10.02.2012 13

More monetary alchemy from Bernanke: Low interest rates help savers

By Robert Romano–Here’s a new one.

Speaking at the Economic Club of Indiana in Indianapolis on Oct. 1, Federal Reserve Chairman Ben Bernanke claimed that quantitative easing and lower interest rates actually help savers.

How? Well, certainly not by offering any tangible return on actual savings. Said Bernanke, “My colleagues and I know that people who rely on investments that pay a fixed interest rate, such as certificates of deposit, are receiving very low returns, a situation that has involved significant hardship for some.”

Today, with near-zero percent interest rates — thanks entirely to Fed easy money policies — savings by frugal Americans earn little to no return, eliminating an essential incentive to save in the first place. When inflation is factored in, there is actually a negative return for holding onto cash rather than spending it.

So, how are Fed policies helping savers, then, according to Bernanke?

“Many savers are also homeowners,” said Bernanke, adding, “indeed, a family’s home may be its most important financial asset. Many savers are working, or would like to be. Some savers own businesses, and — through pension funds and 401(k) accounts — they often own stocks and other assets.”

Bernanke explained, “Only a strong economy can create higher asset values and sustainably good returns for savers… [and] [t]he way for the Fed to support a return to a strong economy is by maintaining monetary accommodation, which requires low interest rates for a time.”

He said home values would collapse without Fed support, unemployment would rise, and asset values would plummet and “[s]uch outcomes would ultimately not be good for savers or anyone else.”

So, admittedly, the Fed’s easy money policies do not in actuality directly help savers. But they will increase home values, asset prices, and create jobs for savers, Bernanke claimed. Okay, but is that even true?

And isn’t that what all of the so-called experts said about the bailouts of banks were supposed to have the same effect in 2008 and 2009?

Markets crashed anyway. Home prices have dropped 31 percent since their highs in 2006. And more than 4 million jobs have been lost on a net basis in this economy while the working age population has increased by more than 9 million.

Here we are, four years into the bailouts, and those jobs are still not coming back, home values remain in a crater, and millions of Baby Boomers have seen their retirement savings obliterated in this recession.

Combined with fraudulent claims that quantitative easing improves the trade deficit or boosts economic growth, with the exception of bailing out insolvent banks, nothing that has been said in support of quantitative easing has turned out to be true.

On trade, the boost of exports brought about by monetary expansion has been more than outweighed by the higher price of oil that we pay overseas. On growth, today despite the Fed more than tripling its balance sheet since 2007 to $2.8 trillion today, we are growing at a tepid 1.3 percent annual rate.

In short, all of the horrible things that were supposed to happen without the bailouts happened anyway with them.

So, tell us another one, Ben.

Today, transmuting lead into gold with a particle accelerator, changing the number of protons in its atoms, has more validity to it than Bernanke’s alchemy of “creating” jobs and prosperity with a printing press. And with the cost of quantitative easing coming in at $2 trillion and counting, it might even be more cost-effective.

Robert Romano is the Senior Editor of Americans for Limited Government.

  • pduffy

    When you make the cost of borrowing money zero, you are essentially stealing an infinite amount of wealth from the future to the present – it’s an attempt at “borrowing time for free”. As the old saying goes, “time is money”, so when the government prints money, they are attempting to create time “out of thin air”. It’s alchemy with time, and you cant’ buy time, the clock moves at only one speed. When you borrow time, you must “pay it back”, (the bubble must be popped), and when you attempt to violate this “law” you will get punished, and we are going to pay BIG, as this may be the biggest bubble in the history of mankind.

  • Rob Blitz

    pduffy, I agree with you, the stuff is gonna hit the fan, and in a bad way. However, I disagree that you can ever make the real cost of borrowing zero. In fact it is the discrepency between the Fed-induced lower rate of interest and the real rate of interest as expressed in the time preference of those who defer consumption (i.e., save) that lies at the heart of the bubble. Consumers have not in fact deferred consumption but investors (primarily in industries at the early stages of production) have been tricked into thinking that that is what is happening. There is a competition for resources happening that will lead to an exhaustion of real resources, resulting in the collapse of the bubble. And all along the way, investment is happening in areas of the economy that don’t reflect the wants of consumers because the price system is distorted. All thanks to Ben and his magical printing press.

  • Rob Blitz

    Man, I would love to know what Ben and the rest of those Keynsians are smoking, because that is some righteous weed!
    To argue that savers are benefited because they are holders (directly or indirectly) of real assets whose value must be propped up by currency devaluation is a perfect demonstration of the pretzel logic that Keynsians must propound in order to disguise the disaster that has become the Keynsian model (and more broadly, the whole of neoclassical economics.)
    I just hope that all of those who so uncritically accepted this unscientific and illogical doctrine will have their names put on a wall of shame so that the impoverished generations that follow them will know them for what they were.

  • gwedem5995

    my husband and I used to earn about $l0,000 per year on our investments, which we saved by frugal living and we are lucky now that we barely break even. With what is going on in this country, I think we would be better off taking all of our investments out and hiding the money under our mattress, as before too long, the government will be seizing all our money to promote O’s fair share policies.

  • pduffy

    I agree the ‘cost’ can never be zero, but they believe it can be, like politicians that believed they could control the price of gas which led to the infamous gas lines. Bernanke’s policy is a ‘tax on savings’ which destroys the incentive to save, which then destroys the incentive to invest, which then destroys the job creation machine itself. It’s self destructive like a drug addict – it feels good in the moment, but eventually the effect wears off and you need a bigger dose of drugs, until the point of no return is reached (QE1, QE2, QE3…..) Either the addict must feel the pain and get off the drugs, or he dies. There is no choice. It’s like eating your own flesh thinking that you will gain weight. At some point it MUST stop, or the economy will completely collapse. The “drug” is government printing and spending, the spending must be stopped or our nation will be destroyed. We didn’t need a “stimulus” of 5 trillion more of spending under Obama, but just the opposite. Now the bubble is 5 trillion bigger, and now what? The future pain we will suffer is MUCH worse than it would have been if the addict was weaned from his addiction in the first place. Bernanke is a drug dealer of the worst kind.

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