Ben Bernanke Blogging Is the Greatest Thing I've Seen All Day
Alright, so the day isn't over yet but when I saw Ben Bernanke has started blogging, I squealed with schoolgirl joy.
Even better that the esteemed former Chief Executive Moneyfucker over at the Fed decided to defend impossibly low interest rates for his debut entry. Oh, Ben, you make it so easy. Literally.
Why are interest rates so low? Will they remain low? What are the implications for the economy of low interest rates?
If you asked the person in the street, “Why are interest rates so low?”, he or she would likely answer that the Fed is keeping them low. That’s true only in a very narrow sense. The Fed does, of course, set the benchmark nominal short-term interest rate. The Fed’s policies are also the primary determinant of inflation and inflation expectations over the longer term, and inflation trends affect interest rates, as the figure above shows. But what matters most for the economy is the real, or inflation-adjusted, interest rate (the market, or nominal, interest rate minus the inflation rate). The real interest rate is most relevant for capital investment decisions, for example. The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed.
You see, children, the person in the street is an idiot. The person in the street probably has, at best, a remedial understanding of how money works. That's a feature, not a bug.
Bernanke goes on to explain, in the most complicated way possible, why the person in the street is an idiot and actually, the Fed isn't to blame for your grandma eating Alpo in her final years.
This sounds very textbook-y, but failure to understand this point has led to some confused critiques of Fed policy. When I was chairman, more than one legislator accused me and my colleagues on the Fed’s policy-setting Federal Open Market Committee of “throwing seniors under the bus” (to use the words of one senator) by keeping interest rates low. The legislators were concerned about retirees living off their savings and able to obtain only very low rates of return on those savings.In Bernanke's defense, they've thrown more than just seniors under the bus. So, there's that.
Really, it's not his fault, you guys, it's the person in the street for not understanding how this works.
A similarly confused criticism often heard is that the Fed is somehow distorting financial markets and investment decisions by keeping interest rates “artificially low.” Contrary to what sometimes seems to be alleged, the Fed cannot somehow withdraw and leave interest rates to be determined by “the markets.” The Fed’s actions determine the money supply and thus short-term interest rates; it has no choice but to set the short-term interest rate somewhere.
It’s a very clear, well-argued post; regular readers know that I’ve been making essentially the same arguments for years. I’d just add two points.First, the image of the little old lady living hand to mouth off the interest on her bank account is basically a fiction. Most retired Americans depend on Social Security for the majority of their income, and have very little in interest earnings; the decline in rates has primarily hurt a small minority of very well-off seniors.