Tuesday March 31, 2014
Bernanke Double Tap
The promotion of ‘risk taking’ during Bernanke’s tenure was, without question, done at the immediate expense of traditional ‘savings’. Deal with it Bernanke.
By Brady Willett

Former Fed Chairman, Ben Bernanke, began his new ‘blog’ yesterday with a dandy entitled ‘Why Are Interest Rates So Low?’  Given that only those with a financial acumen would read a blog from Bernanke, the silliness offered was remarkable. Nevertheless, here goes:

If you asked the person in the street, “Why are interest rates so low?”, he or she would likely answer that the Fed is keeping them low. That’s true only in a very narrow sense.

Given that Bernanke only mentions the Fed’s overnight lending rate as a possible mechanism for impacting market (long-term) interest rates, he is absolutely correct!  Moreover, the Fed has no desire to permanently suppress interest rates, but would instead prefer that interest rates rise and/or reflect a future wherein inflation expectations are around or above 2%. Bernanke adds:

The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed.

OK.  Despite a few grievances the above could have passed as sort of correct. After all, Bernanke points out that ‘Low interest rates are not a short-term aberration, but part of a long-term trend’. Unfortunately, and like his predecessor Sir Alan, Mr. Bernanke could not resist trying to slap some lipstick on his pig of a legacy by getting in some potshots:

A similarly confused criticism often heard is that the Fed is somehow distorting financial markets and investment decisions by keeping interest rates “artificially low.”
 
Those that think the Fed is ‘somehow’ distorting financial markets and investment decisions are ‘confused’?  It is with this statement that Mr. Bernanke is left wanting. And what better way to begin a criticism of Bernanke the blogger, then with Bernanke The Chairman (bolds added):

All told, the Federal Reserve's actions…have helped restore financial stability and pull the economy back from the brink. Because of our [the Fed’s] programs, auto buyers have obtained loans they would not have otherwise obtained, college students are financing their educations through credit they otherwise likely would not have received, and home buyers have secured mortgages on more affordable and sustainable terms than they would have otherwise. These improvements in credit conditions in turn are supporting a broader economic recovery.  Bernanke.  December 7, 2009

Apparently Bernanke circa 2009 was not at all confused about the Fed’s ability to push interest rates lower than they would otherwise be.  Roughly 1-year later, this time after QE2: 

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion. Bernanke.  November 10, 2010

Ignoring Bernanke’s silly overreach with ‘virtuous cycle’, the theme of the Fed working tireless to rig interest rates was clear.  Next, about a year later and shortly after operation twist in 2011, Bernanke again lauded the Fed’s ability to attack rates of interest:

…the Federal Reserve has both greatly increased its holdings of longer-term Treasury securities and broadened its portfolio to include agency debt and agency mortgage-backed securities. Its goal in doing so was to provide additional monetary accommodation by putting downward pressure on longer-term Treasury and agency yields while inducing investors to shift their portfolios toward alternative assets such as corporate bonds and equities.   Bernanke.  October 18, 2011

In 2011 the Fed was ‘inducing’ investors to take on more risk but today Bernanke is appalled by the notion that his policies were/ are negative for seniors/savers? Wow. Then, yet another year later, after QE3:

“Most recently… we announced that the Federal Reserve would purchase additional agency mortgage-backed securities (MBS) and continue with the program to extend the maturity of our Treasury holdings. These additional asset purchases should put downward pressure on longer-term interest rates and make broader financial conditions more accommodative.  Moreover, our purchases of MBS, by bringing down mortgage rates, provide support directly to housing and thereby help mitigate some of the headwinds facing that sector…Although it is still too early to assess the full effects of our most recent policy actions, yields on corporate bonds and agency MBS have fallen significantly, on balance, since the FOMC's announcement...In addition to announcing new purchases of MBS, at our September meeting we extended our guidance for how long we expect that exceptionally low levels for the federal funds rate will likely be warranted at least through the middle of 2015.”
Bernanke.  November 12, 2012

To summarize, Chairman Bernanke readily and repeatedly admitted that the Fed was actively suppressing market rates to levels lower than they would otherwise be year after year after year after year…But now, with the gift of retrospect, blogger Bernanke is shocked to discover that people actually think the “Fed is somehow distorting financial markets and investment decisions”?  If you were to go by the sheer nonsense blogger Bernanke is peddling, all the Fed ever does is use conventional monetary policies to set an overnight lending rate to the banks based upon ‘the concept of the equilibrium real interest rate’ - a guiding force Chairman Bernanke didn’t mention once during his reign.

“Our efforts to support the economy have gone well beyond conventional monetary policy…” Bernanke, 2009. 

Conclusions

From the ashes of the 2008 financial crisis the Fed tried to stitch together an economic advance supported largely by central bank’ bravado. And while blogger Bernanke would like us to believe that under his guidance the Fed enacted policies that were ‘transitory and limited ’, the facts dictate that Chairman Bernanke resorted to actions that were both enduring and boundless.

The problem – for those that think failure is a necessary component of capitalism – is that everything has been ‘artificial’ since the Fed boarded the crazy train in 2008. To be sure, be it ongoing central bank machinations, massive and growing carry trades and/or the insidious suppression of sovereign rates of interest, the financial world today is awash in leveraged cheap money chasing fictitious market prices.  Obviously, with no good end in sight, Ben would like a rewrite and acquire separation from this growing tinderbox of financial mayhem - who wouldn’t?

In short, it is abundantly clear that, regardless of intentions, the Fed’s convoluted path to help ‘savers’* has failed to materialize.  Moreover, there is the growing threat going forward that as the Fed-sponsored asset booms turn to bust, Bernanke will not be remembered simply as the Chairman that threw seniors under the bus, but the lunatic that helped put the bus in reverse to mow down seniors in with a Zombieland-style double tap.  After all, if compelling savers to take more risk was the goal of Bernanke’s Fed (it was) who can be blamed as/if these risks assets blow-up?



* When I was chairman, more than one legislator accused me and my colleagues on the Fed’s policy-setting Federal Open Market Committee of “throwing seniors under the bus” (to use the words of one senator) by keeping interest rates low. The legislators were concerned about retirees living off their savings and able to obtain only very low rates of return on those savings.

I was concerned about those seniors as well. But if the goal was for retirees to enjoy sustainably higher real returns, then the Fed’s raising interest rates prematurely would have been exactly the wrong thing to do. In the weak (but recovering) economy of the past few years, all indications are that the equilibrium real interest rate has been exceptionally low, probably negative. A premature increase in interest rates engineered by the Fed would therefore have likely led after a short time to an economic slowdown and, consequently, lower returns on capital investments. The slowing economy in turn would have forced the Fed to capitulate and reduce market interest rates again.


BWillett@fallstreet.com