Hallelujah! Ben Bernanke Gets Some Guts

For those of you who find watching Federal Reserve press conferences boring but still want to know what yesterday means, let me suggest an exciting alternative.

Go watch the music video to the song "We're Not Gonna Take It" by Twisted Sister. Now imagine Dee Snider as Ben Bernanke and Mark Metcalf's killjoy dad as the political establishment, and listen as Snider/Bernanke shouts:

We're not gonna take it!
No, we ain't gonna take it!
We're not gonna take it anymore!

After sitting on the sidelines and letting politicians tell him how to do his job, Bernanke is finally reasserting the Fed's independence. He's had enough of incompetent politicians and pundits telling him that 8% unemployment is somehow acceptable and that 1% inflation is somehow dangerous. 

And it's about darn time.

The Fed has a dual mandate to promote employment and price stability. The former has been way below target, and the latter far too high. The obvious thing to do in such a situation is loosen monetary policy. But, unfortunately, economics has taken a backseat to politicians wishing to appear "responsible" on inflation.

But no more; Bernanke's through with this (lowercase "F") foolishness. And it appears the rest of the Federal Open Market Committee is, too: The vote was 11-1. Pundits be damned.

The most exciting thing about the announcement was that the Fed's commitment is open-ended. It won't stop until the labor market improves, and even then the policy will continue until the economy has improved to the FOMC's liking.

What is the FOMC's liking? Bernanke won't say, which is part of the policy's diabolical (and I mean that lovingly) brilliance. The vague and open-ended nature of the program is clandestinely designed to inspire fear of inflation. Since you'll spend money today if you think it might be worth less tomorrow, this fear is stimulative for our depressed output economy.

But that's not all. Bernanke said that the FOMC is prepared to do even more if this doesn't work. That might mean (I can only dream) an increase in the inflation target from 2% to 3%.

The bottom line is that Bernanke has gone rogue, and our economy is better for it.

Don't fight the Fed
For savers, I think "The beatings will continue until morale improves" pretty much sums it up. Bernanke clearly doesn't want you to keep money on the sidelines. CD rates will likely become even more pitiful after yesterday's announcement, as will bond yields.

That leaves two asset classes that stand to benefit: stocks and real estate -- and especially stocks having to do with real estate. My favorite play here is actually Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , a CAPScall that I also own. Berkshire has exposure to housing and mortgages through ownership of Benjamin Moore, Clayton Homes, and large chunks of Wells Fargo, among other investments. But at the same time, it's not entirely wedded to housing, and you get Buffett to boot. 

But truthfully, there is no need to get fancy here. Simply socking away money for the long run in index funds like the SPDR S&P 500 (NYSE: SPY  ) or "Diamonds" -- the SPDR Dow Jones Industrial Average (NYSE: DIA  ) ETF -- will be enough to benefit from the policy because its impact is so broad. And that's precisely the point. 

Fool contributor Chris Baines is a value investor. Follow him on Twitter, where he goes by @askchrisbainesChris' stock picks and pans have outperformed 96% of players on CAPS. He owns shares of Berkshire Hathaway.


The Motley Fool owns shares of Wells Fargo and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway and Wells Fargo. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (28) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 14, 2012, at 2:15 PM, Macademia wrote:

    Brilliant. Create fear and destabilize the market to get the productive individuals to spend their hard earned money. The only problem is this. Neither governments nor central banks create jobs: businesses do. I don't see how continually to exponentially expand the money supply will be good for business. In fact, the opposite will be true. Moreover, as the supposed steward of the global reserve currency, Bernanke's actions ultimately will be the end of the dollar as the world's reserve currency and fiat currencies. BRIC countries that already are facing high inflation will now have even more inflation as they are flodded with more money. Inflation is a monetary phenomenon. We all know what will happen when the money supply is expanded in this reckless way. This has been expounded on by F.A. Hayek 40 years ago. I am disappointed that such an uninformed view would be presented here at the Motley Fool.

