Fed Chairman Ben Bernanke stopped in at The National Press Club last week to further the process of transparency that the current Federal Reserve Board has promised. Backing away from anything resembling real transparency, Bernanke warned that too much transparency would likely be misunderstood by the public and the markets. Having thus put us in our proper places, he spent time congratulating himself and the Fed for the considerable successes of the second iteration of quantitative easing (QE2).
Notwithstanding QE2’s failure to accomplish its expressed purpose of reducing interest rates on directly-purchased Treasury bonds, Bernanke called the program a success and pointed with pride to the elevation of stock prices. Having long ago rejected a hands-off approach to fixed income markets, even buying mortgage-backed securities for which there existed no other buyers, the Fed abandoned any pretense that it supported free markets by identifying higher stock prices as a primary objective of the latest rescue effort. New York Fed President Bill Dudley explained the Fed’s zero short-term interest rate policy as an attempt to “force” investors to move money from risk-free and low risk investments to those with greater risk. Yesterday Bernanke explained that as “pushing investors into alternative assets.”
I have long maintained that the Fed’s strategy immorally favors the working generation and financial firms at the expense of the elderly retired, most of whom cannot afford to put limited, irreplaceable assets at risk. A separate question, nonetheless one with a strong moral component, is implied in the buildup of unpayable levels of debt that will be passed along to subsequent generations for the purpose of bailing us out of problems of our own creation.
Centuries of history argue strongly that the only realistic way out of such massive levels of debt is to inflate them away. That resolution creates a separate moral question: What is our responsibility to those who lend us money? Are we absolved of any wrongdoing if we simply make all nominal interest payments and return the principal? Or have we implicitly promised to make those payments in a currency with somewhat equivalent purchasing power to that which it had at the time of the loan?
Most of us, government especially, don’t like to introduce moral questions into financial dealings. How can we not, however? What do we owe to our elderly retired, generations unborn and those who have loaned us money?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.