JUST ONE QUESTION
I got some great emails yesterday regarding my “one question” for Ben Bernanke. An email from DanH said:
“This question cannot be answered because there is no evidence that a ZIRP works. The only thing we know a ZIRP does is help bankers to make more money and blow bubbles.”
ZIRP is zero interest rate policy for those that are wondering. I’d love to hear some reader responses to this one question (which is below). Play devil’s advocate if you agree with me. Or feel free to rip into the administration and the Fed for blowing more bubbles. I have tried to justify Bernanke’s approach, but given his less than impressive forecasting record and strict adherence to a Greenspanian approach I find it hard to justify his actions. We now know that zero interest rate policies did not work in Japan. We know that the low rates of 2002 helped contribute to the housing bubble. You could even argue that the ZIRP in Japan helped create the Yen carry trade which ultimately helped contribute to bubbles in the Nasdaq, China, debt markets and global real estate. We also know that Greenspan’s approach was “flawed” by his own admission. So how can anyone justify the current policy approach? Does anyone have a reasonable answer for this one question:
“Knowing now that low interest rates and government spending failed to stimulate the economy in Japan during the 90’s and only helped make matters worse following the 2002 recession, can you please explain why you expect this same approach to work out differently this time around?”
If so, I am all ears….
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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15 Comments
They’re a broken record. They have one approach that they believe can fix any broken economy. It’s the standard Keynesian model. These are textbook taught Harvard boys who can’t think outside the box. They are trying to fit a square peg in a round hole and it won’t work this time.
Mish has a video with a compilation of statements made by Bernanke since 2005. Very little of what Bernanke said actually came to pass.
http://globaleconomicanalysis.blogspot.com/2009/11/bernanke-vs-meridith-whitney.html
Bernanke has been reactive rather than proactive. Nevertheless, I do think if things get out of control one way or the other he will react (or be forced to react). Right now he sees the inflationary and deflationary forces are largely in balance. The equity markets have recovered about half their losses and unemployment continues to be greater than expected. Why would he change his policy?
If deflation takes hold (see today’s PPI), he may go back to purchasing treasuries directly. If inflation takes hold, he will be forced to raise short rates to keep long rates in check. (But he probably would like to see core inflation over 2% to get things jumpstarted.) He will only act to protect the dollar if general import prices increase enough to spark an significant increase in core inflation. Or oil prices skyrocket enough to put a brake on the economy (as happened in the summer of 2008).
At some point the dollar needs to rise against the Euro and Asian nations with dollar pegs need to let their currencies appreciate against the dollar in order to get thing in balance.
Please excuse my ignorance, but what should the Fed be doing? Should they just sit there and do nothing as the world implodes around them?
The Fed should not exist. It therefore should be doing nothing.
as you know, i think its highly debatable as to whether the japanese response has “failed”. whatever the side effects, they popped a titanic debt bubble and suffered no out-and-out depression, while the govt has continued to facilitate private sector balance sheet repair to the point where their once-bloated corporate sector is now lean. if bernanke et al manage that outcome over the next fifteen years from where we are, that will be a huge, HUGE win. this may sound nuts, but i’m not sure japan isn’t (in spite of its demography and resource limitations) one of the best long-term developed market plays from here. how often in the last forty years has anyone had a chance to buy into a deleveraged developed country private sector with a large hi-tech manufacturing base and heavy asia exposure?
my q:
do you see the fed’s role as a monetary agent solely — or do you feel the central bank has a continuing fiscal role to play in refinancing the private sector through programs such as (most importantly) the permanent MBS purchase program (which is now ending)?
This gets into all sorts of other debates. The unemployment rate in Japan rose steadily throughout the 90′s. It recently hit an all-time high. Their stock market has declined for 20 years. I don’t know what a “depression” is necessarily, but that sounds pretty close to a modern day “depression”.
What have they really accomplished? Japan’s debts are still massive. Granted, their private sector debts have come down tremendously, but their government debts are more bloated than ever.
As for the Fed’s role, I wish they were not so involved in all facets of the market. I’d love to see the Fed run by someone with some risk management knowledge rather than some reactive textbook geek, but that’s not a realistic expectation. That’s like expecting to find a competent mutual fund manager. They need to be less involved in markets and allow the market to work a bit more naturally. We’ve simply delayed the day of reckoning by tinkering with the market’s price discovery mechanism.
It appears to be working quite well. Where have you been?
Depends on your definition of “working”.
What is working:
1) higher commodity prices
2) Higher bank earnings
3) Higher banking bonuses
What is not working:
1) Jobs
2) wage growth
3) House prices are down 30%
4) World equity wealth is down 30%.
If you’re a banker at Goldman Sachs life is quite good. If you’re a blue collar worker at U.S. Steel life sucks.
Another day of higher stock prices!
http://web.me.com/uformula/RCS_Investments/RCS_Investments/Entries/2009/11/16_Dollar_Tanks%2C_Stocks_Up…Surprise_Surprise.html
You’re underestimating your opponent.
That’s just the problem though. He is not supposed to be my opponent (nor do I view him as my opponent). He is supposed to help the American economy so that it most benefits everyone. Not a small segment of bankers….He is running a flawed strategy and it is helping a small portion of the economy while hurting a large portion of it.
Could the ZIRP play simply be the only one that the Fed has (left)? In other words, Ben Bernanke was thinking the future was either Great Depression 2 or stoke another bubble in the hopes it would revive the economy (the same play Japan ran and lost).
What is scary: Mr. Bernanke isn’t stupid. He knows what is happening. He is presiding over destructive practices by the Fed with his endorsement. The only rational reason he’d insist on ZIRP (or whatever you want to call it) is if his information indicates the world economy is on the brink of oblivion.
This could be ignorant, but here’s what I think
1. Government spending is not really directly correlated to what Ben is doing
2. His goal seems to be to keep short term (Fed funds) and long term (via QE) interest rates low to encourage credit expansion, which seems to be the name of his game. It is true that easy money encourages stock market inflows in the short term, but the hope is that this wealth will reach out and be invested in more useful ventures. I think Bernanke, as he once outlined in a speech in Japan, is saving as his next move something akin to charging banks to store reserves at the Fed. If he can lower the bank reserves and cause credit expansion, it could do some good to the real economy
As for the dollar and commodity prices, not sure how much of this is directly related to QE (see the Yen for proof of this). All the talk of printing presses and fiat currency seems to be forward looking/speculative, since M3 has expanded slightly or declined recently. And, if/when the currency really does begin to circulate, it could cause a strengthening of the dollar
From my point of view the contest is between the Fed printing money and the real economy destroying money. As long as the money multiplier continues to go sideways or contract deflation will win. I own commercial real estate and I have been watching my tenants go out of business. I remember my father taking me along Jefferson Avenue in Detroit (it follow the Detroit River up into Grosse Pointe and was the high rent district in the 1930s) he told me back in 1934 when he moved to Detroit that three out of four stores were vacant. That’s my situation today. My situation may be anecdotal but I believe the Fed will lose. Mr. market will kick his butt, and ours.