Could Ben Bernanke Be a “Socialist”?

Could Ben Bernanke be a “socialist”? It’s close to the accusation made by Charles Schwab, alarmed by the Fed’s monetary policy.

Schwab is the founder and head of one of the largest stock brokerage houses in the United States. He knows the mindset of savers better than many. In an unusual editorial published by Dow Jones, he denounced the zero-rate policy practiced by the Fed since December 2008.

According to him, this policy has played its part in the urgency of the fight against the economic crisis. Now it is necessary to abandon it in order to restore confidence to the credit markets. He argues that for some time, this policy has been creating unhealthy distortions in the behavior of investors, lenders and consumers. The zero rates would not even serve to encourage offering credit, because they would turn lenders off of risk-taking for mediocre returns. Basically, this policy would represent a supreme form of intervention on the part of the state in the workings of the economy — intervention that would destroy the normal mechanisms for allocating capital. At its passage, savers feel robbed, a dangerous feeling for consumption and confidence.

I find it to be a very interesting thesis.

It has the merit of posing the greatest problem of the moment: America doesn’t suffer from high interest rates. Trying to lower them like the Fed wishes to do is not necessarily going to boost confidence. The Fed is wrong in fighting. America needs to restore confidence.

One could even argue that raising the rates a bit for the short term could stimulate demand for credit. This decision could create, in effect, an anticipation of another rate hike. It would again make sense to borrow today at a low price, since tomorrow could see a higher rate.

Charles Schwab also asked the Fed to at least stop saying that it’s going to maintain extremely low rates for a long time. In Schwab’s eyes, this claim discourages borrowing and creates a belief that the Fed is terrified by the economy’s fragility.

The chances that “Chuck” Schwab (also hated on Wall Street, as he is not of the same culture) might be heard: zero.