EC Ben Bernanke’s Apologia For The Fed

Bernanke’s First Blog Post

By now it has probably made the rounds that Ben Bernanke has joined the “blogosphere” by beginning to write his own blog at the Brookings Institute. After reading his first post there, we couldn’t resist to comment. The article is entitled “Why are interest rates so low?”. Perhaps not surprisingly, it turns out that it is essentially a long-winded apologia for the Fed’s interventionist policies.

At one point Bernanke e.g. deems it necessary to once again defend himself against a complaint voiced by a legislator, namely that the FOMC has “thrown seniors under the bus” by cutting rates to zero. Bernanke is assuring us that “I was concerned about those seniors as well”. It could be that seniors will be happy to hear it. However, the return they get on their savings remains zilch to this day, so we doubt it will be much of a consolation to them that Bernanke professes to have been concerned. He also tries to refute the fact that the Fed’s interventions are distorting markets (i.e., he refuses to admit that it is blowing one bubble after another).

It is interesting that Bernanke is launching into a justification of Fed policies in his very first post already. Reading it, we felt reminded of one of his previous attempts to exonerate the Fed, when he argued that the housing bubble was the result of “too lax regulations”, and had definitely nothing to do with the Fed’s interest rate policies. Among other things, he neglected to mention in that particular speech that the housing bubble was actually concentrated in one of the most highly regulated sectors of the economy.

Ben Bernanke: honest injun, we’re completely innocent! We only do good manipulations! The markets do the bad stuff all by themselves.

Photo credit: Getty Images

The Natural Interest Rate

Bernanke tries to explain why interest rates are currently so low, and discusses the natural interest rate in this context:

“Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed.

To understand why this is so, it helps to introduce the concept of the equilibrium real interest rate (sometimes called the Wicksellian interest rate, after the late-nineteenth- and early twentieth-century Swedish economist Knut Wicksell). The equilibrium interest rate is the real interest rate consistent with full employment of labor and capital resources, perhaps after some period of adjustment. Many factors affect the equilibrium rate, which can and does change over time. In a rapidly growing, dynamic economy, we would expect the equilibrium interest rate to be high, all else equal, reflecting the high prospective return on capital investments. In a slowly growing or recessionary economy, the equilibrium real rate is likely to be low, since investment opportunities are limited and relatively unprofitable.”

It seems a bit unfortunate that economists are calling it the “equilibrium interest rate”. What Wicksell described was the fact that there exists a time discount, a “natural” or “originary” interest rate, that is independent of the height of market interest rates. Wicksell’s work has been incorporated and refined in the interest theories of later economists, inter alia in the work of Frank Fetter in the US and Ludwig von Mises in Austria (whom we quote at length below).

Human beings have a limited life span, and time only moves in one direction for them. Time is an extremely important factor influencing their choices and actions. All action is future-oriented and aims at attaining satisfaction, or “removing uneasiness” as Mises put it, at some point in the future. Human action is purposive and achieving a goal sooner is always preferred to achieving the same goal later. This is not a philosophical or psychological concept, but rather an essential, inviolable category of action, i.e., it is a praxeological theorem. As Mises explains:

“If any role at all is played by the time element in human life, there cannot be any question of equal valuation of nearer and remoter periods of the same length. Such an equal valuation would mean that people do not care whether success is attained sooner or later. It would be tantamount to a complete elimination of the time element from the process of valuation.”

“[…A]cting man does not appraise time periods merely with regard to their dimension. His choices regarding the removal of future uneasiness are directed by the categories sooner and later. Time for man is not a homogeneous substance of which only length counts. It is not a more or a less in dimension. It is an irreversible flux the fractions of which appear in different perspective according to whether they are nearer to or remoter from the instant of valuation and decision. Satisfaction of a want in the nearer future is, other things being equal, preferred to that in the farther distant future. Present goods are more valuable than future goods.

Time preference is a categorial requisite of human action. No mode of action can be thought of in which satisfaction within a nearer period of the future is not – other things being equal- preferred to that in a later period. The very act of gratifying a desire implies that gratification at the present instant is preferred to that at a later instant. He who consumes a nonperishable good instead of postponing consumption for an indefinite later moment thereby reveals a higher valuation of present satisfaction as compared with later satisfaction. If he were not to prefer satisfaction in a nearer period of the future to that in a remoter period, he would never consume and so satisfy wants. He would always accumulate, he would never consume and enjoy. He would not consume today, but he would not consume tomorrow either, as the morrow would confront him with the same alternative.”