Bernanke's Blog: why are interest rates so low?
Bernanke's Blog: why are interest rates so low?
Thought this might be of interest (no pun intended):
Why are interest rates so low? | Brookings Institution
Kevin
Why are interest rates so low? | Brookings Institution
Kevin
If I make a calculation error, #Cruncher probably will let me know.
The new blogger
[Thread merged into here, see below. --admin LadyGeek]
There is a new blogger in the finance & economics blogosphere. Some guy named Bernanke and his first post concerns the level of interest rates in the US. An informing read written by someone who has both academic and real world experience on the subject he has chosen to write about. It's certainly interesting that this is the first subject he picked to write about on his blog.
Link to blog - http://www.brookings.edu/blogs/ben-bern ... tes-so-low
BobK
There is a new blogger in the finance & economics blogosphere. Some guy named Bernanke and his first post concerns the level of interest rates in the US. An informing read written by someone who has both academic and real world experience on the subject he has chosen to write about. It's certainly interesting that this is the first subject he picked to write about on his blog.
Link to blog - http://www.brookings.edu/blogs/ben-bern ... tes-so-low
BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). |
The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
Re: Bernanke's Blog: why are interest rates so low?
Great read! I've been thinking for awhile that people may be underwhelmed by what happens when the Fed eventually does increase interest rates (probably sometime later this year). Sure, short-term interest rates will rise. Money markets will probably yield a little more. But that's about it. Interest rates aren't low BECAUSE of the Fed. The Fed has kept short-term interest rates low because of larger macro-economic issues at hand.Kevin M wrote:Thought this might be of interest (no pun intended):
Why are interest rates so low? | Brookings Institution
Kevin
Re: Bernanke's Blog: why are interest rates so low?
I'm surprised. I was expecting typical economic mumbo-jumbo, but Bernanke actually wrote a very clear and understandable explanation that I, a non-economist, could grasp. He might have a future in writing now that he no longer has to use Fed-speak.
- Rick Ferri
- Posts: 9708
- Joined: Mon Feb 26, 2007 10:40 am
- Location: Georgetown, TX. Twitter: @Rick_Ferri
- Contact:
Re: The new blogger
Ben Bernanke wrote:"What matters most for the economy is the real, or inflation-adjusted, interest rate (the market, or nominal, interest rate minus the inflation rate). The real interest rate is most relevant for capital investment decisions, for example. The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed."
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
Re: The new blogger
I read his first post this morning, and I found it to be one of the best and clearest explanations of the Fed's role in determining interest rates that I've read. Very well written and easily understandable even for a non-financial person such as me. My eyes did not glaze over once.
"Worrying is like paying interest on a debt that you might never owe" -- Will Rogers
Re: Bernanke's Blog: why are interest rates so low?
FYI - I merged bobcat2's thread into here.
-
- Posts: 1125
- Joined: Fri Jul 01, 2011 7:33 pm
Re: Bernanke's Blog: why are interest rates so low?
A good read. Thanks for posting.
Re: Bernanke's Blog: why are interest rates so low?
Bond values will drop.toto238 wrote:
Great read! I've been thinking for awhile that people may be underwhelmed by what happens when the Fed eventually does increase interest rates (probably sometime later this year). Sure, short-term interest rates will rise. Money markets will probably yield a little more. But that's about it. Interest rates aren't low BECAUSE of the Fed. The Fed has kept short-term interest rates low because of larger macro-economic issues at hand.
My VBTLX has a duration of 5.4 years, it will lose 5.4% when interest rate kicks up by 1%,. I'm heavy into VBTLX so it could hurt, like how it performed immediately after I bought it 11/12 leason learned.
I'm ready to sell it, almost. But equities don't look so good lately.
Bernanke: "Why are interest rates so low?"
Another duplicate thread merged here - admin alex
The following is a blog post written by Ben Bernanke, basically justifying the Fed's past and current actions. He concludes by saying that the state of the economy--not the Fed--is the ultimate determinant of the sustainable level of real stock market returns.
Do any of you agree/disagree?
http://www.brookings.edu/blogs/ben-bern ... rmedbroker
The following is a blog post written by Ben Bernanke, basically justifying the Fed's past and current actions. He concludes by saying that the state of the economy--not the Fed--is the ultimate determinant of the sustainable level of real stock market returns.
Do any of you agree/disagree?
http://www.brookings.edu/blogs/ben-bern ... rmedbroker
Re: Bernanke: "Why are interest rates so low?"
What Bernanke is saying is that the Fed has minimal impact on long term rates, which is correct, and, further, it is to the Fed's interest to set short term as close as possible to what he calls equilibrium rates, and in the academia is more commonly referred as natural rates, meaning the rates that would exist if the market dictated it. No one can disagree on that, as was demonstrated in the times before the 2008 crisis when for too long Greenspan kept rates too low, and now understood to be below natural rates. Most economists feel that this action was a major factor in the creation of the crisis. Much has been writen on this (and if interested can google my article "The Natural Rate of Interest Rule".)
