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For several months now, the GOP in general and the Tea Party in particular have
taken unending swipes at Federal Reserve Chairman Ben Bernanke, turning him
into a virtual pi ata. In his speech in Jackson Hole, Bernanke finally swung
back. Many were shocked that the markets were strong even in the absence of
some new form of financial stimulus like the Quantitative Easing version 2 that
he announced at the same conference last year. In my view, that particular
flooding of cash into the economy mostly ended up in the stock and commodity
markets. For sure, it never helped U.S. housing or industrial production. Much
of the gains triggered in stocks triggered late last summer by QE2
were erased in the last month by a crashing stock market as the world watched
our governing processes grind to a halt.
Perhaps some folks were cheered that the Fed Chairman parked his hypodermic
syringe and decided not to give another shot of stimulants to the markets. He
left the door open for more discussion at a two day, instead of the usual one
day, Fed meeting in September and alluded to the potential uses of additional
tools:
the Federal Reserve has a range of tools that could be used to provide
additional monetary stimulus. We discussed the relative merits and costs of
such tools at our August meeting. We will continue to consider those and other
pertinent issues, including of course economic and financial developments, at
our meeting in September, which has been scheduled for two days (the 20th and
the 21st) instead of one to allow a fuller discussion. The Committee will
continue to assess the economic outlook in light of incoming information and is
prepared to employ its tools as appropriate to promote a stronger economic
recovery in a context of price stability.
Of course we can ask, who is Bernanke kidding? He blew his wad on his principal
tool two years ago when he took interest rates to near zero, in on e dramatic
move. He said recently that he will hold rates at this low level until some
time in 2012. Once you have pushed rates to such low levels and kept them there
for so long, it becomes obvious that not much in your bag will stimulate
employment or housing.
Speeches given in 2008-9 indicated that Bernanke had a bona fide fear of
deflation. It seems to have been well justified. If you own a home, the
principal asset of most people who own one, it has been devalued by 25-35% over
the last three years. There is no sign that price stability has yet arrived.
All we can say is that the rate of decent has slowed.
If you are a retired person or one who is nearing retirement there is often
talk about a 401K having become a 201K. Financial assets have declined for
many. Rising commodity prices for basics such as oil and gas, cereal, meat and
other staples including corn oil, is a problem at the grocery and at the gas
pump. That means most people have less to spend and what they need to buy costs
more. No wonder that most Americans are having a crisis of confidence in their
net worth and that of the United States. No matter what the banks say to the
contrary, it is near impossible to get a loan to finance a new home or a small
business. Some huge percentage of real estate transactions are now being done
for cash as a result.
The reality is that it is not the FED that can pass bills to replace our
crumbling infrastructure, encourage higher education, or put Social Security
onto a self sustaining track. The FED cannot work toward balancing the budget.
I seem to be in complete agreement with Bernanke when he said:
Fiscal policymakers can also promote stronger economic performance through the
design of tax policies and spending programs. To the fullest extent possible,
our nation s tax and spending policies should increase incentives to work and
to save, encourage investments in the skills of our workforce, stimulate
private capital formation, promote research and development, and provide
necessary public infrastructure. We cannot expect our economy to grow its way
out of our fiscal imbalances, but a more productive economy will ease the
tradeoffs that we face.
When FDR introduced Social Security most people lived only a few short years
after retirement. Now, many people live now until they are 90 or 100, not 68 or
72 as when it was first enacted. What to do is not really rocket science. We
have a roadmap that Dwight Eisenhower laid out in the early 1950 s when our
interstate highway system was constructed, the GI bill sent everyone who had
served our country in WWII or Korea to college. Other than in recent years,
most of us paid far more than 50% of what we earned in taxes. In most of my
working lifetime, they got far more than half of what I earned in salary.
Time and time again, the U.S. has run deficits in bad times and paid them off
in good times. You raise taxes, pay off our debts, and then you are in good
shape the next time the Government needs to spend something extra to move the
country along out of a serious downturn.
It is the FED s job to promote stable monetary policy and price stability. It
is the job of the Congress to enact fiscal policy when it isn t being
dysfunctional and putting all of us and our credit rating in peril. Not many of
us were happy with the developments over the summer in D.C. Bernanke addressed
that, too:
Finally, and perhaps most challenging, the country would be well served by a
better process for making fiscal decisions. The negotiations that took place
over the summer disrupted financial markets and probably the economy as well,
and similar events in the future could, over time, seriously jeopardize the
willingness of investors around the world to hold U.S. financial assets or to
make direct investments in job-creating U.S. businesses.
Joan E. Lappin CFA Gramercy Capital Mgt. Corp.
In these turbulent times, put our decades of experience to work for your
portfolio. Don t let a beginner practice on your retirement funds. Contact us
at info@gramercycapital.com