Former Federal Reserve chair Ben Bernanke has no patience for the idea that Fed is creating inequality and hurting savers.
In an interview with the Financial Times published Friday, Bernanke takes to task the idea that the Fed’s policy of cutting rates to 0% and keeping them there to support a slow, plodding post-financial-crisis economic recovery has helped enrich the already-wealthy and punished “Mum and Pop” savers who just want a safe return on their money.
“It’s ironic that the same people who criticise the Fed for helping the rich also criticise the Fed for hurting savers,” Bernanke told the FT’s Martin Wolf. “And those two things are inconsistent. But what’s the alternative? Should the Fed not try to support a recovery?”
The basic complaint here from critics is that by keeping interest rates at 0%, investors and savers of all types — but most notably “regular” people who are saving for retirement — are forced “out the risk curve.”
This means that instead of buying a relatively safe asset like a government bond, these folks have to buy riskier assets like stocks to get the 5% or 6% annual return they need to meet retirement goals.
For a number of reasons, this sort of complaint is silly and fundamentally misunderstands what investing and saving really entails, which is the pursuit of certain returns balanced against that return’s inherent risks.
And as Cullen Roche outlined in a post last month, the basic thrust of the argument that savers are being hurt by Fed policy is that “savers” are sort of, in some way, entitled to a certain nominal return on their hard-earned money.
What they really want is risk free income. And that usually comes from the US government as a function of the Fed’s policies. Ironically, these complaints usually come from “hard money” and anti government types. And in arguing for risk free income they’re essentially asking for a handout from the US government in the form of higher interest payments from Uncle Sam. In doing so they’re arguing for a higher government deficit and debt since interest income is one of the largest expenses in the budget deficit.
What is often evoked in criticising the Fed’s “treatment” of savers are 8% certificates of deposit you could get back in 1980s, which basically allowed you to park money at a bank for 3 months and get all of it back, plus an additional 8%.
And with short-term rates near 0%, the nominal returns on an 8% CD sound downright scandalous to a modern-day person investing and saving for retirement.
But the thing is, these rates aren’t just made up out of thin air: they are a product of the Fed’s balance between what the economy and markets need and can handle in terms of short-term interest rates. And this decision takes into account how fast the economy is growing, what the rate of inflation is, what the global economic situation is like, and so on.
In other words, this isn’t just a one-off decision the Fed makes independently.
Bernanke told Wolf, “If people are unhappy with the effects of low interest rates, they should pressure Congress to do more on the fiscal side, and so have a less unbalanced monetary-fiscal policy mix.” And in this Bernanke is telling Wolf that Congress approving additional government spending is the thing you’re really looking for if you want additional economic stimulus.
The Federal Reserve, in Bernanke’s view, did its part and avoided a Great Depression. “A Great Depression is not going to promote innovation, growth, and prosperity,” Bernanke told Wolf.
And so now it’s Congress’ turn. Or something.