Mr. Bernanke Gets His Way

by: John M. Mason

Well, Mr. Bernanke has moved the Federal Reserve to a position of greater transparency. We now have projections of interest rates out until the end of 2014. It is now believed by most members of the Fed’s Open Market that the Federal Funds rate will remain close to zero until the end of 2014.

What is the probability that the Federal Funds rate will be close to zero for the last six months of 2014?

In my mind, zero or close to it!

What is the probability that the Federal Funds rate will be close to zero for the first six months of 2014?

In my mind, zero or close to it!

What is the probability that the Federal Funds rate will be close to zero for the last six months of 2014?

You guessed it!

And, so on…

Seems like I don’t have a lot of confidence in these forecasts.

What are these forecasts for, then?

I have already written my answer to this question. These forecasts are to make Mr. Bernanke feel better.

Mr. Bernanke doesn’t want to be misunderstood. Apparently, in the past, Mr. Bernanke feels that he has been misunderstood. Now, with the “new transparency” there should be no doubt where Mr. Bernanke and the Fed stand…and Mr. Bernanke should feel justified.

This is the first time in my mind that the Federal Reserve has done something of this magnitude so as to make the Chairman of the Board of Governors feel better.

I hope it achieves its goal because as far as I am concerned this new transparency program does absolutely nothing for me in terms of understanding where interest rates are going to be for the next two to three years. It does absolutely nothing for me in terms of understanding what the monetary policy of the Federal Reserve is going to be for the next two to three years.

If anything this new transparency program will assist, in the shorter-term, speculators in making lots of money. George Soros, and others like him, loves a situation in which a government says it is going to maintain a price for as long as it can. This type of government activity creates “sure thing” bets.

The economy is in the condition it is in because there is still a lot of insolvency around. By keeping short-term interest rates as low as they are helps financial institutions and other private or public organizations remain open hoping that they will be able to work themselves out of their insolvency.

According to a report released Wednesday put together by the American Bankers Association and State Bankers Associations, thirty percent of the commercial banks reporting were under some form of written agreement with regulators. A total of 1000 banks responded to the survey, so the study should be fairly representative. Extrapolating this to the total number of banks in the banking system we would get some 1,900 banks under some kind of agreement with the regulators.

This is when there are still some 864 commercial banks on the FDIC’s list of problem banks, which we know does not include all the banks under some kind of agreement with the FDIC.

Many home owners still find the market values of their homes below the amount of the mortgage that exists on the property. Commercial real estate loans are still defaulting at a very rapid pace and many businesses are declaring bankruptcy or are near filing for bankruptcy, especially small ones.

It is understood that the Federal Reserve must continue to protect against further economic deterioration and must continue to protect those individuals and institutions that are insolvent or near insolvency.

Because of this and the consequent slow pace of economic growth the Fed must continue to keep the economy excessively liquid.

I don’t know that publishing interest rate forecasts for the next three years will convince us any more that the Fed is attempting to protect the banking system and the economy. I guess it must help Mr. Bernanke to sleep better to know that he is releasing all this information even if it does little or nothing for anyone else.