I found the following on Bill Bonner's (Empire of Debt) Daily Reckoning site, and thought it was good enough to share.

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As you may remember, dear reader, we put in a Country Hotline Service here at the Daily Reckoning headquarters. We offered to give advice to central bankers and heads of state – for free.

Well, we’re still waiting for the phone to ring. But if the phone ever rings, we’re ready. We can imagine the call:

Ben: “Gosh Bill, I’m in a bit of a jamb. I’ve got rising consumer prices on the one side...and a falling housing market on the other. I should raise rates to head off inflation, on the one hand, but if I do that, I risk sending the economy into a recession. Then, I’ll get blamed for everything. The Republicans will lose the White House – and blame me, of course. The economy will sink – just like Japan in the ’90s – and I’ll get blamed for that too. It isn’t fair...”

DR : “Well...you...

Ben: “Wait...it’s actually worse that I made it sound. Because either way I go, I’m screwed. If I cut rates, the dollar will go down and the “crude oil cowboys” are going to push the price up to $200 – and the whole world economy could go into some kind of crisis. If I raise rates, on the other hand, I’m almost certainly dooming all those marginal homeowners to bankruptcy. They all live on credit. And if the cost of credit goes up...they’re going to be squeezed hard. What’s really happening is that we’re on the downside of the credit cycle. So the cost of credit is going up...no matter what I do.

“And don’t even think about mentioning Paul Volcker. I’m sick of hearing his name. Let’s face it, he wasn’t a genius; he was just lucky to be on the right side of the credit cycle. Lending rates peaked out early in his term at the Fed...he could coast the rest of the way. I’ve got the opposite situation. Lending rates are bottoming out...just as I get started. It’s going to be uphill from here on...and I’m left holding the bag.

“Did you see what happened in the bond market recently? The 10-year note yield went over 4%...and it didn’t come back down until speculators started to bet on a rate increase.

“What can I do? Sit tight? But if I do nothing...and sit pat...I’ll get even more criticism. People will forgive you if you do the wrong thing; but they’ll never forgive you for doing nothing. Doing nothing is not an option.”

DR : “Well...what we’re seeing is pretty much what you could have expected, isn’t it? Isn’t this what happens when...”

Ben: “Look...I don’t need any of your lectures...I just want to know what lever to pull on. The one marked ‘fight inflation’ or the one marked ‘fight recession’?”

DR : “Sorry, Benny...it’s not that easy.”

Ben: “What do you mean? There are only two levers. I just wan to know which one to pull.”

DR : “It doesn’t really matter, does it?”

Ben: “What do you mean by that?”

DR : “Just as you said; you’re in a jamb. If you raise rates, while house prices are falling and GDP is nearly flat, you’re almost surely going to have a recession. But if you cut rates, oil is going up...inflation will rise...bonds will fall, and interest rates will go up anyway. Either way, the economy goes into a slump.”

Ben: “Yeah...so what do I do?”

DR : “Well...you’ve got to think about it in a whole different way. People made mistakes. They built too many houses. They paid too much for those CDOs and MBSs and all the rest of it. They bought businesses for more than they were worth. You can’t do anything about those bad mistakes...except help people correct them as soon as possible.

“You’re not doing any favors by offering more credit to a guy who is too deep in debt. And you’re not doing anything good for an economy that is living on borrowed time and borrowed money. What the whole system really needs is a correction. Why not give it one? Raise rates – a lot. That’ll send a message. That’s what Vol....never mind. Give people a reason to save again. And give the speculators a good spanking. Liquidate housing. Liquidate the banks. Liquidate the farmers. Liquidate the stock market. Liquidate the consumer. Liquidate the whole damned bunch. And while you’re at it, go on TV and tell the public the truth; that modern central banking is as fraudulent as Freudianism...and that from now on, you won’t be putting out any more funny money.

Ben: “Hold on...you know I can’t do that...

DR : “Then get out while the getting is good. Maybe you could fake a heart attack or something, and announce your retirement...that would give you some public sympathy...while you leave the next guy holding the bag.”

The phone is still silent.

On a practical level holdings rates where they are while sounding the inflation horn is probably the soundest thing to do? Give the markets the expectation that rates will rise without dampening current stimulus or making the cost of oil worse. The goal being to allow the situation to stabalize some. There will still be solvency issues out there but we can't grow our way out of those without causing crippling inflation.

Can we grow again the way we have the past few decades? There may be some life left in this situation but I don't think much. Even the countries which have been powering global growth are feeling the pressure of energy/food costs. Scarcity will constrain growth potential.

