Wall Street rejects $700m bailout plan, crash coming! « Peter J. Cooper’s Weblog

arabianmoney, I like this story. It's good stuff.

The reaction is negative because of what Bush and Hank Paulson did by trying to inject post defacto Keynsian theories that died after the Vietnam War. Keynesian's; keyed money to gold, even though Bush did not return to the Gold Standard he did follow the Keynes Government Interventionist policies. After the Vietnam War the Gold Standard was dropped for the Monetary Policy which still had Government Intervention but not as much.

The impact of Keynesianism can be seen by the wave of economists who have based their analysis on a criticism of Keynesianism.

One school began in the late 1940s with Milton Friedman. Instead of rejecting macro-measurements and macro-models of the economy, the monetarist school embraced the techniques of treating the entire economy as having a supply and demand equilibrium. However, they regarded inflation as solely being due to the variations in the money supply, rather than as being a consequence of aggregate demand. They argued that the "crowding out" effects discussed above would hobble or deprive fiscal policy of its positive effect. Instead, the focus should be on monetary policy, which was largely ignored by early Keynesians.

Monetarism had an ideological as well as a practical appeal: monetary policy does not, at least on the surface, imply as much government intervention in the economy as other measures. The monetarist critique pushed Keynesians toward a more balanced view of monetary policy, and inspired a wave of revisions to Keynesian theory.

http://en.wikipedia.org/wiki/Keynesian_economics

Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy.[1 

This control was'/is seen when they manipulate interest rates between the banks that affect mortgages and the business sector when building homes, selling homes, and job creation........

With the high 2 trillion dollar debt for the War on terror in Iraq and Afghanistan, and threats to invade Pakistan, Iran, Syria, and the tab for supporting Israel with Billion dollar tax and spend thrifts they acquire.....they collapsed the Monetary Policy..........ushering in the Policies of Robert Mundell an Economist who won the Nobel Prize in Economics in 1999 for the Mundell-Fleming Model. Why they did not pick him for Secretary of Treasury is beyond me.  Probably because part Keynesian and Monetary Policy keeps their grip on Military Financing by loading debt onto the taxpayer and crashing the Markets at the same time.... They will be forced to accept the Mundell-Fleming policy toward free markets determining interest rate fluxuations from the Fed....in other words the end to Bernakes job.

One important assumption is the equalization of the local interest rate to the global interest rate.

We speak of a system of flexible exchange rates when governments (or central banks) allow the exchange rate to be determined by market forces alone.

Typically this means governments (or central banks) announce an interest rate target which they are prepared to buy or sell any amount of domestic currency to maintain.

Changes in money supply

An increase in money supply will shift the LM curve to the right. This directly reduces the local interest rate and in turn forces the local interest rate lower than the global interest rate. This depreciates the exchange rate of local currency through capital outflow. The depreciation makes local goods cheaper compared to foreign goods and increases export and decreases import. Hence, net export is increased. Increased net export leads to the shifting of the IS curve to the right to the point where the local interest rate will equalize with the global rate. This increases the overall income in the local economy.

A decrease in money supply will cause the exact opposite of the process

Changes in government spending

An increase in government expenditure shifts the IS curve to the right. The shift will cause the local interest rate to go above the global rate. The increase in local interest will cause capital inflow and the inflow will make the local currency stronger compared to foreign currencies. Strong exchange rate also makes foreign goods cheaper compared to local goods. This encourages greater import and discourages export and hence, lower net export. As a result, the IS will return to its original location where the local interest rate is equal to the global interest rate. The level of income of the local economy stays the same. The LM curve is not at all affected.

A decrease in government expenditure will reverse the process.

An increase in the global interest rate will cause an upward pressure on the local interest rate. The pressure will subside as the local rate closes in on the global rate. When a positive differential between the global and the local rate occurs, holding the LMB curve constant, capital will flow out of the local economy. This depreciates the local currency and helps boost net export. Increasing net export shifts the IS to the right. This shift will continue to the right until the local interest rate becomes as high as the global rate.

A decrease in global interest rate will cause the reverse to occur

http://en.wikipedia.org/wiki/Mundell-Fleming_model

Rev. Jermano