No one can explain the most complex economic and monetary issues in a simpler, more homespun fashion than former governor of the Federal Reserve, Bob McTeer. He is known for carrying around two yardsticks, one slightly longer than the other, to demonstrate to your average guy the monthly changes in employment.

Bob argues that the Fed is getting a bad rap today. Ben Bernanke?s quantitative easing is neither inflationary, nor causing the collapse of the dollar. This ?money printing effort? is not actually printing any money. The $3 trillion QE executed so far was designed to buy mortgage-backed securities to bring liquidity back to the market place. It then enabled the purchase of a further $600 billion in Treasury securities to prevent a double dip recession. On top of this, the Treasury piled the $700 billion TARP to recapitalize the major banks. All three of these programs were wildly successful.

As a result, the Fed balance sheet has grown from a pre-crash $800 billion to $3.6 trillion. Normally this would be inflationary, but it is not this time, as all of the extra money is being tied up with excess reserves at the banks. The proof of this is that the money supply, M2, is growing at a very modest rate, barely enough to accommodate the population growth. Without the Fed programs, the monetary base would have fallen off a cliff.

The challenge going forward is for the Fed to unwind its balance sheet at the same rate that the banks start paring back excess reserve through more aggressive lending. Too slow, and the Fed risks inflation. Too fast, and it risks falling back into recession. After the end of QE the Fed is likely to maintain a neutral stance, rolling over maturing debt, instead of paying it down. They may never sell their bond hoard.

Although it appears that the dollar is in a free fall in the foreign exchange markets, it is in fact at the same level as it was before the financial crisis. All it has really done is given back its flight to safety bid. The dollar is really a function of our international balance of payments and global interest rate differentials.? Bob feels that the next big move in the greenback is down.

McTeer points out that the Fed has been a huge cash cow for the Treasury, and ultimately, the taxpayer. So far, it has taken in more than $200 billion in profits. The TARP funds paid a 5% preferred dividend and brought in tens of billions of dollars in profits from the banks, General Motors, and AIG.

Bob views Obama?s $900 billion stimulus package as ?an attempt to shoot a hog with a shotgun.? The big problem is that businesses view such programs as temporary and act accordingly. Permanent changes to government policies get you more bang for the buck.

Bob, 70, was probably one of the last people in Texas to use a functioning outhouse. He grew up in rural Ranger, Georgia, the son of a truck stop operator, and his first brush with the real economy was pumping gas and picking cotton.? Somehow, he scored an economics degree from the University of Georgia, and moved on to work at the Federal Reserve.

He was named president of the Dallas Fed in 1991, and went on to pioneer the analysis of the impact of technology on the macro economy. Bob is simple, but he is no lightweight. Today, he serves as a chancellor of Texas A&M University, with 100,000 students.

I have always been a sucker for a visiting Nobel Prize winner in economics. So when I heard that Dr. Michael Spence was passing through town, I was on the next BART train. Michael was here to promote his latest book, The Next Convergence; The Future of Economic Growth in a Multispeed World.

Michael believes that world GDP will triple over the next 40 years, and that the bulk of that growth will come from emerging markets, which will account for half of all GDP within 5-10 years. China is now moving the needle on the global economy big time.

The great challenge moving forward is that the emerging markets can no longer use proven economic models that worked in the past. Investing in aggressive export sectors that pulled their countries forward worked well for Japan, and then South Korea, Taiwan, Singapore, Malaysia, and Thailand. But China and India are now too big, and the US too small to replicate that feat.

Furthermore, the big BRICS are now pushing up against the theoretical limits to growth. China is now consuming up to 80% of some commodities, and further demand could bring dramatic price increases. While America accomplished its economic miracle with oil at $1 a barrel, today?s emerging markets are going to have to pull it off at $100 a barrel. China is now in the middle income range of $4,000-$8,000 per capita, where a lot of developing countries tend to get stuck.

These countries have also reached their environmental limits, with pollution so severe that it threatens to stifle growth. If you don?t believe him, try taking a summer afternoon stroll in Beijing sometime, and see if you can breathe afterwards. The current environmental mess in China will cost a fortune to clean up.

The answer to is accelerate technological development, eventually bring it up to western standards. Throwing coddled state protected enterprises to the wolves and allowing creative destruction to work its way will also be important. Asia already has a big advantage in that their entire infrastructure is brand new, so they don?t have to ?obsolete? it first to move forward, as we do.