This is, of course, a problem because a lack of growth reduces job growth and earnings potential. Slowing growth can reduce costs but since supplies are finite growth is capped. All old ideas. Point being what one needs to do is encourage savings and redistribute high end wealth to maintain possible economic levels before wealth is destroyed, and decralize production to increase per unit labor requirements, which creates inflation and rolls back productivity destroying standards of living but maintains a workable economic model.

I am sure you saw reports of the BP report on oil reserves giving us an ability to maintain current levels of consumption for 42 years. Of course if you want growth consumption goes up, the window closes. This may force the decentralization of production wiuthout much policy input. Not only do you may cost of moving goods, you have the cost of moving managers, the travel requests from ex-pats and commuting workers, the ability for labor to re-locate, the raw cost of energy makes decentralized production more viable. Moving raw materials or components will be cheaper than moving people.

If we cam maintain near the current level of global economic activity while expecting lower growth but concentrate on better wealth distribution we really may be in a tolerable situation. But we can't let the pschological effect of lower growth destroy our ability to maintain a workable model.

That post got me to again wonder what might be the effect of the Fed announcing that their lending rates would be fixed - for all time. That would, at the very least, remove one difficult to predict and often quirkey variable from economic calculations all over the world. I have usually found that equations with fewer parameters are less likely to exhibit instabilities.

One other step that the Fed could take which would have a fairly predictable effect would be to announce that they would no longer buy US Treasury bonds. It might even reverse the insane tax-cutting as the government found it harder to shed responsibility. Again, such a move would reduce the complexity of the financial equations.

Oh yeah; I would also open the Open (note that word) Market Committee meetings to live TV.

Gingham's advice to Ben is: On a practical level holdings rates where they are while sounding the inflation horn is probably the soundest thing to do? Give the markets the expectation that rates will rise without dampening current stimulus or making the cost of oil worse.

LeRoy: It seems to me that giving people 'the expectation that rates will rise' without actually doing so would be running a severe risk of destroying whatever credibility the Fed has left when it comes to fighting inflation. The old Aesop's fable of the boy who cried wolf comes to mind. This is what the Bush administration has been doing for some time: talking tough about the importance of a strong dollar while doing nothing about it in the real world. The end result has been a more-or-less continuous fall in the value of the dollar. I suspect that most currency market participants are coming to regard Henry Paulson's talk about the desirability of a strong dollar as being kind of a humorless joke, one that provokes mirthless snickers. When Jean-Claude Trichet and the European Central Bank talk tough about inflation, people sense that they mean it, and so the Euro rises versus the dollar. What will cause the price of oil to worsen is if the Fed continues its tough-guy talk about inflation but then does nothing about it. 'Speak softly and carry a big stick' is probably good advice when it comes to monetary policy.

Lately, Ben Bernanke has been adding his voice to Henry Paulson's about the need for a stronger dollar. If Big Ben does not back up his macho talk with some interest rate hikes before the end of summer, I am anticipating a rather serious further fall in the dollar, with unpleasant implications for oil and other commodity prices.

Talking tough and then revealing yourself to be a wimp is no way to win admirers, whether you're doing it on the beach or in the halls of some central bank.

Bonner has Ben making the following amusing but accurate observations:

Ben: “Gosh Bill, I’m in a bit of a jamb. I’ve got rising consumer prices on the one side...and a falling housing market on the other. I should raise rates to head off inflation, on the one hand, but if I do that, I risk sending the economy into a recession. Then, I’ll get blamed for everything. The Republicans will lose the White House – and blame me, of course. The economy will sink – just like Japan in the ’90s – and I’ll get blamed for that too. It isn’t fair...”

Ben: “Wait...it’s actually worse that I made it sound. Because either way I go, I’m screwed. If I cut rates, the dollar will go down and the “crude oil cowboys” are going to push the price up to $200 – and the whole world economy could go into some kind of crisis. If I raise rates, on the other hand, I’m almost certainly dooming all those marginal homeowners to bankruptcy. They all live on credit. And if the cost of credit goes up...they’re going to be squeezed hard.

LeRoy: Exactly right. Bernanke must choose whether he wants a recession or an accelerating inflation. Interestingly, the new issue of The Economist seems to agree that this is pretty much the choice. [I left it at home, or would quote from it.] I know what choice I would make. Joseph Schumpeter: "A recession is a good cold douche for the economy." And inflation is the cruelest tax of all. Now, I may be a bit biased, because I know my job is very secure. If I were at a bigger risk of being 'downsized', or 'outsourced', or just plain 'fired', would my position differ? Maybe.

