If you think your job is tough, imagine being Ben Bernanke. Yes, the Federal Reserve chairman is well-paid, gets a limousine and bodyguards and so on. But he also gets blamed for every economic hiccup, big or small.
Savers and retirees have a particular complaint: years of microscopically low interest rates. Bernanke and his Fed cronies pushed short-term yields down to nearly zero, mainly to bail out their Wall Street pals. Or did they? Maybe not.
A recent report from Montreal-based BCA Research argues Bernanke's strategy didn't create the persistently low interest rates we've had since 2008. Instead, it says Fed policy is a response to larger economic forces and rates would have fallen regardless.
BCA, publisher of the venerable Bank Credit Analyst, devoted its Nov. 2 Global Investment Strategy report to debunking “Financial Repression.” This scary-sounding term is the theory that central banks suppressed bond yields by holding short-term rates at zero and monetizing government debt.
The BCA report says zero rates are more a reflection of deflationary pressure caused by higher savings rates, deleveraging, banking-sector stress and extraordinary cash hoarding. As evidence, the report shows how short-term rates also dropped near zero in the Great Depression — without artificial money creation, because in the 1930s central banks were constrained by the gold standard. In real (inflation-adjusted) terms, long-term rates bottomed out near -10 percent in the early 1940s.
I don't know whether BCA is right about all this, but it makes intuitive sense. Interest rates are simply the price of money. Yields reflect the supply of savings, balanced against the demand to borrow those savings. When everyone wants to save — and no one wants to borrow — the price of money naturally drops.
As someone who supports true capitalism, I find this idea comforting. Why? Because it means even the Fed is not all-powerful. Whatever governments and central banks do, in the long run the free market will always have the last word.
Bernanke should like it, too. Like the rest of us, he just needs to do what he can with what he has. The world isn't on his shoulders — no matter how many people want to put it there.
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