Ben Bernanke Attempts to Pacify Savers

In remarks from yesterday’s speech that were even more disingenuous than comments about money printing and debt monetization noted here earlier, Fed Chief  Ben Bernanke also attempts to rationalize the impact of Fed policy on the nation’s savers who, for the last four years, have been punished with freakishly low interest rates and, more recently, have been promised more of the same for at least a few more years.

The concern about possible inflation is a concern about the future. One concern in the here and now is about the effect of low interest rates on savers and investors. 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.

However, I would encourage you to remember that the current low levels of interest rates, while in the first instance a reflection of the Federal Reserve’s monetary policy, are in a larger sense the result of the recent financial crisis, the worst shock to this nation’s financial system since the 1930s. Interest rates are low throughout the developed world, except in countries experiencing fiscal crises, as central banks and other policymakers try to cope with continuing financial strains and weak economic conditions.

A second observation is that savers often wear many economic hats. Many savers are also homeowners; 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. The crisis and recession have led to very low interest rates, it is true, but these events have also destroyed jobs, hamstrung economic growth, and led to sharp declines in the values of many homes and businesses. What can be done to address all of these concerns simultaneously? The best and most comprehensive solution is to find ways to a stronger economy. Only a strong economy can create higher asset values and sustainably good returns for savers. And only a strong economy will allow people who need jobs to find them. Without a job, it is difficult to save for retirement or to buy a home or to pay for an education, irrespective of the current level of interest rates.

The 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. If, in contrast, the Fed were to raise rates now, before the economic recovery is fully entrenched, house prices might resume declines, the values of businesses large and small would drop, and, critically, unemployment would likely start to rise again. Such outcomes would ultimately not be good for savers or anyone else.

Clearly, the plan to help cash-strapped retirees is to inflate the housing market again so that seniors earning 0.2 percent a year on their savings account can take out a reverse mortgage to make ends meet.

The situation wouldn’t be nearly so bad if the Fed’s policies weren’t disproportionately benefiting high income individuals and Wall Street traders as more and more Americans shun risk assets. Coincidentally, these effects are detailed in two reports today:

• Wary Americans saving more, even as government encourages risk - Washington Post
• Top 1% Got 93% of Income Growth as Rich-Poor Gap Widened - Bloomberg