  • Report this Comment On September 14, 2012, at 2:47 PM, savant55 wrote:

    The stock market is, on a daily basis, never stable nor are the recent rises based upon economic progression or on company profitability (much like it was just before the crash in 1999). It's only a matter of time, short time, that it will crash once again. Maybe someday we can get back to the notion that companies that are profitable and have sound business plans will lead the way.

  • Report this Comment On September 14, 2012, at 2:54 PM, mdk0611 wrote:

    Are you sure this was a show of defiance towards politicians?

  • Report this Comment On September 14, 2012, at 3:16 PM, flowinglake wrote:

    Defiance.....no. Payback to the Pres who let him stay another term.......yes! Printing more money is simply the best way to bring down the dollar and the United States of America. I agree, it is disappointing that such an uninformed view would be presented here at the Motley Fool.

  • Report this Comment On September 14, 2012, at 4:24 PM, A2Matty wrote:

    So try and try again...how is this going to help after the last 3 rounds of money printing didn't? Flowinglake was right, this wasn't defiance, this was following orders of the folks who appointed him (let my buddy Corzine from MF Global walk and I'll scratch your back - which reminds me, what happened to Fool's non-stop coverage of that?). And where are these inflation numbers coming from? 1%? Tell that to people who buy milk and bread, or gas for that matter.

    So again, we're "stimulating" the economy and there's no mention of having to pay it back..because when it's the fed, we just fire up the printing presses!

    So I suppose I can thank Bernanke for my paper gains this week...can I curse him when this doesn't work and I have to deal with REAL inflation?

    All we really know is that this was an attempt to help the current administrations campaign and little more...they'll be touting it's success in press conferences next week I'm sure.

  • Report this Comment On September 14, 2012, at 4:34 PM, gtechie wrote:

    "For savers, I think "The beatings will continue until morale improves" pretty much sums it up. Bernanke clearly doesn't want you to keep money on the sidelines. CD rates will likely become even more pitiful after yesterday's announcement, as will bond yields."

    Yet none of this matters to the author, because we can just invest in companies when The Dollar goes down the toilet!

    One question: how do you expect to get repaid when you eventually sell your investments? The worthless dollar, that's right!

  • Report this Comment On September 14, 2012, at 5:52 PM, PostScience wrote:

    Time to get that cash off the sidelines and into the economy.

  • Report this Comment On September 14, 2012, at 10:25 PM, GrumpyOldGuy wrote:

    Fear not. The millions of elderly on fixed income applaud the Feds decision.

    I know i'm not worried. My bank (Chase) is paying me one tenth of one percent on my savings account.

    That comes to 1 cent per month for every $1200 bucks. And as an added bonus, when the spit hits the fan the $1200 bucks will be worthless.

    Guts indeed Ben, guts indeed.

  • Report this Comment On September 15, 2012, at 12:27 AM, DividendsBoom wrote:

    *sigh*

    Chris, Chris, Chris

  • Report this Comment On September 15, 2012, at 9:16 AM, ETFsRule wrote:

    Great post. It's good to finally see the Fed wake up and do something.

  • Report this Comment On September 15, 2012, at 9:35 AM, rd80 wrote:

    I fear QE3 is a huge mistake that will backfire.

    It may pull mortgage rates down a bit, but is creating its own headwinds to do it. Look at what's happened in the few days since the announcement. Oil prices up. Agriculture commodities up. Hard commodities up. Ten and thirty year treasury yields up. Dollar down. If people have to spend more on food and energy, they have less to spend on manufactured stuff that creates jobs and people out of work have an even harder time. If treasury rates go up, they'll put upward pressure on mortgage rates.

    A rise in long term borrowing is one of the major headwinds Bernanke is creating if the trend holds. Maybe buying MBS will lower mortgage rates, or maybe it'll just push private and institutional investors into other assets. And mortgage assets can be a tricky business. Much of the mortgage activity over the past several years has been refinance - that creates a supply of new MBS, but returns principal on existing securities almost as fast.

