5 Tough Questions for Ben Bernanke

As the Fed holds first-ever press conference, investors want answers

     

3. Are  near-zero interest rates are fair to savers and retired folks on fixed incomes?

percentage sign1 150x150 5 Tough Questions for Ben Bernanke

Mr. Bernanke, earlier this year, you said on CNBC that the purpose of QE2 was “not to increase stock prices per se.” But at the same time, you said, “But the way monetary policy always works is through interest rates and asset prices …By taking these securities out of the market and pushing investors into alternative assets, we have led to higher stock prices… The policy is affecting the stock market really in two ways. One is by lowering long-term yields and forcing investors into alternative assets.”

Thanks to your monetary policies, money market mutual funds are now relying on fee waivers to avoid breaking the bank. For example, according to the Spring 2011 edition of the T. Rowe Price Report, without these waivers the firm’s money fund yields would be as much as 29 basis points in the red! Even Vanguard, a not-for-profit fund company, admits in its money fund prospectuses, “Vanguard and the Fund’s Board have voluntarily agreed to temporarily limit certain net operating expenses in excess of the Fund’s daily yield so as to maintain a zero or positive yield for the Fund.” Read about

So tell me Ben, if even a not-for-profit fund company can’t keep its money funds afloat without a subsidy, how can today’s savers and retirees secure their financial future? How much longer does the government plan to steal from savers in order to fatten bank profit margins?

4. What would you do if, one of these days, the Chinese placed a $100 billion order to sell their U.S. Treasury bonds?

china map 5 Tough Questions for Ben BernankeLast week, Standard and Poor’s announced it was downgrading the outlook for U.S. debt, saying “In 2003-2008, the U.S.’s general (total) government deficit fluctuated between 2% and 5% of GDP. Already noticeably larger than that of most ‘AAA’ rated sovereigns, it ballooned to more than 11% in 2009 and has yet to recover.” China’s Foreign Ministry Spokesperson Hong Lei responded, “We hope the US. government will earnestly adopt responsible policy measures to protect the interest of investors.”

Let’s face right up to that big issue that S&P has called to our attention: The U.S. government’s spending has gotten wildly out of control, and something really needs to be done about it. S&P says an agreement between the Republican and Democratic Parties in Congress and the White House needs to be reached by 2013. If not, S&P says there’s a 1 in 3 chance that they will have to lower the debt rating of the United States government.

The Fed is sitting on a powder keg. At some point, it will be necessary to restore a semblance of balance between savers and borrowers. When interest rates begin to tick up, the rush to buy anything and everything could turn into a universal urge to sell. The Chinese are already complaining about the meager rewards of Treasuries.

What would happen if they decided to dump just 10% of their $1.15 trillion position in U.S. debt? How is the Fed going to deal with such an outcome?

5. With so many regional Fed presidents voicing dissent, is the Fed’s renowned “collegial” decision-making process breaking down?

Just after you announced QE2, Mr. Bernanke, your former fellow governor at the Fed, Kevin Warsh, was critiquing the policy (in diplomatic terms, of course), saying, “The Federal Reserve is not a repair shop for broken fiscal, trade or regulatory policies.

Given what ails us, additional monetary policy measures are poor substitutes for more powerful pro-growth policies.” Since then, Warsh has resigned. Meanwhile, Thomas Hoenig of the Kansas City Fed has called QE2 a “bargain with the devil,” Richard Fisher of the Dallas Fed has warned the U.S could suffer “the same fate as in the Weimar Republic,” and Charles Plosser of the Philadelphia Fed has said a failure to reverse course “could have serious consequences for inflation and economic stability.”

What do you think of so many regional Fed presidents going around, giving speeches that dissent from your own point of view? What makes you so sure that you are right and everyone else is wrong?

Richard Band is the editor of Profitable Investing.

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