The Fed and its main recent players, Ben Bernanke and Janet Yellen, are possibly well meaning, but are they charlatans in a way, dangling the carrot of future prosperity in front of the nation? This will be discussed in more detail later, but the more I read Ben Bernanke, the more I know his bluff needs to be called somehow.
In the age of derivatives, the free market cannot be free. The free market for interest rates assumes that demand for bonds ebbs and flows. It assumes that there are more times when long interest rates are higher than short interest rates. Since inflation is more prevalent than deflation, that assumption used to be important.
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In the normal economy, Banks loaned money to the real economy based on long rates being significantly higher than short bonds. This is not something we don’t all already know.
But, as I said, with the rise of derivatives, the long rate stays lower than it would otherwise be, and that is wreaking havoc upon the financial system.The yield curve for short maturities to the long bond (30 year) is not now inverted, but certainly, from a historical view the long bond has yielded a better return.
Ben Bernanke penned an interesting article posted at the Brookings Institute that reveals the true Ben Bernanke. He says long bonds reflect the current economy, and this is all temporary, and it will pass and normalcy will reassert itself.Â
However, clearly there are mass shortages of the long bonds for use as collateral in the financial world. Scarcity of bonds makes the prices go up and yields go down. Why Bernanke did not address that issue in his article is perplexing.
But, Bernanke does not believe that we are in a secular stagnation, opposing a view which has been offered by Larry Summers. Ben has said that secular stagnation won’t last more than 10 to 15 years!
Secular stagnation is where there is little or no growth in the economy – and Bernanke calls 15 years of that malaise just a temporary blip. Bernanke believes the low growth is a temporary situation. He looks to near full employment as proof that we are past secular stagnation. Of course, workforce participation is at near historic lows, so Bernanke likely does not have the employment picture correct.
