Bernanke Speaks On The Protests

The wall street protestors are having some success at gaining recognition from key policy makers like Ben Bernanke who responded to a question yesterday about the protests to the joint economic committee . He claimed to sympathize with the protests by saying that, “Like everyone else I am dissatisfied with what the economy is doing right now. Certainly 9% unemployment and a very slow growth rate is not a very good situation – which is what they are protesting.” However, while I am sure that no one is celebrating the sluggish growth of the US economy, I really don’t think that is precisely what is driving the protests.

I think people are more likely protesting excessive profits on wall street. They are appalled by bonuses distributed to executives of insolvent institutions and there is general feeling that wall street has profited at the expense of the broader population. People though seem to have differing opinions as to the exact message behind the protests. Bernanke´s past solutions to what he interprets to be the cause of the protests (high unemployment and weak growth) has been to increase monetary stimulus and quantitative easing. Unfortunately for the protestors, these policies tend to be ones that might stimulate growth but mainly through the financial sector at the expense of the middle class. Instead of persuading the Fed to temper monetary stimulus, the protests might inadvertenly influence him to step on the accelerator.

A friend of mine suggested on a current events forum that the protests, even without a clear message would, “capture the world’s attention and allow for the change-agents, policy guys, the lobbyists and lawyers to step in and use the moment to direct peoples’ attention towards legitimate structural, legal, economic change.” Unfortunately, as I pointed out to him, policy makers are already aware of the huge economic problems and that just reinforcing this awareness wouldn’t add anything useful to the general discourse. This seems to be what is happening as Bernanke believes that the protests are reflecting his own positions when I imagine they were intended to change them.

Barack Obama, who should be pretty influential in setting policy in the United States, wasn’t even able to push through small revenue increases as part of the budget plan necessary to raise the debt ceiling a couple months ago. If Obama can´t pass such a reasonable and simple request through Congress, it seems unlikely to imagine that the protestors will make any progress with a message that seems convuluted to many people. I think for the protests to be successful, they are going to need a clear and unified economic message that someone like Bernanke won’t be able to mistake. He is obviously not going to spend a lot of time listening to the protestors to formulate his understanding of the economy, so the message that trickles through needs to be consistent and unmistakable.

Operation Twist

Today the Fed announced a new measure called operation twist. The idea behind this move is that they will be selling about 400 billion dollars in short maturity bonds (3 years or less) and will use the proceeds to buy an equivalent amount of bonds of longer maturities (6 years or more). This will have no effect on the Fed’s balance sheet because they will be selling the same value of assets as they will be purchasing. However, this will extend the average maturity of bonds that the Fed holds from 6 years to just over 8 years. Part of the Fed’s logic is that short term rates cannot raise very much because the Fed Funds rate is practically 0% and the Fed has pledged to keep it there until at least mid-2013. On the other hand, they do believe that the purchases have the ability to drive long term rates lower. The 10-year yield is considered to be an important benchmark for mortgages so any reduction could potentially help support weak home prices and make mortgages more affordable.

There is a pretty widespread belief that the Fed’s move today will have almost no effect on the general economy. If the Fed’s round of QE2 in which they purchased 600 billion of long term securities had no measurable impact on the economy, then surely “operation twist” which is dealing in lower sums and doesn’t even expand the Fed’s balance sheet will likely not have any substantial effect either. 61 percent of economists polled by bloomberg predicted that the move would not have a meaningful impact on unemployment and 15 percent thought it would have a potentially harmful effect. Todays drop in the dow of 2.5% was further proof that Fed’s move is not being met with great hope from investors. The best thing that could be said about today’s move is that it drove many of us to listen to an old classic.