But I think Mr. Bernanke should be raising interest rates. He should be raising them now.

I, on the other hand, think that Mr. Bernanke should fade into the background while the Congress, with the obedient compliance of the administration, should sharply raise income taxes at the higher to highest income levels, while lowering thes taxes at lower income levels, so that the net effect would be a budget surplus. The result would be precisely what is needed and what the Fed cannot accomplish: To strengthen the dollar, thus reducing inflation, while increasing the income of the less wealthy, thus reducing the burden of home ownership. Increasing the incremental tax rate to 100% at an income level of half a billion dollars would prevent an end run where corporations poured out money to the wealthy to attempt to compensate them for their tax rate increases.

Obama's proposed changes to taxes are pretty close to what you are recommending: he would raise taxes on the wealthy, and reduce them at lower incomes. [Although he is not recommending a 100% tax rate at any particular income level, and I rather strongly suspect he won't, not wishing to run the risk of being immediately labeled as a Marxist. As some are already accusing him of being.] And I favor those changes to our tax code, which is one of the reasons I will vote for Obama.

But I believe you are wrong in asserting that the Fed "cannot...strengthen the dollar, thus reducing inflation". The Fed could certainly do this by beginning a campaign of raising the Fed funds rate and discount rate, just as they have helped to trigger a serious bout of inflation by their nine-month campaign of lowering those rates. They should, in other words, begin to reverse what they started doing last August, when the credit crisis first made itself evident.

The high inflation, and indeed stagflation, of the late 1970s, was brought under control by the 'tight money' policies of Paul Volcker. Those methods do work, even though they are painful to many people in the interim. Sometimes harsh medicine is the best thing a doctor can prescribe.

Mr. Bernanke must decide whether he wishes to emulate Paul Volcker, or Arthur Burns, the unlamented Fed Chairman of the mid-1970s who figured that the way to help Americans with soaring gas prices was to print more money, which is akin to fighting a fire by pouring gasoline on it.

Note that you have only presented and responded to a fraction of the statement I made, which was "The result would be precisely what is needed and what the Fed cannot accomplish: To strengthen the dollar, thus reducing inflation, while increasing the income of the less wealthy, thus reducing the burden of home ownership." There are two conditions which must be met in that statement. I think simultaneously resolving both issues presented is beyond the Fed's capabilities.

I did indeed focus on the first two clauses in your list of things 'the Fed cannot accomplish'.

The Fed indeed has little control or influence over the distribution of income (or wealth) in the country. Nor can they directly affect 'the burden of home ownership'. [But their easy money policies of 2001-2006 made it possible for any Tom, Dick, or Harry to get a home loan, as the country was awash in 'funny money'.]

But I am having a tough time seeing how your proposed tax changes would reduce inflation. If we are going to increase taxes on the wealthy, and reduce them on the lower income brackets, that would imply more spending by the less wealthy...which would be inflationary, in and of itself. [Unless you really believe that all the less wealthy people would take their tax cuts and use them to reduce their debt levels, instead of spending them on new consumer goodies; and if you believe that, I got me some good dry swampy Florida real estate to sell you---real cheap!!]

Combine your tax changes with a tight money policy, and we might be able to get this country on the right path again...

I am making the naive assumption that strengthening the dollar, which going from deficit to surplus certainly should do, would reduce the cost of imports which make up a major portion of our expenses. If the taxes at the top end are high enough, then I should decrease the spending in that portion of the population, which is the only spending that has been racing along unimpeded so far.

I believe a budget surplus represents a tight money policy since eliminating the need for government borrowing from the Fed reduces their need (desire? how is one ot know?) to introduce additional liquidity to the system.

As I have said previously, I would also eliminate the corporate income tax and redistribute that burden (which we know to be a minor part of government income in any case, and a major reason for wailing, caterwalling, and general bad business practices anyway) over the human portion of the economy in a reasonably fair fashion, taking into account the correlation of income with wealth when determining features of the steepening of the tax curve.

My other suggestion here has been a new (and badly needed) usery law which makes bad loans such an uneconomic investment as to stifle reckless activity by taking away any urge on the part of the banks to make these loans. That should certainly be a powerful tool directed toward eliminating profligate spending.

I am, as you well know, a system thinker and understand that a plan, in general, has to contain numerous elements to be workable. Whereas impeaching and imprisoning Bush would be a joy, I understand that wouldn't, by itself, correct the economy.

OK; your turn: How would you get the oil out of the shale which underlies your neighborhood?

