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Guest Post: The "Person In The Street" Is Correct: The Fed Keeps Interest Rates Low
Submitted by Peter Cleppe of OpenEurope
The "Person In The Street" Is Correct: The Fed Keeps Interest Rates Low
On his new blog, former US Fed chief Ben Bernanke tries to explain that "the person in the street" is wrong to think interest rates are low because of the Fed.
He writes:
"If you asked the person in the street, “Why are interest rates so low?”, he or she would likely answer that the Fed is keeping them low. That’s true only in a very narrow sense. The Fed does, of course, set the benchmark nominal short-term interest rate. The Fed’s policies are also the primary determinant of inflation and inflation expectations over the longer term, and inflation trends affect interest rates, as the figure above shows. But what matters most for the economy is the real, or inflation-adjusted, interest rate (the market, or nominal, interest rate minus the inflation rate). The real interest rate is most relevant for capital investment decisions, for example. The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed."
Obviously, the man in the street is correct: the Fed (or US regulation, for that matter) only allows certain financial institutions to issue money (legal tender) and it allows these to hold insufficient capital. If John has $10.000 in his bank account, which he thinks he can access and use any time he wishes, but the bank's capital ratio is only 10%, it means every single customer of the bank only really has 10% of what he thinks he can access and use any time.
That wouldn't in itself be a big problem in case the Fed would just let people suffer from parking their money in risky banks, but the Fed also acts as a "lender of last resort" in case a bank run would finish these irresponsible banks. Why would any bank then not engage in risky activity?
The result is a massive increase of the monetary mass, and as a result, the price of (future) money (the interest rate) is kept at a low level. That is how the Fed or regulators are able to influence interest rates, contrary to what Bernanke claims.
What's the use of this? Who has an interest?
Governments do not pay back their loans. They issue new loans to pay back the old ones. Who would ever lend to someone who engages in such practices? At least one would charge a very high interest rate to compensate for the risk.
When oceans of money are being created, it's not as risky any more to use part of it to lend to governments. When Freddy owns $10.000, it's risky for him to gamble with $500. When Sarah owns $1.000.000, $500 is to her what's $5 to Freddy. So the more money is being created, the more likely it will end up in the pockets of Ben Bernanke's political overlords.
In the case of the U.S., which thanks to its pool of capital, political and military power, enjoys the exorbitant privilege of having the world's reserve currency, an expansive Fed will not even necessarily "throw seniors under the bus", as one of Bernanke's critics once mentioned, suggesting that monetary expansion erodes life savings of senior citizens. A lot of the monetary expansion results in investment bubbles all over the planet. Some even have "credited" Bernanke with triggering the Arab "Spring", as food prices in the Middle East rose from mid-2010 to an unsustainable level after quantitative easing was re-started. It looks like Bernanke, or at least the institution he presided, is more powerful than he seems to think.
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Public: "I really like the end of the Fed minutes."
Yellen: "you mean the part where I laid out the plan for the future?"
Public: "No. The part where it ends."
So, basically everything we do here at the Fed is kind of a head fake, especially when we do it for seven years in a row, which is probably longer than what most of you consider to be the short run, and, that's what we get paid the big bucks for, to print the really, really big bucks for our Wall Street masters and government benefactors who could really give a shit about anything but the short run anyway, because, somethimes the long enough timeline isn't that long.
If the transmission channels for low interest rates to generate inflation (money flowing into the "real" economy) still worked we'd have inflation out the ass. But they don't. Why? Because the entire developed world is debt saturated.
The only marginal borrower of money now is the government. Which all at once has both infinite access to credit and spends the money in ways that provide little multiplier effect in the economy. From government to the banks to the central bank and back again. A nearly perfect closed loop that only requires ZIRP to side-step what would otherwise be the well known death-spiral of compounding interest piling up beyond it's ability to be supported.
In the 70s somebody famous said "We're all Keynesians now."
To which I say "We're all Japan now."
Well put.
http://www.youtube.com/watch?v=IWWwM2wwMww&t=1m11s
Wow!
I'm going to make this perfectly clear.
All the proof you need no trickle down not even the least little bit.
Ah but multiplier effect out the wazoo if you get anything at all to the bottom.
All except one thing raising the minimum wage. My Apt raised the rent 100.00 in the projects to suck that up.
Ben Bernanke:
"Ah, little ole me had literally no power at all at the Fed. But if you interfere with what we do, it could lead to the end of the economy!"
And you'll never hear a word about any of this on the 6 o'clock news. And the band played on.
The Bernank is a misleading POS and the Fed will fck whoever they have to to recap the banks.
Pool of Capital? Thats's a new one. SARC
We can thank that mf'er Ben Bernanke for the royal screw job we got.
No shit, 0% for 70 months, you should have to wait 6 months to get a new car, but the lots are full of 'em. All that is doing is driving up prices to cover the bad debt end of the deal. More and more executive orders meant to drive home (pun intended) the liberal agenda simply puts more and more nails in the coffin that is the economy.
What the fuck is Bernake lying about, the bearded pos. QE .. the outright printing of fiat to BUY 10 yr Bonds both Gov't and MBS is keeping interest rates down... and the Fed is implementing QE... Why the fuck isn't this lying pos in feckin' jail ?
The Fed cannot allow interest rates to rise, because it would in short order, put an end to the Federal Government. Historically, rates for Federal Debt have averaged about 6%, today it is around 2%.
Last year, the interest on our National Debt was about 400 Billion, about 12% of ALL tax revenue. Had the rate been floating freely and close to the long term average, the interest alone would have been over a TRILLION dollars or a THIRD of all tax revenue!
Can you seriously imagine our "legislators" being able to deal with the spending cuts or tax increases that would be needed to cover the loss of a third of tax revenue? How many government agencies (including defense) could sustain a 20-30% cut in funding? How would voters react to have a THIRD of all taxes going to INTEREST on the National Debt?
FED loses control over the rates and this country is toast.