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Ben’s Getting a Bum Rap, Blame Greenspan



February 28, 2008 – Comments (4)

I find it humorous in a dark sort of way that Ben Bernanke is getting beaten up so badly in the press and by politicians lately.  In fact, I almost feel sorry for him.  Why you ask?  Because a huge chunk of this mess that we’ve gotten ourselves into now is Alan Greenspan’s fault.  Did Bernanke lower the Federal Funds rate to almost nothing and leave it there for years creating the mother of all housing bubbles and then rapidly start yanking the rug out from under it by rapidly raising rates?  No, it was Greenspan.  He borrowed from Peter to pay Paul as the saying goes, or in this case I suppose that he was borrowing from Ben to pay Alan, pushing off a little economic pain years ago for a much worse situation today.  Then just when things are about to get really bad, Greenspan just rides off into the sunset and makes more money than the average U.S. citizen could ever imagine in the private sector by writing books, consulting, and giving speeches while poor Bernanke is left to clean up his mess.  I realize that Bernanke is not blameless in this whole situation, but he certainly didn’t start it.

So now Mr. Bernanke is left holding the bag stuck between a rock and a hard place.  On one side he has raging inflation sparked by the high price of oil and other commodities and on the other side he has what has the potential to be a massive economic slowdown here in the United States.  Traditionally, one could just raise interest rates to stop the rapid inflation that we are experiencing, but I am not so sure that would work this time around when the high prices that we are seeing are being cause at least in part by government regulation forcing us to waste previous crops to use as an inefficient fuel source while at the same time refusing to unlock the land that is locked up in the Conservation Reserve program, the possible plateau of global oil production putting a floor under oil prices, and ever an increasing demand for food and energy from the rapidly growing emerging market middle class.  Raising interest rates, or at least not cutting them any more isn’t going to fix any of those problems.  Sure it would probably slow the decent of the U.S. dollar, but for how long?

The more I think about it, the Fed might be making the right move lowering interest rates into this mess.  Sure it will probably make inflation worse and cause the dollar to fall even further, but if the rate cuts are effective at least the economy won’t fall into a massive, deep recession.  Rising prices are bad enough when the economy is in good shape, if the Fed doesn’t pull us out of this slowdown and prices continue to rise because of global factors that interest rates have no influence over, aka stagflation, then we would be even worse off.

These are just a few thoughts that popped into my head this morning.  I don't know whether I am right or not, but I hope that this post opens up an interesting, civilized debate about what the Fed should do with interest rates.  As a disclaimer, I believe that the Fed will continue to lower rates and I have aligned my personal investment portfolio to at least partially benefit if that happens.


4 Comments – Post Your Own

#1) On February 28, 2008 at 11:14 AM, FourthAxis (< 20) wrote:

I feel bad 'cause ole' ben can't stop the war, which relates to the financing problem he's got.  However, I didn't hear him calling for rate increases when the market was hitting new highs either.

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#2) On February 28, 2008 at 11:34 AM, charlesblazer (30.03) wrote:

Indeed.  It's the formula for success today in politics.  Borrow, Boogie, and Bail.

Borrow: Don't do anything difficult.  Don't solve any real problems.  Just put everything off.

Boogie: Party.  Pretend to be productive.  Take credit for any present good fortune.  Blame all failures on the previous guy.  Smile for the camera.

Bail: Leave the next generation holding the bag.  If you're really bold, briefly re-enter the spotlight a few years later to chastise them for letting it get out of hand.  Sell a book on it.

It works for almost any issue, including monetary policy.  Other recent examples: War on terror, immigration, environment, social security.

It's formulaic.  It's sickening.  Our children will pay for it.

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#3) On February 28, 2008 at 11:48 AM, xthecritic (84.20) wrote:

He isn't responsible for how we got here but he should stop putting his head in the sand on the inflation issue.

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#4) On February 28, 2008 at 12:51 PM, devoish (85.41) wrote:

Assuming the goal is to get housing moving again without falling home prices:

According to the "how much can i borrow" calculator on the website the average Suffolk County household income of $65,000 needs an interest rate of 0.5% in a 30 year conventional to afford the average house of $456,000, with annual taxes of $8000. So basically Bernanke needs to give money away in order for housing to move again and avoid people being foreclosed or deciding to walk away. And the banks need to be willing to lend for .5bps.   And that is with 20% down.

 Another option would be to create more buyers by raising the minimum wage to $15.50 and create homebuyers through higher wages rather than lower interest rates. But youn still need that 0.5% rate.

If you are in a hurry and you do not want to wait for these new homebuyers to save the 20% down, at 5% down you need to get the minimum wage up to $25.00 so a two person working household will earn the $102,000 annually required to buy that same $456,000 house with a conventional at 3%.

That would be equally painful, right? No?

Nothing but time (pain) and lower prices (suffering) will solve this.

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