Let me start off by saying I certainly recognize the superior intellect and business intuition Ben Bernanke possesses. He was self taught in calculus, due to a lack of educators in that field in his high school, and later received a 1590 (out of 1600) on his SATs. His tenure at Princeton, where he was chair of the Department of Economics, and his membership of the Board of Governors of the Federal Reserve System, all warrant the single most powerful financial position he holds today. That is indisputable.
However, although I’m not an expert on his entire tenure as FED chairman, I do have to question the solutions and outcomes he hopes to garner from his latest statements at the annual financial conference at Jackson Hole Wyoming. My biggest concern is with his notion that keeping interest rates at their historically low levels until 2013 will assist in economic growth.
Where do my contentions lie with this strategy? For one, it’s not a new one. It’s a go-to remedy that can assist in gloomy economic environments when deployed for a limited period of time. But I don’t think it’s the correct prescription for our country’s current condition. Interest rates have been at these historically low levels for a couple years now. They began their decline dramatically after the bank collapse of 2008 and haven’t seen even one week of up-ticks since their free fall began. Second, all statistics and economic indicators have pointed towards little in the way of positive results stemming from this approach. Both housing prices and approved mortgage applications have remained unconventionally low. Meaning, while low mortgage rates have prevailed, consumers either aren’t applying for them or haven’t been eligible.
The feedback we’ve seen on our blog also reiterates this notion. In fact, even with smaller loan-side banking products, such as credit cards, people are still having a harder time getting approved. Those with acceptable credit histories, who would once have had a plethora of options available, are being turned down by both large banks and local credit unions.
So while low interest rates aren’t helping to increase housing sales, mortgage applications, or other loan-side banking products, they are effectively keeping popular FDIC insured savings products at insanely low yield levels.
When key rates are lowered and savers are therefore neglected in an attempt to boost home sales, that is okay, but only if it works. And unfortunately, the statistics being published today show the contrary.