Jeremy Grantham, chairman of institutional money manager GMO, suspects the economy will recover more slowly than people want, which will prompt Federal Reserve Chairman Ben Bernanke to keep rates too low for too long — which, in turn, will send stocks to the moon.
“Bernanke is, in fact, begging us to speculate, and is being mean only to conservative investors like pensioners who cannot make a penny on their cash,” Grantham writes in his monthly letter to investors.
“Collectively, we forgo hundreds of billions of potential interest, but at least we can feel noble because we are helping to restore the financial health of the banks and bankers, who under these conditions could not fail to make a fortune even if brain dead.”
We’re lucky if a tiny fraction of our forgone interest is returned by banks as loan repayment profits, Grantham notes. “Some profit!’ he exclaims.
“Oh, for the good old days when we could just settle for a normal market-clearing rate of interest. But that, I suppose, would be wicked capitalism, and we had better get used to bank-and-speculator-benefiting socialism.”
Speculators are not stupid, Grantham points out. They see that each crash is followed by a long, artificial period of low rates and easy financial borrowing.
“They see that Bernanke is an unreconstructed Greenspanite in that he refuses to address bubbles but will leap to ease the pain should a bubble break,” Grantham says.
With official interest rates near zero and the Federal Reserve unable to cut them any further, every policy meeting brings the central bank one step closer to an eventual monetary tightening, and the Federal Open Market Committee meeting slated for this week is no exception.
"The Fed is in no hurry to raise rates," said Eric Green, economist at TD Securities, told Reuters. "The FOMC meeting will not show any material digression from the methodical wait-and-see approach to policy."
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