, 2012 and 2013 we predicted the S&P debt downgrade, sequester and the second debt ceiling standoff were great buying opportunities for stocks. In addition, we correctly predicted the US wouldn’t default on its debt , that the small drop in GDP from the sequester would not hurt the economy or stock market, and that congress would hammer out a budget compromise in the last minute.

We were right about things that aren’t economics related, such as politics and stock picking. In 2012 we wrote that Facebook’s stock would outperform Apple. Facebook stock has tripled from it’s 2012 lows while Apple has fallen 30%. We also correctly predicted that the agitators in the Chris Christie bridgegate scandal had no smoking gun to implicate him, and without it, the story would blow over in a few weeks. Sure enough you don’t even hear about that anymore.

The left and the right like to weave these myopic narratives about how things should happen because they cannot conceive any other possibility, or they ignore the data that disagrees with their preconceived notions. Others on the left yearn for a simpler time, presumably when everyone had good paying jobs and people were happier. They want to believe that inequality and debt will lead to crisis, not because economic data supports it, but because they subconsciously want it. They see crisis as a way to upend the elite power structure to be replaced with a more egalitarian one. It may feel comforting to hold these views, but using them as the basis for making predictions will only result in being wrong all the time.

The Free Market Case For More Immigration

The most liberal person in the world says there is no tech skill shortage, implying that the h-1b visa cap shouldn’t be raised. But the tech shortage is real. According to a study conducted by CareerBuilder, IT jobs in the U.S. grew by 13 percent from 2002 to 2013, but the number of people who graduated with IT degrees in 2013 was 11 percent lower than it was in 2002.

Many ‘tolerant’ liberals are just protectionists that want all the overpaid jobs and social welfare programs to themselves. Immigration should be controlled, of course, but some immigrants bring value that current citizens don’t provide. Consider that 40% of S&P 500 companies were founded by immigrants or their children. Or that according to the National Science Foundation, 25% of the total tech workforce is made up of U.S. immigrants; furthermore, 42% of doctoral engineering and science workers as well as 34% of master’s degrees holders in the U.S. are foreigners. Immigrants can fill the tech skill shortage , but have a greater propensity to consume than regular citizens. They help reduce operating costs because American labor is too expensive for America to live to its full competitive potential. The free market is the best path to prosperity, so why are so many liberals (and some republicans) opposed to certain parts of it, like immigration and lower wages?

The left would rather have sluggish economic growth and less innovation in exchange for higher wages. In a meritocracy wages are determined supply and demand. This is in accordance to the Neoclassical microeconomics models. Whereas most markets have a point of equilibrium without excess surplus or demand, the labor market is expected to have a persistent level of unemployment. The left wants to interfere with the free market by discouraging immigration so that companies have to hire more overpaid workers, in a futile effort to have full employment.

The push towards lower wages isn’t motivated by greed. It’s looking after the best interest of shareholders and consumers to keep costs as low as possible. The benefits of cheap labor outweigh the potential externalities. Apple can hire overseas labor because those people will never have enough money to buy an iPhone anyway. The Americans that could have hypothetically been hired by Apple will look elsewhere for work. The savings from outsourcing far exceeds what Apple could earn from the increased purchasing power from US apple employees if some of those employees had slightly more money in their pocket to buy apple products. Boeing, for example, knows that average Americans won’t be buying its planes, so they can outsource with impunity knowing that it won’t hurt demand for their planes. The added profit means Boeing can sell its planes for less money, and this eventually translates into cheaper airline tickets for everyone else or lower freight shipping cots, etc.

As market libertarian, we should favor more h1-b visas for high tech workers, to make America more competitive. More skilled immigration will help businesses and possibly make everyone better off. We cannot have a large social safety net and more immigrants, so good bi-partisan compromise is to cut back entitlement spending for more immigration.

Sorry, No Student Loan Bubble

Through observation, the most popular topics as measured by comments and pageviews are posts that are critical of higher education or student loans, posts that are about IQ or standardized testing, and lastly, minimum wages, basic income and Obamacare. This theory was affirmed when the half-pint Robert Reich published a satirical college commencement speech on Business Insider (or maybe Business Insider syndicated the story) about the bleak prospects facing newly minted graduates due to overwhelming student loan debt and low paying jobs. This article garnered over ninety comments (and counting) in just a few hours, well above the average of one to three comments for a typical Business Insider story.

This is nothing new. The left has written about student debt bubbles for years and they keep being wrong. Check out this google search of articles dated between 2005 and 2009 of failed predictions of a bubble.

