On July 22 Fed Chairman Bernanke appeared before the Senate to testify about the state of the economy and monetary policy. I watched most of the hearing and found it interesting. But I have seen nothing written about it. (The video and transcript are available here.)
There were two things I found interesting. The first was the fact that several senators asked Bernanke repeatedly for his views on how to reform healthcare. One would think senators would want to ask a doctor or someone who has studied the matter rather than someone who claims to be an economist.
The second interesting thing was Bernanke's testimony near the end of the hearing at 02:43:28 when he was questioned about an increase in the savings rate. He said the following (emphasis mine):
Well, there are very few silver linings to this crisis, but I think one of them is that increased thrift and increased attention to family finances will come out of it. So we welcome the higher saving rage. It's constructive for the country, it's constructive, it reduces our dependence on foreign lenders. It supports investment. So it strengthens family finances, so that's positive. Policy makers have been trying to find a magic bullet to increase savings and given the low savings rates, obviously it's not been very successful. There have been a number of ideas, one - a number of them relate to what's called behavioral approaches. Taking account of the fact that people are lazy and it gives them - the first choice you give them is what they'll take. So, for example, recently the congress made changes to the late that allows employers to make 401(k) contributions an opt-out rather than opt-in choice for their workers. And they found that just by making that simple change, that many more workers decided to contribute to their 401(k) plan and that builds up over time, of course to a significant amount of savings. Many employers also contribute, match, 401(k) contributions. So those are some of the kinds of methods that may be useful. I talked with a senator recently about financial literacy and financial education. Again, I think part of the issue - particularly among lower income and minority populations, who don't save as much is making them aware of the benefits of saving for retirement and for other life goals. So I think education has a role to play as well. But I have to tell you senator, that the economics profession has not been extremely successful in finding good methods of increasing savings. And it takes unfortunately this kind of crisis to change behavior the way we've seen it.
The above statement really makes me wonder about Bernanke. Does he really believe such nonsense? Or is he just lying? It isn't hard to understand why the savings rate has been low for so long. The savings rate was low because the Federal Reserve made interest rates artificially low, lower than where the market would have set them. This coupled with the debasement of our currency through the creation of money and credit (aka inflation) causes people not to save. Low interest rates send the message that it is better to borrow than save. It just doesn't make sense to save at 2% (or less) when the rate of inflation is 5% (or more). I don't know what is sadder, the fact that Bernanke doesn't get this, or that the senators he was talking to believed his idiotic statements.
Now I know someone will say that savings rates are up even though interest rates are at historic lows. I believe this is at least partially due to a change in attitude. People are already maxed out with debt and can't take on any more. Or even if they can, they don't want to because of rising unemployment and falling asset values. At the same time, banks are facing massive losses and are unwilling to lend.
So what should be done about it? We need a free market in money. Allow interest rates to be set by the market. Allow for competing currencies. And most of all, end the Fed.
Categories: Monetary Policy
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