October 4 (Reuters) — The Federal Reserve’s asset purchases lowered borrowing costs and supported the economy, and more buying could further ease financial conditions, Federal Reserve Chairman Ben Bernanke said on Monday.
He leaves out the negative influence of the interest rate and fiscal channel that he wrote about in his own 2004 paper. The economy is a net receiver of interest from the govt and lower rates reduces interest payments from the govt to securities holders. And in this cycle savers lost more interest income than borrowers gained, with the difference going to wider net interest margins for banks, who have no propensity to consume from that interest income.
“I don’t have a number to give you, but I do think that the additional purchases, although we don’t have precise numbers, have the ability to ease financial conditions,” Bernanke said.
Bernanke said he was convinced that the Fed’s massive purchases from March of 2009 until early 2010 had lowered effective interest rates at a time the central bank’s benchmark lending rates were anchored near zero, where they remain.
The buying program “increased the willingness of investors to take a reasonable amount of risk and create some support for the economy,” he said.
Again, he leaves out the fact that all the $50 billion + of annual interest earned by the Fed on its new portfolio of over $2 trillion in securities would otherwise have gone to the economy, but instead is turned over to the us treasury, thereby functioning as a tax.
In September, the Federal Open Market Committee said it was ready to take further steps to help the U.S. recovery if the economy stays sluggish. Reviving the program to buy assets such as U.S. Treasuries seem like a potential step.
In a wide-ranging, hour-long forum with university students in Providence, Rhode Island, Bernanke defended the U.S. government’s often criticized program to support banks during the global financial crisis.
The Troubled Asset Relief Program, or TARP, has turned out to be a ‘pretty good investment” for taxpayers money loaned to banks during the financial crisis is returned with interest.
Many people don’t understand that TARP was designed to help the economy, not the banks, and that the country’s economic downturn would have been much worse without it, Bernanke said.
Nor does he seem to understand it was nothing never anything more than regulatory forbearance, and not a fiscal expenditure. The FDIC, for all practical purposes, already guaranteed all bank deposits should bank losses exceed the amount of the bank’s private capital. So adding more public capital through tarp rather than simply granting regulatory forbearance (along with imposing any terms and conditions the govt might desire) was non nonsensical, politically destructive and divisive, and demonstrative of a complete lack of understanding of the banking system by the entire govt., media, and financial sector in general.