    Then add in the continuing damage done to savers and retirees who need interest income.

    I think Bernanke's intentions are good, but believe QE3 will do more damage than good. Earlier easing caused financial asset prices to rise, but didn't do much to stimulate the economy. I don't see any reason to expect this plan to do anything different.

    As a stock holder and someone able to refinance a mortgage if rates fall, I believe QE3 helps me more than it hurts me. But I don't see it doing much good for someone who's looking for a job.

  • Report this Comment On September 15, 2012, at 9:39 AM, everlearn wrote:

    Hallelujah Macademia, A2Matty-

    Not a conspiracy theory flowinglake, just the road to hell paved with good (but really misguided) intentions. Perhaps. Helicopter Ben's so fearful of deflation/interested in ensuring the market doesn't lose money (at least the numbers on their balance sheet) that he wants inflation (and it's probably his secret marching orders anyway) No better way to pay down a multi-trillion $ national debit than inflating away the value of a currency. Winners all around, gov't and industry alike!

    Oops, did I exclude the populace to whom they both purport to serve...?

  • Report this Comment On September 15, 2012, at 9:45 AM, donnie24 wrote:

    What a disgusting article!! Fool should be ashamed.

  • Report this Comment On September 15, 2012, at 9:52 AM, jeffhre wrote:

    Fear, uncertainty, doubt. Knowledge-ummm, ummm.

    It's amazing how so many people on an invsetment site are so afraid to do anything. Anything at all, except complain about how their CD rates are so low. And whine about how the dollar will be so terribly frighteningly low, oh my.

  • Report this Comment On September 15, 2012, at 10:52 AM, jmlerche wrote:

    What a great article! Invest in SPY/DIA while they are at multi-year highs due to the action of the Fed (not business fundamentals)! Buy high/sell low and when you sell the costs of basic needs will have doubled. What a deal.

  • Report this Comment On September 15, 2012, at 2:24 PM, HectorLemans wrote:

    I often wonder about all of you saying how horribly irresponsible this is and how the value of the dollar is going down the tubes. Have you done any investing over the last...say... 10 years? There's plenty of money to be made in good old fashion stocks - no need to dump all your money in gold and silver or hide it under the mattress. If you spend your whole life preparing for the great depression you're so sure will happen, life will pass you by.

  • Report this Comment On September 15, 2012, at 3:09 PM, deckdawg wrote:

    Is this article serious or sarcastic?

  • Report this Comment On September 15, 2012, at 3:09 PM, texas4141 wrote:

    This is my second post; I'm a lurker. Interesting comments. I don't see how any of this is a surprise. Politicians can't get elected promising to cut programs or raise taxes. The stealth answer is to devalue the currency, effectively reducing the impact (value) of payments to these programs. The added benefit is inflating out of debt.

    Sorry savers :( It doesn't make it easy on those with cds/savings accounts that are a high percentage of net worth right now. Other strategies might need to be employed if you're previous strategy was geared towards ultra-safe income and you desire actual returns.

  • Report this Comment On September 15, 2012, at 4:25 PM, GregKS wrote:

    Chris,

    After reading your post, I just have to ask if your ever heard of a definition of insanity as "repeatedly doing the same thing and expecting a different result"? Here we are at QE3, and unemployment is still over 8%.

    Or, how about the solution of excess debt is even more debt? It is being tried here and in Europe, and I really don't expect a satisfactory conclusion.

    So, Chris, are you really insane?

    Greg

  • Report this Comment On September 16, 2012, at 10:17 AM, FoolSolo wrote:

    I'm with Chris on this one, and I applaud Chris and Bernanke for taking this bold position. What Bernanke is trying to do is counteract the stupidity that has befallen congress. If our elected officials can't stop bickering and grinding our economy down with gridlock tactics, then someone has to do something about it. Granted, it may not be the best WE THE PEOPLE can do, but if the elected officials refuse to do what they are supposed to do, then what else can WE do?

