bank rates

Accommodation Now. Accommodation Tomorrow. And Accommodation FOREVER!

As speeches go, it wasn’t a barn burner.

And, except perhaps for a few enthusiastic students of the “dismal science” of economics, it wasn’t particularly inspirational.

No Gettysburg Address.

Nevertheless, for anyone trying to understand current monetary policy, Ben Bernanke’s speech last week at Jackson Hole is worth reading.

(Of course, you have to read it many times to overcome the opacity inherent in statements of the Fed chairman.)

For one thing, the speech contains useful insights into the theoretical underpinnings of LSAPs (“large-scale asset purchases” — aka “quantitative easing”).

These include concepts like “portfolio balance channels” and “imperfect substitutability,” which, simply put, produce a double whammy for interest rates whenever the Fed wades into markets.

The speech also discusses the Fed’s “communications tools,” including “forward guidance,” its regular projection of when zero interest rate policy will end (called, unbelievably, the “policy liftoff date”).

The speech expresses the predictable conclusion that Fed policies have worked and the predictable promise that the central bank “will provide additional policy accommodation as needed.”

Now, why does my headline imply that such difficult-to-understand rhetoric is comparable to George Wallace’s firebrand diatribe on racial segregation in 1963?

OK, the headline’s over the top.

But both speeches display an inflexible policy stance based on outmoded thinking.

George Wallace’s needs no explanation.

In Bernanke’s case, his outdated notion, passionately held, is that lower rates, if given sufficient time, will always produce more economic growth than higher rates.

For Bernanke, the economic benefits of low rates may be delayed or diminished by “headwinds,” like housing market conditions and fiscal gridlock.

But they won’t be completely thwarted.

There will always be more growth than there would have been had rates been maintained at higher levels.

Bernanke’s doctrinal rigidity comes across clearly, through all the jargon, when he uses the Fed’s own historically based economic model to test whether quantitative easing has produced more jobs.

Presumably, this is the same model that told him to deploy QE in the first place.

What did he expect? That it would tell him actions it recommended hadn’t worked?

For me, endless monetary easing is self-defeating.

Besides artificially propping up financial asset values, it only produces a negative economic outlook that’s hardly encouraging to businesses, lenders, consumers and savers.

My own views are closer to those of mega asset manager PIMCO, popularizer of the concepts of the “New Normal” and “Financial Repression.”

I’ll discuss these next time.

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