There’s a huge myth about monetary policy out there, and it goes like this: It’s investors and banks who are demanding the Fed keep interest rates at 0%, while also doing QE over and over again.
John Hussman repeated this myth in his weekly letter this last week:
Why does the Fed want this? Simple. Chairman Bernanke believes that by creating a bubble in speculative assets, people will “feel” wealthier and keep consuming – regardless of the fact that real incomes are stagnant and debt burdens are already intolerable, and despite the fact that there is extremely weak evidence for any such “wealth effect” in the historical record. Undoubtedly, it would be difficult for Bernanke to refrain from these reckless policies when everyone is crying “do something!” But the willingness to tolerate short-term criticism in the interest of long-term benefit is part of what separates leadership from cowardice.
We thought that Hussman’s characterization was totally off. Most likely, Bernanke thinks deep down that he should be doing a lot more, but the “crying” he’s hearing from the financial and political worlds is saying something like: “STOP PRINTING, OR YOU’LL TURN US INTO ZIMBABWE.”
The thing is, we read a lot of commentary from financial professionals on both the buy side and the sell side. We also listen to pay a lot of attention to what bank CEOs are saying, and the fact of the matter is that we almost never hear calls for more easing or cheap rates. Think of how many times you’ve heard Bill Gross, or a Bill Gross wannabe talk about financial repression (play scary music).
Former FDIC chief Sheila Bair is also pushing this myth.
In a Washington Post op-ed, she offers a classic “modest proposal” to fix income inequality by giving $10 million loans to everyone, via which they could buy risky assets.
Obviously, her point is that this is the current state of policy, except that it only applies to Wall Street. And so she insinuates that we need to get off this cheap money fix.
That prompted to Mike Konczal to tweet…
Re: Bair, I still don’t understand the expansionary monetary policy benefits 1%/rentiers/wealth argument. Finance complains rates are low!
— Mike Konczal (@rortybomb) April 13, 2012
In theory, the pro-inflation camp is the populist one, since a policy of inflation means borrowers see their burdens eased, and those with assets see the holdings devalued. But somehow people keep pushing the idea that it’s the opposite, and that its the finance world screaming for higher rates, and that everyone else would benefit with tighter policy and more deflation. It’s a very odd myth.
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