    Stop dissing Chris for stating the obvious, and start focusing your anger in the right place... this congress is the worst congress in history. They have failed to enact law, to act in the interest of the populace, and to show a modicum of interest in reducing unemployment or creating jobs. This congress has put political partisanship ahead of everything else, and I dare say the opposition has even damned the people and the well being of the country to regain the White House. They are the ones that should be ashamed. They are the ones that deserve your anger. They are the ones that have driven this country to the fiscal cliff. We owe this entire mess to them.

    Do the responsible thing... FIRE THEM ALL! Send them a message that we want a congress that is willing to come to work every day and govern. Remind them that their duty is to do the tough things that their position demands. Tell congress to stop being partisan and political, and do the job they were elected to do. GRIDLOCK is not in the job description. Either behave like mature, professional, adults or step down and let somebody else put the big boy pants on to get the job done.

    The time has come to put country and citizens ahead of politics.

  • Report this Comment On September 16, 2012, at 1:26 PM, TMFMorgan wrote:

    <<Here we are at QE3, and unemployment is still over 8%.>>

    What would it be without QE1 and 2?

  • Report this Comment On September 16, 2012, at 11:24 PM, A2Matty wrote:

    TMFMorgan -

    Would be a great point if they could show that there were notable changes in employment due to QE!, 2 or operation twist...I didn't hear Bernanke say that any of the prior three attempts had a measurable impact on jobs. If they had, they would be screaming from the rooftops about it, so it's probably safe to assume there was no impact (but there is a greater supply of Ben Franklins out there).

    Fool On.

  • Report this Comment On September 17, 2012, at 8:29 AM, TMFGortok wrote:

    I'm not sure if this post is tongue-in-cheek or not.

    God, I hope it is.

  • Report this Comment On September 17, 2012, at 8:34 AM, TMFMorgan wrote:

    <<I didn't hear Bernanke say that any of the prior three attempts had a measurable impact on jobs.>>

    Perhaps you weren't listening? Here's Bernanke:

    "For example, a study using the Board's FRB/US model of the economy found that, as of 2012, the first two rounds of [QE] may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred."

  • Report this Comment On September 17, 2012, at 10:39 AM, damilkman wrote:

    I am of the opinion that QE3 will not be effective. What the author fails to understand is the nature of the current resession. There is plenty of money for investment. People are choosing not to invest because of the climate of uncertainty. The best we can say about Bernanke's plan is he is attempting to encourage the investing public to go back to their destructive overborrowing ways. This is an attempt to fix a symptom instead of addressing the cause. It is a good point that Congress is being derelict in their duty. But two wrongs do not make a right. Attempting to force people to invest & spend when it is not in their interests will ultimately backfire as one is attempting to fight market forces.

  • Report this Comment On September 17, 2012, at 9:03 PM, A2Matty wrote:

    Morgan, you're right, I didn't catch that (and I'm an economy nerd so I will go read up on it). Though, apparently neither did Egan-Jones who promptly downgraded the US Credit rating...citing QE3.

    From Egan-Jones:

    [T]he FED’s QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the US economy and, by extension, credit quality. Issuing additional currency and depressing interest rates via the purchasing of MBS does little to raise the real GDP of the US, but does reduce the value of the dollar (because of the increase in money supply), and in turn increase the cost of commodities (see the recent rise in the prices of energy, gold, and other commodities). The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power. Hence, in our opinion QE3 will be detrimental to credit quality for the US…. From 2006 to present, the US’s debt to GDP rose from 66% to 104% and will probably rise to 110% a year from today under current circumstances; the annual budget deficit is 8%. In comparison, Spain has a debt to GDP of 68.5% and an annual budget deficit of 8.5%.

    ...we're now compared to Spain, nice!

    Look at the operative word carefully in your citation, "may" have created increased private payrolls and millions of jobs. So did the stimulus. The fact is REAL unemployment is at all time lows (going by workforce participation) and no one is taking credit for that. Maybe Bernanke should have said they may have "created or SAVED" 2 million jobs.

