Ben Bernanke, the head of the Federal Reserve, made the remarkable move of defending his policies in public. He used the Op Ed section of The Washington Post as his platform. It is a sign of how nervous the Fed is about its decision to buy $600 billion worth of fixed income assets in the open market to try to stimulate the economy.
“… low and falling inflation indicate that the economy has considerable spare capacity, implying that there is scope for monetary policy to support further gains in employment without risking economic overheating,”Bernanke wrote.
He also explained the anticipated benefits: “lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment.”
Interest rates are already at unprecedented lows. Large companies can borrow money for yields which are then sold in the single digits. That may be one of the reasons that corporate America can horde $1 trillion in cash. Many fear that another economic dip makes it wise to keep a full bank account.
As for the housing market, the rates for mortgages are the lowest on record. The home buyer’s strike is due to fear that the values of homes will continue to fall. Unemployment and foreclosures are the major causes of that. The Fed cannot solve those problems through the purchase of hundreds of billions of dollars of bonds. Even if capital become more available, it is useless if companies and people refuse to spend it.
Douglas A. McIntyre
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