You know it bothers me that after about eight odd years of having the middle lower classes suffer through stagnating or declining standards of living for the past eight odd years that now we must suggest that a recession is the medicine the economy needs. I fear that what follows the recession may not be much of an improvement. Perhaps there is no alternative, perhaps the people are getting what they desreve for electing a nincompoop. Yet for us to say that we must tighten the money supply to control inflation, knowing that we must wait for the global economy to cool sufficiently to actually dampen demand for commodities enough to affect inflation seems really kind of cruel. How far does the global economy need to slow to effect our domestic inflation? By tightening the money supply/strengthening the dollar we not only reduce pressures on oil prices we dampen a lot of other domestic economic activity.

Perhaps there is no alternative.

Or maybe we could focus on what is causing the inflation. Food and energy primarily. And through policy address those, hoping to allow the U.S. economy to retain more viatilty, instead of allowing to become the whipping boy of the global economy. Now we could for instance exploit oil reserves in protected areas, but if we did we should cap production in those areas, exploit just enough to relieve the difference between excess and shortage, not to pump as much as possible. We could also subsidize upgrading numerous consumption venues with more efficient means, lighting, heating, refrigeration, etc. The big problem here is that we have committed to a market approach to weaning ourselves from oil. While we have done work toward making alternatives competitive with oil, the cheaper oil is the less likely alternatives are to be made available. Unless mandated by policy, this can be accomplished as long as people are willing to accept and "intrusive" government. Policy decisions can also be enacted to rolled back as the case may be to relieve some of the price pressures on food.

Gotta run, sorry if I am dropping the thought a bit early, but I am sure you get the jist of the idea.

To distill your comments:

Gingham: Bernanke should talk tough but do little or nothing to give the markets time to recover (assuming the default is indeed towards correction, and not decay). It'll be a long slow slog. We also need to increase overall savings and redistribute some wealth downwards from the top--where it has been accumulating these last eight years. Production must be decentralized to lower transportation costs and energy use.

Leroy: The Fed is losing credibility with all this tough talk and no action. The Fed has allowed a 40% debasement of the dollar on George Bush's watch, and it's time to raise rates, not merely warn about inflation expectations. As Milton Friedman opined, "Inflation is always and everywhere a monetary phenomenon". The Fed's E-Z money policies caused the bubbles in tech stocks and housing, and are now causing the inflation in commodities. [These last were not Leroy's points, but I thought they sounded good right here]. Bernanke must choose whether he wants a recession or an accelerating inflation--which itself could cause a worse recession down the road [again not Leroy's point, but I think applicable].

Phil: Congress (and the new president) should raise taxes on the rich and lower them at the lower end, but the net should be a tax hile, which would gradually get rid of the deficit, and hence, strengthen the dollar--thus, lowering commodity prices.

Leroy: More spending by the less wealthy would be inflationary from the demand side; we need to combine your tax changes with higher interest rates [which would in fact be a double whammy on the economy, guaranteeing a severe recession--probably just we schmuks deserve].

Phil: I would raise taxes so much on the wealthy that the net effect (a budget surplus) would be contractionary, not inflationary.

Gingham: a recession such as you (Leroy) propose would be harsh medicine for the working class. We must continue growing, albeit at a slower pace. We should develop alternative energy and even tap oil in protected areas (ANWR and offshore).

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I personally don't have any 'solutions', but it is testament to just how far Bush has got us into a hole that our digging out of it would involve so many painful remedies. The analogy to a junkie and his heroin is an exact metaphor. The Republicans have been drug dealing for 25 years, and it's now time to pay the piper.

Genedio tries to summarize our various remarks as follows:

Gingham: Bernanke should talk tough but do little or nothing to give the markets time to recover (assuming the default is indeed towards correction, and not decay). It'll be a long slow slog. We also need to increase overall savings and redistribute some wealth downwards from the top--where it has been accumulating these last eight years. Production must be decentralized to lower transportation costs and energy use.

LeRoy (now): The easiest and most natural way to 'increase overall savings' is to ensure that savers are rewarded for saving, by having positive real interest rates---which we do not currently have---because nominal interest rates are (far) below inflation. I am not fond of the idea of 'forcing' people to save, when they can see the value of their 'savings' dropping like a rock.

