Ben Bernanke & # 039; s End Game
Ben Bernanke & # 039; s End Game
Ten years after the financial panic, the architects of the rescue policies are taking a victory lap. We do not relist the immediate panic response, some of which we support. But there is a policy whose outcome is still uncertain: the almost decade of zero interest rates and the purchase of unprecedented Federal Reserve bonds. Does the October correction in stocks, including the 3% drop on Wednesday, tell us that this bill is now expiring?
The final payments in any monetary cycle of the Fed are not simply the results when interest rates are low and the policy is easy. The verdict is clear only at the end of the cycle, when the Federal Reserve has to unwind its housing and the interest rates increase. Only then can the world see clearly if the Federal Reserve exceeded its stimulus with unpleasant consequences at the other extreme.
That is true even in a conventional monetary cycle of falls and then increases in interest rates. So, just in the midst of the housing crisis that triggered the 2008 panic, we saw the results that the Fed kept interest rates too low for too long from 2003 to the middle of the decade.
Negative real interest rates produced a credit subsidy that fueled the boom in commodities and housing mania that eventually turned into panic and falling. Former Fed presidents, Ben Bernanke and Alan Greenspan to this day, blame all other "global imbalances," but they should reread Charles Kindleberger: "The cycle of hobbies and panics results from procyclical changes in supply of credit".
This is especially true in the current monetary cycle due to the post-2008 administrations of the Federal Reserve. The purchase of Bernanke Fed bonds, known as quantitative easing (QE), was deliberately aimed at keeping long-term interest rates low. The objective of this "financial repression" was to push investors towards more risky assets than Treasurys or bank accounts. Risk assets include stocks that have had an extraordinary career since 2009 even when the real economy grew moderately until 2017.
But since the fiscal reform and deregulation reversed Barack Obama's policies, the real economy has exploded and is now growing at around 4%. The Fed is raising rates in response and delaying (albeit slowly) reducing its bond purchases. Bond yields are now increasing in response to this faster growth, and traditionally that has meant that stock prices will fall.
The question that no one can answer with certainty is whether the correction in the prices of the assets will be longer and deeper because the financial repression of the Fed was so widespread. Some of our friends think it is irrelevant and that higher corporate earnings and faster growth will take stocks to new heights, giving or taking occasional adjustments. We hope you are right.
But an honest evaluation has to be that nobody knows. We have never seen the kind of central bank experiment that Mr. Bernanke initiated and that followed Europe and Japan. It is certainly possible that as bond rates rise, capital will move out of certain risky assets and return to a more normal pattern of investment allocation and risk.
No one knows, too, how much such a reversal will affect the real economy. Growth and economic confidence in general are strong enough now that even a large stock correction may not hinder. Then, again, if the "wealth effect" of the 401 (k) increase and share prices contributed to consumer confidence in the rise, it may be subtracted in the decline.
Keynesian economists also worry about what will happen when government spending slows after 2019, but this underestimates the supply-side impact of the fiscal reform's incentive changes. Unless the Democrats take Congress in November and reverse the reform, or Trump's trade war intensifies, the recession does not seem imminent.
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All this leaves the current Fed president, Jerome Powell, with some difficult decisions. But nobody should think that this final game will be just his legacy. Mr. Powell and the current Federal Reserve inherited this clean-up operation after the long QE era and the zero interest rate.
Mr. Bernanke had begun to reduce the purchase of Fed bonds by the time he left the Reserve in 2014. Janet Yellen succeeded him and began to raise zero rates very slowly with a similarly slow bond reduction. Their legacies are as at stake as Powell's as the Fed moves to the end of this era of financial repression and toward a more complete verdict on post-crisis monetary policy.
The good news is that, thanks to the combination of Trump-GOP policies, the economy is strong. The economic gains from faster growth, increased productivity and a restricted labor market are also likely to flow more widely than in the bull market in the era of repression. But as share prices are shown, the transition is uncertain and may be uneven.
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SOURCE LINK ERESVIRAL.COM https://www.beviral.online
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