The problem, of course, is that measuring natural rates is extremely difficult. So the Feds have to guess the number. Historically, the natural rate has been about 3% in real terms, so I am very surprised that Bernanke feels that is is now that low.
The problem, of course, is that measuring natural rates is extremely difficult. So the Feds have to guess the number. Historically, the natural rate has been about 3% in real terms, so I am very surprised that Bernanke feels that is is now that low.
Erwin
-
- Posts: 536
- Joined: Tue Nov 25, 2008 2:34 pm
Re: Bernanke's Blog: why are interest rates so low?
I've just learned a new compound word: equilibrium rate.
Thanks for the link.
Thanks for the link.
The finest, albeit the most difficult, of all human achievements is being reasonable.
Re: Bernanke's Blog: why are interest rates so low?
Duration is an academic measurement, nothing more. It has little to no bearings on what will ACTUALLY happen to the value of the bonds. A higher duration means that it will be more susceptible to changes in interest rates, sure, but the magnitude of any effect isn't decided only by duration. Changes in interest rates don't happen in a vacuum. Ceteris paribus (Latin for "all else being equal/same), sure your bond fund would lose 5.4%. But the market isn't ceteris paribus. It's in constant fluctuation as everything is constantly changing. In fact, interest increasing later this year has already been priced into the price of your bond fund. What's going to change your bond fund's value is if EXPECTATIONS change. Meaning, if interest rates rise FASTER or by a higher MAGNITUDE than expected, then it'll hurt your bond fund. If interest rates rise SLOWER, though, or to a LESSER degree, then your bond fund will actually GAIN in value.rerod wrote:Bond values will drop.toto238 wrote:
Great read! I've been thinking for awhile that people may be underwhelmed by what happens when the Fed eventually does increase interest rates (probably sometime later this year). Sure, short-term interest rates will rise. Money markets will probably yield a little more. But that's about it. Interest rates aren't low BECAUSE of the Fed. The Fed has kept short-term interest rates low because of larger macro-economic issues at hand.
My VBTLX has a duration of 5.4 years, it will lose 5.4% when interest rate kicks up by 1%,. I'm heavy into VBTLX so it could hurt, like how it performed immediately after I bought it 11/12 leason learned.
I'm ready to sell it, almost. But equities don't look so good lately.
In all likelihood, the Fed will raise interest rates by maybe 0.25%. Your bond fund may drop by half a percent at most. Or more likely will gain. And the interest it pays out will outweigh any loss that the rise in interest rates causes.
For proof, look at what happened with interest rates from 2003-2007. Rates were increasing constantly during that period. What happened to Bond Funds during that period? They thrived. Total Bond Market did between 2.5% and 7% the whole time.
-
- Posts: 1006
- Joined: Sun Aug 12, 2012 12:35 am
Re: Bernanke's Blog: why are interest rates so low?
Bernanke gave a class on the role of the Fed that I found to be a very clear explanation of what a Central Bank's role is. The class is available for free on iTunes U: https://itunes.apple.com/us/itunes-u/re ... 9475?mt=10
Re: Bernanke's Blog: why are interest rates so low?
This single blog post by Ben Bernanke tells me why he must be a great teacher.
Lev
Lev
-
- Posts: 1079
- Joined: Tue Jun 21, 2011 10:35 am
- Location: Deep in the Balkans
Re: Bernanke's Blog: why are interest rates so low?
However, don't they say that those who can, do. Those who can't, teach.Levett wrote:This single blog post by Ben Bernanke tells me why he must be a great teacher.
Lev
- in_reality
- Posts: 4529
- Joined: Fri Jul 12, 2013 6:13 am
Re: Bernanke's Blog: why are interest rates so low?
Who are "they" and why should we take what "they" say as accurate?HongKonger wrote:However, don't they say that those who can, do. Those who can't, teach.Levett wrote:This single blog post by Ben Bernanke tells me why he must be a great teacher.
Lev
-
- Posts: 5774
- Joined: Mon Sep 22, 2014 4:47 pm
Re: Bernanke's Blog: why are interest rates so low?
>However, don't they say that those who can, do. Those who can't, teach.
"They" may say it but it is a foolish and anti-intellectual statement.
Particularly in this case- if there is anybody who has walked the walk it is Ben Bernanke.
"They" may say it but it is a foolish and anti-intellectual statement.
Particularly in this case- if there is anybody who has walked the walk it is Ben Bernanke.
Re: Bernanke's Blog: why are interest rates so low?