Exports become less important in this model. In fact, you can see how this works by tracking shoe maker Nike?s production base over the years, where Spence was once a board member. It started in Japan, and then migrated to South Korea, Taiwan, China, and ended up in Vietnam.

The great revelation for Michael in doing his research, the ?aha? moment, was to discover that economic growth is not an economic issue, it is a political one. Great leadership is the common ingredient among the most successful countries. Governments that are too big fall into the abyss of central planning. Those that are too small can?t adequately invest in infrastructure to prime the pump for the private sector.

Michael has identified 13 countries currently in the sweet spot, including Brazil (EWZ), South Korea (EWY), Taiwan (EWT), Singapore (EWS), Hong Kong (EWY), Thailand (TF), Indonesia (IDX), Oman, Botswana, Malaysia (EWM), China (FXI), Malta, and surprisingly, Japan (EWJ). Since I believe that emerging markets will lead the next leg up in global equity markets, this gives me a great short list to work from.

You may recall that Michael is the Harvard professor who, along with Joseph Stiglitz, won his prize in 2001 for the dynamics of information flows and market development. A Rhodes Scholar, he is also the former dean of the Stanford business school. Among his recent chores has been assisting the Chinese government to develop their upcoming 12th five year plan for economic development.

The great thing about interviewing Joseph Stiglitz over dinner is that you don't have to ask any questions. You just turn him on and he spits out one zinger after another. And he does this in a kibitzing, wizened, grandfatherly manner like one would expect from a character that just walked off the set of Fiddler on the Roof.

The unfortunate thing is that you also don't get to eat. The Columbia University professor and former World Bank Chief Economist animatedly talked the entire time, and I was too busy feverishly taking notes to ingest a single crouton.

Stiglitz argued that for 30 years after the end of the Great Depression there was no financial crisis because a newly empowered SEC was on the beat, and everything worked. A deregulation trend that started under Reagan began stripping away those protections, with the eventual disastrous repeal of the Glass-Steagle Act in 1999, which kept commercial banks out of the securities business. The philosophical justification adopted by many economists, including Fed chairman Alan Greenspan, was that unfettered markets always lead to efficient outcomes.

This belief was based on simplistic models assuming that markets were always perfect, always open, and that everyone had perfect information. Stiglitz's own work on 'information asymmetry,' which earned him a Nobel Prize in economics in 2001, pulled the rug out from under this theory, because it showed that one party to a transaction always has more information than the other, usually the seller. I have heard investing oracle, Warren Buffet, tell me the exact same thing.

The banks used this window to introduce super leveraged derivatives that had never been regulated, studied, or even understood. They then clawed open accounting loopholes that were so imaginative that, not only were shareholders and regulators deceived about how much risk was involved, senior management was clueless as well. Instead of managing risk, they created and multiplied risk.

A 2006 GDP that was 80% derived from real estate transactions and a savings rate that fell to zero meant that a severe crash was a sure thing. President Bush's response was to unleash an extreme form of 'trickledown economics,' with the banks given $700 billion with no conditions attached. Intended to recapitalize the banks so they could resume lending to the mainstream economy, much of the money ended up being paid out in bonuses and dividends to foreign counterparties. Of the $180 billion used to rescue AIG, $13 billion went to Goldman Sachs, and much of the rest went to German and French banks. No wonder Main Street feels cheated.

The financial system is now more distorted than ever, with smaller banks that actually lend to consumers and small businesses going under in record numbers, because the playing field is so uneven. There are too many structural conflicts of interest. The ?once in a 100 year tsunami? argument is merely a justification for changing nothing. Banks would rather maintain the fiction that the loans on their books are good, than make adjustments. No financial system has ever wasted assets on this scale, and the end result will be a national debt many trillions of dollars larger.

The $887 billion stimulus package was too small, and should have been at least $1.2 trillion, but there was no way Obama was going to get more out of congress. The 40% of the stimulus that was tax cuts was saved or put into Treasury bonds and created no immediate beneficial effects on the economy. More money should have gone to the states, which unable to deficit spend, are now a huge drag on the economy. But even this meager package was able to prevent the unemployment rate from rising from 10% to 12%, as it was set to do. Any major spending cuts will produce 'Hoover' outcomes.

Well, I don't get to chat at length with a Nobel Prize winner every day, so I thought I'd give you the full blast, even though I had to leave a lot out. For a dinner that I could actually eat, I walked next-door for a Big Mac meal and supersized the fries.