Bernanke said the Fed's policies mirror what other central banks around the world are doing.Interest rates are usually an expression of future risk. The more risk, the higher the rate charged. Interest rates are also a function of “you want it now" (three dollars now for five dollars on pay day). You either save up and pay cash or you borrow funds at some cost, to reward those who saved the money you are borrowing. The present rates are low only because of government intervention in the markets.
"Long-term interest rates in the major industrial countries are low for a good reason: Inflation is low and stable and, given expectations of weak growth, expected real short rates are low," he said.
Bernanke claims to have studied the Great Depression at length, and so have I. His method for our recovery is not one I agree with. We survived the Great Depression. The major cause was a misallocation of resources. One sector of the economy took off and everyone piled on trying to get rich. And then it collapsed. It took quite a while for the economy to return to normal.
In Africa 40 years ago there was a cattle boom. The more cattle you owned the wealthier you were perceived to be. As the cattle population increased over time, more and more resources were devoted to feeding them. All it took was a drought and, the cost of hay skyrocketed. Most farmers found that they could no longer afford to feed their herds, let alone sell them to someone else. The cattle market collapsed. A lot of the livestock died from starvation. From there, families starved to death. Notice, it wasn’t a shortage of food that killed the people, it was a misallocation of resources. Their apparent cattle wealth disappeared, and they had little if any savings to buy food with.
We are trying to recover from a misallocation of resources in the real estate market. Guess what--- the government is not going to let the market collapse, just because people spent too much money on it ---they are going to keep it going. In Africa, the government could have stepped in and provided food for the cattle, but it wouldn’t have solved the problem. Resources would have been expended on items that were economically unfeasible. This is what our government has done to the housing bubble. It has enabled more resources to be spent on a project that has no real return. Notice that as long as the real price for raising cattle or real estate is subsidized by government forces, the market cannot return to normal. The government subsidies insure that the misallocation of resources will continue.
The questions that need to be asked, are; “Where does the Federal Reserve get the written authority to buy 85 billion dollars’ worth of bonds each month?” and “Where does the Federal Reserve get the mandate to set interest rates?”. We are talking about a government agency that has the ability to spend trillions of dollars a year, saving the banks and the housing market from ruin, on the assumption that this “herd of cattle can be fed” and sold later for the dollars loaned earlier. This is a government agency that has the ability to spend more in one year than Congress has funds to spend from taxes collected.
It comes to mind that we have a 85 billion dollar sequestration for a year that appears to be a real monkey wrench in the economy. And here's the Federal Reserve with that same amount for a monthly allowance with which to purchase bonds.--must be my imagination.
People over a lifetime saved their earnings for retirement expecting interest rates would reflect risk in the market. Does the Federal Reserve have the right to artificially manipulate interest rates to support this misallocation of resources? The Federal Reserve has saved the banking system and now they are working on Fannie and Freddie. Failure is rewarded with bailouts and individual risk is eliminated with government guarantees. Without the Federal Reserve interference, interest rates would be able to return to normal levels. That would be too bad for the housing market, but then maybe our kids could afford to buy a home, and Grandpa and Grandma, might get some real interest paid on their savings. Let’s return risk to our markets and reward success --- unfortunately Ben's going to save that real estate market, and avoid a Great Depression. Ben's got some great deals on 100 acre "farms" inside the city limits of Detroit and they're already zoned residential.