A recent article from time.com about how student loans are ruining the economy continues in the leftist tradition of premature bubble prediction. The doom & gloom credo is to predict early and predict often.

But before we can address a solution, we need to address the cause. The rise of student loan debt is attributable to leftist efforts to mainstream college education so that it’s readily accessible to everyone, whereas in the past college was attended by those who could afford it or were smart enough reap the benefits of it. Nowadays, high school graduates who can’t even read their diplomas are attending college and we’re supposed to be surprised or sympathetic when they can’t find good paying jobs? Or that fifty percent of college enrollees don’t finish, squandering tuition money that could be have put to better use elsewhere? These are people that should have never been admitted to college. Less prestigious colleges will admit anything that passes the fog mirror test, provided it can pay the tuition. The solution is to better screen applicants and giving students more realistic advice about their post-secondary options, but because college is such a big business, many low aptitude applicants (and parents) will continue to be duped into thinking college is a ticket to success, when they just aren’t smart enough or mature enough to to take advantage of it. Or they earn a low paying, easy degree, which isn’t as big of a concern in an elite college, because the diploma and connections are worth the price alone; however, those admitted to odds-and-ends U don’t have this luxury.

Another reason college attendance is surging because in today’s cutthroat labor market having a degree gives an advantage over someone that doesn’t have one. Some employers require a degree, even if the job doesn’t necessitate it, because a candidate with a degree is believed to be more competent- and with supply far exceeding demand- employers can be as selective as they want. The unemployment rate for students with technical degrees like math, science, physics or computer science is substantially lower than the humanities; furthermore, jobs requiring technical skills pay much more, too. Very specialized jobs like surgery or endoscopy are not amenable to autodidacticism. As shown in the graph below, college grads earn more and are less likely to be unemployed. Those with STEM degrees have the best prospects of all.

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Technically, any trend with an underlying exponential growth curve will appear like a bubble if viewed from a long enough time frame, including things that can’t go negative like compounded interest. Student loan debt tops one trillion, but in 2011 the average debt per student was only $23,300 (or about the cost of a car, but I don’t see the left protesting the auto companies)- a far less daunting number than the two to three hundred thousand dollars purported by the sensationalist media. Secondly, unlike a car, the value of a tuition appreciates, because of rising demand and costs to obtain it. Student loans are not like mortgages because they are non-dischargeable in bankruptcy. Additionally, the federal government is making a profit from student loans to the tune of $40 billion a year. College critics James Altucher and Robert Reich omit these facts. They also ignore the role of IQ in predicting college success, blaming failures on the job market or greedy corporations, when many people just aren’t intellectually cut out for college or choose easy, low paying majors. These are the same liberals that want to end psychometric testing, when more testing is, in fact, the most reasonable solution to the college problem. The second solution is personal responsibility. No one forced you to major in liberal studies, but don’t blame the government, the fed, or the 1-percent when employers can’t find a use for, say, a history of arts major when Wikipedia can fill that job for free.

Why Economists Don’t Need To Be Able To Predict

A common criticism of economists, and the economics field in general, is that they, the economists, ‘failed to see the crisis’. But is this really important or just a red herring used to sling mud at an important profession? Because they didn’t predict, ergo the models are wrong and economists are wrong. Case closed.

Economists are better at solving and explaining economic problems than predicting or preventing them. A doctor cannot
reliably predict if someone will get cancer or prevent someone from getting cancer, but he can offer treatment for it and an explanation for the biological processes that cause cancer. Does this mean doctors aren’t credible? Absolutely not. Similarly, economists don’t necessity have to be able to predict crisis, but they certainly have demonstrated a knack for keeping them as brief as possible. Economists (Greenspan specifically) helped stem the Black Monday stock market crash by infusing liquidity on Tuesday morning. As treasury secretary, Larry Summers helped engineer the bailout during the 1994 economic crisis in Mexico, the 1997 Asian financial crisis. In 1998, Summers, Robert Rubin, and Greenspan (dubbed The Committee to Save the World, according to Time), engineered the successful Long Term Capital Management bailout. The lesson is that we don’t need to predict crisis; we only need to have the systems in place to sequester problems so the rest of the economy can continue thriving. If there’s a problem it can be fixed in a matter of weeks or months with the coordination of the fed, the executive branch, and congress. The folks that ‘predicted’ the 2008 crisis were blindsided by the huge recovery- a recovery that is still raging to this day as stocks continue to make new highs. It’s safe to say fed policy in 2007-09 was a resounding success, as well as QE 2 & 3. Bernanke’s successor, Janet Yellen, doesn’t need to be an oracle; she only needs to wield the cudgel of monetary policy to nip problems in the bud as they arise.