Leroy: The Fed is losing credibility with all this tough talk and no action. The Fed has allowed a 40% debasement of the dollar on George Bush's watch, and it's time to raise rates, not merely warn about inflation expectations. As Milton Friedman opined, "Inflation is always and everywhere a monetary phenomenon". The Fed's E-Z money policies caused the bubbles in tech stocks and housing, and are now causing the inflation in commodities. [These last were not Leroy's points, but I thought they sounded good right here]. Bernanke must choose whether he wants a recession or an accelerating inflation--which itself could cause a worse recession down the road [again not Leroy's point, but I think applicable].

LeRoy (now): I do agree that if we continue to see acclerating inflation, that this is simply laying the groundwork for an even more serious recession down the road---so wouldn't it be much better to have it now, rather than later? The analogy I like to use is of a person with a serious tooth problem, who keeps postponing an urgently needed trip to the dentist---simply because they are afraid of dentists. Their problem is going to get worse and worse, is it not? As an aside, I do agree that the fall in the value of the dollar is causing some of the inflation in commodity prices, but not all. I think there are real (Malthusian) reasons for this trend as well...as we have often discussed.

Phil: Congress (and the new president) should raise taxes on the rich and lower them at the lower end, but the net should be a tax hile, which would gradually get rid of the deficit, and hence, strengthen the dollar--thus, lowering commodity prices.

LeRoy (now): I think Genedio in another thread was skeptical of just how much of a 'deficit hawk' Obama would be in practice. It is clear (at least to me) that McCain's proposed policies would cause the deficit and the national debt to simply explode---which I think is frighteningly irresponsible...but, as far as I can tell, Obama's policies would also increase the deficit (and the debt). While his tax hikes on the wealthy would probably be greater than the modest tax cuts he is proposing for lower income citizens, he is also planning on some fairly hefty spending increases, some of which are probably quite sensible (increases in energy R&D, for example). Thus I am not at all sure we are going to 'gradually get rid of the deficit'. If I were you, I would not expect any help for strengthening the dollar from an abrupt shift of fiscal policies resulting in a budget surplus. That just doesn't seem to be in the cards, and it reflects just how much damage has been done to our fiscal position by the eight years of Bush II...

Leroy: More spending by the less wealthy would be inflationary from the demand side; we need to combine your tax changes with higher interest rates [which would in fact be a double whammy on the economy, guaranteeing a severe recession--probably just we schmuks deserve].

LeRoy (now): Saying that Americans 'deserve' a nasty recession is not the kind of language I would use. But I would say this: we are now, clearly, in a stagflationary environment, and the only 'cure' that I know for this, is a serious rise in interest rates (= very tight money policies), which will indeed induce a severe recession, and be very tough on all those Americans who so foolishly borrowed to the hilt. Can't help that, I'm afraid. I am all ears if anyone out there thinks they have a better solution. So far I simply have not heard of any.

Phil: I would raise taxes so much on the wealthy that the net effect (a budget surplus) would be contractionary, not inflationary.

LeRoy (now): I would just say this is not politically likely. Even in the event of an Obama landslide (which I do think is possible, by the way, especially if the economy continues to worsen).

Gingham: a recession such as you (Leroy) propose would be harsh medicine for the working class. We must continue growing, albeit at a slower pace. We should develop alternative energy and even tap oil in protected areas (ANWR and offshore).

LeRoy (now): I agree that we should be developing our ANWR and offshore oil resources. I differ from most of the Democratic Party on that issue. [And some Republicans, such as McCain and the governors of Florida and California, have also opposed these measures, but Governor Crist of Florida and McCain have in recent days been changing their position on this. Crist is a likely running mate for McCain, by the way.] However, this caveat: we should strive to make it very clear to the American public that all of these resources are just a stop-gap measure, that would, at most, provide us with a few extra years to develop alternative energy sources, and is in no way a substitute for conservation and some pretty major changes in the American energy-hog lifestyles that Dick Cheney said were 'non-negotiable'...

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I personally don't have any 'solutions', but it is testament to just how far Bush has got us into a hole that our digging out of it would involve so many painful remedies. The analogy to a junkie and his heroin is an exact metaphor. The Republicans have been drug dealing for 25 years, and it's now time to pay the piper.

LeRoy (now): Yeah. What a mess!!!

For arranging this confusing opportunity to view a debate between Leroy(now) and Leroy(notnow).

And Leroy: note that there is a major difference between what I say I would do and what I expect anybody in the government to actually do. It is all pretty depressing and tends to reduce my enthusiasm about elections.

Phil: there is a major difference between what I say I would do and what I expect anybody in the government to actually do.

LeRoy: And there is a major difference between what I actually say and what Genedio paraphrases me as saying. I was not myself in that 'debate'.

Though I do sometimes argue with myself.

And the funny thing is, I always win!!