The Central Bank Versus The American People

Source: Decline of the Empire

The Federal Reserve has now committed to keeping short-term interest rates near zero for almost three more years. They have also committed to a 2% inflation target. Some say QE3 is just around the corner, but that’s not my subject today. Tim Iacono took note of Ben Bernanke’s disingenuous answer to a question during his latest news conference (video below). Blue shading highlights Bernanke’s answer.

Basically, his answer to Gregg Robb of Marketwatch about the difficulties being experienced by fixed-income investors makes no sense as he confuses conservative investments with riskier ones in the rather disingenuous answer excerpted below:

In the case of savers, we think about all these issues and we certainly recognize that the low interest rates we’re using to try to stimulate investment and expansion of the economy also pose a cost on savers who have a lower return. And we do hear about that obviously and we do think about that.

I guess the response I would make is that the savers in our economy are dependent on a healthy economy in order to get adequate returns, in particular, people who own stocks, corporate bonds, as well as Treasury securities. And if our economy is in really bad shape, then they’re not going to get good returns on those investments.

So, I think what we need to do is, when the economy goes into a very weak situation, then low interest rates are needed to help restore the economy to something closer to full employment and increase growth and that, in turn, will lead ultimately to higher returns across all assets for savers and investors.

That’s little comfort for all the risk-averse savers out there just looking to get more than one percent on a certificate of deposit when the inflation rate is running at three or four times that amount (by government measure, your results may be much higher).

In another post, Tim quotes the Aleph Blog to further document the Central Bank’s war against savers.

Bernanke Does Not Understand Savings

Twice in his press conference yesterday, Bernanke showed that he was out of touch with average Americans. He argued that average people could keep up with a 2% increase in the price level by investing in stocks and (presumably short-term) bonds.

I’m sorry, Ben, but ya gotsta come down from the uneducated ivory tower and wallow in the mud wit da restov us. There are three problems with what you said:

• It’s hard to earn 2% (after-tax) consistently when the Fed funds rate is zero.
• Only the top 20% of the wealthy have enough assets to keep themselves afloat using the asset markets. Most people would like to do something to protect themselves from inflation, but lack the means to do so.
• Average people do not invest, they save at financial intermediaries like banks, S&Ls, and life insurers. Fed policy kills rates for savers. They will not become investors, because they lack the knowledge to do so.

I am again sorry, Ben, because your policies  ,discriminate against the poor and the lower middle class. Yes, the rich and the upper middle-class clever can escape the penalties stemming from your policies, but the lower-middle class and the poor can’t.

Think of it this way: your policies are making it more palatable for average people to buy gold, because the alternatives in savings are lousy. If there is no income, why not grab safety from inflation?

The ostensible purpose of Central Bank policy is to control the (core) inflation rate and promote full employment. Viewed from the perspective of working (and jobless) Americans, this policy has been a miserable failure. Viewed from the perspective of large investors, this policy has been “successful” in the sense that it has reflated some of the assets they typically hold (e.g. the S & P 500). Gregg Robb’s question to Bernanke spoke of the criticism he is receiving from Republican candidates for president. (I assume he was referring to Ron Paul.) But this is not a partisan issue, as much as people want to make it one. The war on savers and those on fixed (or declining) incomes cuts across political boundaries.

I’m going to take Ben Bernanke at his word. I will not posit yet another conspiracy on the part of the FOMC to make the rich richer and the poor poorer, although it is certainly tempting to do so because that’s been the main effect of Central Bank policy. Barack Obama has been supportive of Federal Reserve policy, though he does not comment on it. That’s the Change You Can Believe In.

If we take Ben Bernanke at his word, then it is high time for him and many others to admit the complete failure of modern Keynesian theory and current monetary policy. As Bernanke says, this zero interest rate nonsense is meant to stimulate investment and expansion of the economy. Invest in … what? Emerging markets? Crude oil and other commodities? The dollar and other currencies? Gold? Foreign debt? Because that’s where the money has been flowing. The money always goes where the returns are highest. And what about here in the United States? Do we really need another Mall of America? More commercial real estate? Do we really need another fancy football stadium? Of course not!

Americans need money in their pockets. Good paying jobs would be a good way to accomplish that, but the Fed’s policies have not created any jobs outside of Wall Street. And even there bank jobs are now disappearing. If the Fed can’t create jobs, the least it can do is make it worthwhile for ordinary Americans to get a decent return on what little money they’ve got instead of encouraging them to gamble it away. The least they can do is give in to the deflation (or disinflation) so inflation doesn’t whittle away their money.

Only fiscal stimulus (additional government spending) can build public transportation systems, high-speed rail, fix sewers and water lines, repair bridges and all the rest of stuff which has been totally neglected for over 30 years now. Private investors will not touch this stuff. It is outside their purview. There’s no immediate return in it. But the government is broke. And the government has wasted trillions of dollars over the last few decades on foreign wars and other military “expenses”. It’s high time economists like Bernanke and other FOMC board members started taking a long, hard look at these realities, too.

Whether it was intended this way or not, modern Keynesian economics and current monetary policy has morphed into … Trickle-Down Economics! But with a twist. In Trickle-Down, money predominantly flows only one way—up! But with what we’ve got now, money not only flows up, it also flows away from savers and those on fixed incomes while “official” inflation runs at 3% or more. That’s the Giant Sucking Sound you hear when you get less than a 1% return on your savings account, or your money market account or your Treasury Bills if you’ve got any.

Welcome to the “Best” of Both Worlds.

In short, one of the major economic battles of our time pits The Central Bank against the American People. It’s easy to see who’s winning. And it’s even easier to see who’s losing.

Read more at Decline of the Empire