The CEO Game

In an Op-Ed in the Washington Post online today (Sunday), Ben Bernanke stepped up as a public figure and a politician to inform other public figures and politicians about the havoc the proposed legislation to reform the Fed would have on the United States’ economy. The difference between Bernanke and his audience? Apparently, none of them had even taken Econ 101.

Will They Listen?

It is basic economic fact–in a field with very little facts and very many theories–that an independent Federal Reserve that dictates monetary supply is a major reason why the Unites currency is trustworthy. It has been proven, as Bernanke said himself, that central banks that have the power to make monetary policy independently of political influence lead to lower inflation and interest rates. This is because the bank can be trusted not to simply print more money to inflate the country out of date or shift its interest rate to suit whatever party is in power. An independent Fed leaves the politics to the politicians and the economy to the economists. And so, the economy performs best.

It’s not that there’s not room for improvement in the Fed’s regulation of banks, as the crisis has clearly shown. And it’s not that there’s not room for greater transparency in the Fed, or to remove some of its responsibilities, such as creating a new agency to take over the Fed’s consumer lending issues, as Bernanke has already agreed to. But the proposals to remove the rule of the central bank regulatory powers or to audit monetary policy deliberations and actions make absolutely no economic sense. They make political sense, because people are angry and they want to see heads roll. This is exactly why the Fed needs to be sheltered from the whims of the masses and their representatives.

What I want to know is how so many people have taken seriously the economic proposals of a man who wants to return to the Gold Standard? Why don’t our politicians wake up? In the past 30 years there has been a worldwide movement towards erecting independent central banks. This movement has been accompanied by economic improvement, most notable inflation stability. Creating independent central banks was one of the main ways that Latin American countries curbed the hyperinflation that tortured them for so many years, for instance. Are we really going to take a step backwards? We could add tying the Fed to political whims to the list of uniquely American disgraces, such as not signing the Kyoto Protocol or the UN Convention on the Rights of the charter.

Tamar.

The CEO Game.

Interest rate – What does that means? Well, interest rate is the extrapayment a borrower needs to pay the lender in addition to the loan, at the end of the loan period. In other words, it is the price paid for borrowed money.

Reacting To The Rates

How do the lender and the borrower decide what interest rate fits the?

First of all there is a benchmark for the interest rate; this benchmark is the central bank’s interest rate. The central bank in each country determines its interest rate in order to manage macro parameters such as: investment rates, unemployment, and inflation. Why is the central bank’s interest rate a benchmark? Because the main bank can always print more money and so there is no way that the central bank won’t return its debt and therefore this interest is considered to be free of risk or “safe”. This is not entirely true, however; if inflation increases the lender have less purchasing power in the end of the loan process.

But the central bank only gives loans to other banks, and then those banks give the public loans at a higher interest rate. How do those banks decide what interest rate to offer to which client? The commercial bank uses data it gathers on us as individual and estimates what the risk is that we won’t be able to repay the loan. The interest rate the bank offers us is based on a statistical model that most accurately predicts this chance.

How does the central bank control the investment in the country? Well, it’s easy to guess … The main bank uses the interest rate to control how much money will circulate the market and how much individual will desire to invest money. If the central bank’s interest rate is high, most people will prefer to save the money in the commercial banks and profit from the high interest rate. The high rate will cause much money to sit in the bank, and if the money just sits in the bank you can’t use it to open new businesses and promote new initiatives. On the other hand, a low rate of interest may cause many people to use their money to open new businesses and create more workplaces. For example, if you can open a business that promises a return of 7.5% of the money you invested each year, and the interest rate is 10%, you would just put your money in the bank and get 2.5% more on your investment. But if the interest rate is 2.5%, then you can open your business and earn 7.5%, 5% more than the interest rate that you will get form the commercial bank.

So, what does this have to do with the CEO Game? Well, the CEO Game is unique among business simulations for the degree of realism involved in game play — that is why it is a serious game, and not just a game. Interest rates will change as you play the CEO Game, reflecting changes in the real world. In order to be a successful business tycoon, you will have to understand how the changing interest rate changes your interests — and make changes accordingly.

Omri.

The CEO Game.