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Hedge fund hot-shot David Einhorn, the founder of Greenlight Capital who publicly shorted Lehman before the bank’s demise, spoke at the Buttonwood Gathering hosted by The Economist in Manhattan’s Financial District moments ago.The topic of the discussion is the Federal Reserve’s policy.
The moderator referred to a column Einhorn wrote for the Huffington Post back in May.
A Jelly doughnut is a yummy mid-afternoon energy boost. Two Jelly doughnuts are an indulgent breakfast. Three Jelly doughnuts may induce a tummy ache. Six Jelly doughnuts — that’s an eating disorder. Twelve Jelly doughnuts is fraternity pledge hazing.
First, Einhorn says there’s this assumption that if we want the economy to improve and we want more jobs and more consumption what we need is ever easing monetary policy.
“My point is if one jelly doughnut is fine a thing to have. 30-five jelly doughnuts and that’s not a fine thing to have…It’s not a question of diminishing return, but it actually turns out to be a drag,” he said.
Einhorn said that we’re at the point, or possibly past the point, where these incremental easing of the Federal policy actually acts as a headwind for the economy. He says it’s slowing down our recovery.
He says the leaders have this “group think” where if we want a stronger economy we have to have these easings and lower rate.
There are a couple of things wrong with this, he says.
He says he thinks the lower rates by the Fed drive up the cost of commodities — oil and food. He says that takes income out of peoples pockets that they could spend on other goods.
He says that lower rates are causing people who aren’t able to earn a safe return on savings to hoard their savings rather than spend.
“By denying individuals savings, or interest on their savings, it’s causing a hoarding on that,” adding that it hurts the economy by driving down consumption. “At least that’s my judgment,” he says.
The moderator then asked Einhorn what he thinks the Fed is missing.
“I think it’s the basic assumption. You could start with a view that lower rates generally stimulate the economy, which in most environments is generally true,” he says.
He says it’s hard for economists with very limited empirical data and models to see this.
“There’s not demand that’s being held down because rates are too high,” he says.
About a month ago, Fed Chairman Ben Bernanke at a press conference said low interest rates support the value of many assets Americans own such as homes and businesses.
There are two problems, Einhorn explains.
“The first is he is assuming what he’s trying to prove. In other words, he’s assuming that his low rate policy is actually making a strong economy and then he says therefore we benefit from the strong economy that overwhelms the heart of the savers. But if you take the premise the other way and think the accommodative policy is slowing down the economy, well then his policy isn’t creating an off set…”
The second problem is Bernanke is talking about the benefit of housing values, stock values, but Einhorn points out that a policy trying to create income with asset bubbles can have bad consequences when those bubbles eventually unwind.
“It’s very unclear why we would want to do that again.”
“Second, there is no underlying analysis where he compares the benefit of the so-called wealth effect versus the harm of the lost income of the savers and weighs those things against to each other to conclude that yes savers are being hurt, but it’s being overwhelmed by the wealth effect.”
He thinks if they took the time and looked at the data the best they could they would come to the opposite.
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