Years ago now, in 2009 and following, I joined a small minority of economists critical of the Zero Interest Rate Policy chosen by Ben Bernanke and others in charge of the Federal Reserve Bank (Fed) to cure the Mortgage Bond crisis. The current crisis is a direct consequence of over a decade of bad official policy.
At that time, the head of the Kansas City Fed branch, Tom Hoenig, spoke at the Metropolitan Community College in Independence. My question to him was whether the Fed leadership was considering allowing interest rates to find their market level on their own. He answered in the negative, but strongly expressed his own opinion that to allow the market to return to its own equilibrium would be the best solution. He has been a lonely voice ever since.
Instead, Chairs Bernanke, Yellen, and now Powell continued to force down interest rates to favor borrowers (like the government and giant business) over the natural benefits to savers from 4-6 percent returns on cash. And they wondered why individuals, pensions, insurance and other companies–and banks–all went to such great lengths to chase higher yields.
Meanwhile, they maintain the cockamamie concept that a healthy economy requires at least 2 percent inflation to eat away the purchasing value of our dollars. These are the geniuses in charge of supposedly maintaining a sound dollar!
Do you remember the television advertisement for margarine that ends with lightning, thunder, and Mother Nature saying, It’s not nice to fool Mother Nature!? Even more true and important is this principle: it is never a good idea to ignore and throttle the natural forces of supply and demand, especially for money in the economy.
Rather than focus on inflation, the great Milton and Rose Friedman of the University of Chicago, recommended maintaining an increase in the supply of money at a modest rate over time. His professor’s most vocal disciple, Brian Wesbury, and Tom Hoenig have argued since 2009 that the Fed was creating future problems instead of healing the economy.
The so-called Great Recession is now even more clearly seen in the rear view mirror as being caused by the “Everyone Should Buy A House With A Mortgage They Cannot Afford Policy” of the prior decade of legislation and housing policies. But even now, the medicine chosen along with ridiculous oversight boards and rules of Dodd-Frank legislation has failed. No, Mr. President, the bank failures of last week were not caused by loosened regulations. They were caused by the effects of ill-advised low interest rates!
Caught between a rock and a hard place now, the Fed is playing catchup to rein in the inflation it promised was so transitory. It caused the inflation spike by the largest creation of money supply in world history to save us from the Covid-19 shutdowns (now clearly seen as a horrendous mistake). Since they all have doctorates in economics, why don’t they practice the principle of First, Do No Harm?
But otherwise smart people think they must do something even if it is wrong. In 1930, supposedly to cure the depression, Congress passed the Tariff Act that killed world trade and our economy until the WW II crisis. I have given the most recent example of this magical thinking above. Now to avert a run on all banks, the government and Fed are guaranteeing all money in the failed banks, not just $250,000 per account. That is the good news for this week that will cause a worse problem sometime in the future.
Oh by the way, the billionaires including Bill Ackman, will also profit from the sell-off of the past several days. Ackman makes his predictions that the world is about to end and you should sell everything. Then he prepares to buy banks and other company stocks at ridiculously low values. How is that legal, one might ask?
We will muddle on. Do not, however, take your money out of the bank unless it is to earn a better return lending to the government (buying T-Bills and the like).
(Past performance is no guarantee of future results. The advice is general in nature and not intended for specific situations)