    Whether we agree with QE3 or not, I think we all can agree that we hope it works!!! - none of us want to be Spain (economically anyway).

  • Report this Comment On September 20, 2012, at 10:49 AM, NoOracleHere wrote:

    Mixed feelings here. Tight money as some have espoused is clearly not the answer. Tight money was the policy in the 1930's. But we have not had tight money. Trouble with the Fed's actions that I see is that they tend to stimulate the wrong economy. To my understanding, there are two economies, a productive/consumptive economy, and a speculative economy. In the first, goods and services are produced, and money flows opposite the direction of those goods. Essentially money flows down in this economy. But in the speculative economy, goods and services are mostly absent. Money just flows, and it tends to flow to the "winners", in much the same way as a casino. The Fed needs to be careful to stimulate the productive/consumptive economy and not the speculative. When stocks rise, this is inflation - a rise in the prices of companies. But people celebrate this because it's speculative. When the Fed buys toxic assets, it goes to the banks. Banks don't produce goods and services, and they are essentially speculative - making money from money. This would be wrong headed on the part of the Fed. But when the Fed buys US Treasuries, I can support this. It reduces the "real" Federal debt (debt not owed to the Fed). And when the Government spends that money on roads and bridges, goods are produced, workers are employed. Similarly, when the government spends on social programs, services are produced, and this is productive. But if they give it to the bank, then it just sits there, and becomes inflation on a later day. For those worried about inflation, there are other ways to soak up the excess dollars. But it's difficult to justify "soaking up" excess dollars when you are trying to pursue a loose money policy - that is, unless you start to think about things correctly, and realize what kind of activity is being stimulated (speculative vs. productive). But I'm concerned that the Fed doesn't distinguish. Their current policy is to buy up toxic assets. This rewards the "criminals" and the stimulus goes directly into the speculative economy. This could backfire. So like I said at first, mixed feelings.

  • Report this Comment On September 21, 2012, at 11:35 AM, gcp3rd wrote:

    Well I'm going to have to disagree at least partially with a lot of the naysayers posting here. We on this site are all likely more educated on at least the basics of investing than the average bear. That's why we surf MF and post on it. So yes we can all see how QE3 benefits our stock holdings through inflation. But I don't agree that's speculative - inflation is just the change in purchasing power of the dollar. As the dollar cost of stocks have gone up since QE3 in the near term that's better for what we already own, worse for what we still want to buy. Read that last sentence again - owning something other than dollars in the bank account will be positive for Americans. And guess what - a LOT of us own HOMES. It's called inflation when milk goes up, it's called appreciation when your home value goes up.

    Ultimately what the Fed is going for is inflation - to encourage people/businesses to spend money. No the average American might not be tuned in enough to think "hey, I better put my extra $20 in a mutual fund", but a lot of us are and you can bet just about every business in this country is aware of these dynamics. If you are thinking of ordering a new printing press, building a new factory, buying a company truck, hell even stocking up on office supplies, you are not going to wait to do it if it will cost you 3% more next year, or 5% more the year after. Businesses get that. Businesses employ people. Businesses making those decisions now rather than later is good for employment. I'm a one person business - I will spend money prior to year end at least for tax reasons, but certainly if any capital expenses will be cheaper this year than next.

    Look at the banking system. There's a chart on MF from a recent article showing the gap between bank deposits and loans - it got really wide in 2006 and has never come back in line with its historical rate of roughly being equal. Investment banks aside, the banks are not going to keep sitting on $1 trillion in reserves (not sure the exact balance) if we are at 2-3% inflation instead of the current 1%. Maybe they will expand lending.

    What's the first thing I started doing once QE3 was announced? Paying off some student loan debt with my cash hoard, speeding up the rate I maximize my retirement contributions this year, and thinking of other ways to reduce the cash wasting away in my bank accounts. In short, reducing my cash holdings and at some point that will translate into GDP growth at least for me.

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