The Education Gap

On June 22, 2011, the Federal Open Market Committee (FOMC) concluded a two-day meeting. This was followed by the obligatory press release. That statement was followed by a press conference featuring Federal Reserve Chairman Ben S. Bernanke. CNBC, in the person of Maria Baritomo, interviewed three former FOMC members later in the day:

LEE HOSKINS, President of the Cleveland Federal Reserve branch, 1987-1991.

WILLIAM FORD, President of the Atlanta Federal Reserve branch, 1980-1983.

ROBERT HELLER, Federal Reserve Board of Governors, 1986-1989.

There was no disagreement among the three. There was one subject that all three emphasized: Simple Ben’s QEII-Money-Flooding-Zero-Interest-Rate Policy (MFZIRP) has left the economy in a worse state than if he had done nothing at all.

Following are some of their comments:

LEE HOSKINS: I think the Fed is doing great damage by running negative real interest rates so long. That’s a misallocation of capital…. The Fed made it real clear today they don’t control employment and they don’t control real GDP. They should stick with trying to control the one thing they can and that’s inflation.

[At this point, BARITOMO, sounding a bit like Bernanke might in a similar discussion, asked what the Fed should do about the fragile economy. HOSKINS continued, repeated what he had already said, in a manner that suggested he was speaking to a four-year-old]: The Fed doesn’t control real growth, they don’t control employment. The only thing over time the Fed can control is inflation. If we try to saddle the Fed with a bunch of other responsibilities, we’re going to hurt the one thing that the Fed can control over time. If they control inflation, then the business community and individuals will make decisions that will expand the economy. But, the uncertainty surrounding negative real interest rates and what [they do] to capital markets and the dollar seem to be a real negative to this policy.

WILLIAM FORD: Nothing the Fed has done has helped positive GDP growth. It has not fixed the housing crisis by lowering rates to historic low levels. It has not promoted business investment, borrowing and spending. It’s killed the dollar without helping exports a lot and that’s causing inflation of import prices to go up. Most importantly, they are hurting America’s elderly people by having 14 trillion of personal savings accounts of all kinds subject to interest rates that are 5 percent below where they normally are two years after the recession is over. That’s costing elderly people about $300 billion. It’s reduced GDP because they don’t have the money to spend.

BARITOMO asked ROBERT HELLER about the “reacceleration the chairman [i.e., Bernanke] is expecting in the second half.” The second half of 2011 commences this Friday:

HELLER: There’s a bit of regeneration of the strength in Silicon Valley. A lot of it is really based on Twitter and Facebook. That isn’t real strength in the overall economy, teenagers talking to each other more….Overall, I think the economy will have a hard time facing the headwinds. The Fed should be running positive real interest rates.

About Frederick Sheehan 53 Articles

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009). He is the co-author of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve.

Mr. Sheehan was Director of Asset Allocation Services at John Hancock Financial Services in Boston. In this capacity, he set investment policy and asset allocation for institutional pension plans. For more than a decade, Mr. Sheehan wrote the monthly "Market Outlook" and quarterly "Market Review" for clients.

He is a frequent contributor to Marc Faber's "Gloom, Boom & Doom Report." He also has written articles for "Whiskey & Gunpowder" and the Prudent Bear website, among others. He currently serves as an advisor to an investment firm and a non-profit foundation.

A Chartered Financial Analyst, Mr. Sheehan is a graduate of Columbia Business School.

Visit: Frederick Sheehan's Website

1 Comment on The Education Gap

  1. This article is correct. Those who have worked, saved and planned are slowly being made poorer for it as our currency loses value and our domestic accounts yeild no return.

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