Even better, get the series directly from the Federal Reserve: FRB: The Federal Reserve and the Financial Crisis, Chairman Bernanke's College Lecture Seriesrrppve wrote:Bernanke gave a class on the role of the Fed that I found to be a very clear explanation of what a Central Bank's role is. The class is available for free on iTunes U: https://itunes.apple.com/us/itunes-u/re ... 9475?mt=10
Click on the four links under the heading to see the videos and supporting material:
- Origins and Mission of the Federal Reserve <-- Origins of central banking
- The Federal Reserve after World War II
- The Federal Reserve's Response to the Financial Crisis
- The Aftermath of the Crisis
-Instructor Resource: Questions for Classroom Discussion (PDF)
Re: Bernanke's Blog: why are interest rates so low?
Ah, finally the answer to "Which came first, the chicken or the egg?"
- Clearly_Irrational
- Posts: 3087
- Joined: Thu Oct 13, 2011 3:43 pm
Re: Bernanke's Blog: why are interest rates so low?
One of the problems is that duration is a linear approximation of a non-linear phenomenon. Convexity is the non-linear version but it's a tougher concept to talk about. http://en.wikipedia.org/wiki/Bond_convexitytoto238 wrote:Duration is an academic measurement, nothing more. It has little to no bearings on what will ACTUALLY happen to the value of the bonds. A higher duration means that it will be more susceptible to changes in interest rates, sure, but the magnitude of any effect isn't decided only by duration.
Re: Bernanke's Blog: why are interest rates so low?
This is an excellent point. I would add, though, that changes in expectations for interest rates is going to have a larger effect on bond prices than the actual change in interest rates. If everyone is already expecting a 0.5% increase, it's already priced into the security. If it is raised instead by 0.75%, that will hurt bond prices. If it is raised by only 0.25%, it will raise bond prices.Clearly_Irrational wrote:One of the problems is that duration is a linear approximation of a non-linear phenomenon. Convexity is the non-linear version but it's a tougher concept to talk about. http://en.wikipedia.org/wiki/Bond_convexitytoto238 wrote:Duration is an academic measurement, nothing more. It has little to no bearings on what will ACTUALLY happen to the value of the bonds. A higher duration means that it will be more susceptible to changes in interest rates, sure, but the magnitude of any effect isn't decided only by duration.
- abuss368
- Posts: 27850
- Joined: Mon Aug 03, 2009 2:33 pm
- Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
- Contact:
Re: Bernanke's Blog: why are interest rates so low?
Hi Kevin,
Excellent article penned by the former Chairman of the Federal Reserve!
Thank you for sharing.
Excellent article penned by the former Chairman of the Federal Reserve!
Thank you for sharing.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Bernanke's Blog: why are interest rates so low?
I think this may be the only place on the internet where an article by Ben Bernanke can be intelligently discussed, debated, and appreciated without anyone resorting to political attacks on each other.abuss368 wrote:Hi Kevin,
Excellent article penned by the former Chairman of the Federal Reserve!
Thank you for sharing.
Bogleheads is a special place.
Re: Bernanke's Blog: why are interest rates so low?
It depends what interest rate you're talking about. The interest rate relevant to a bond is the interest rate for that particular bond; i.e., the yield to maturity for the bond. Price and yield to maturity are precisely related by a mathematical formula; i.e., they are two ways of expressing the same thing. Therefore, a change in the yield to maturity for a bond will have a completely predictable and exact change in the price of the bond, and vice versa.toto238 wrote:I would add, though, that changes in expectations for interest rates is going to have a larger effect on bond prices than the actual change in interest rates.
As explained in the blog post:
So the Fed sets "the short-term interest rate", which may or may not have an impact on longer-term interest rates. QE was an attempt to influence longer-term interest rates as well, and its success can be debated, but it did not set longer-term interest rates.The Fed’s actions determine the money supply and thus short-term interest rates; it has no choice but to set the short-term interest rate somewhere.
This distinction can easily be seen by examining changes in the yield curve since the Fed set the Fed funds rate to essentially 0%. Play with this Dynamic Yield Curve tool, and notice how rates beyond the shortest terms have moved around a lot since 2009, while anchored at about 0% at the short end.
Expectations of future rates impacts both current prices and current yields (rates) of bonds of different maturities. Expectations can't affect one without affecting the other (since they are different measures of the same thing).
Kevin
If I make a calculation error, #Cruncher probably will let me know.
Re: Bernanke's Blog: why are interest rates so low?
Thanks for sharing this article. A very clear and concise explanation that a layperson can understand.
Re: Bernanke's Blog: why are interest rates so low?
I'm not sure what this "no choice" quote means. The Central Bank certainly has a choice to not set a short-term rate upper bound. As for the lower bound, is Bernanke referring to the Central Bank's sole ability (by law) to set reserve ratios? Because otherwise every bank can expand money supply at will, as well. The Central Bank can certainly step away and let the market set the rate entirely. Whether that's prudent is another matter.Bernanke wrote:The Fed’s actions determine the money supply and thus short-term interest rates; it has no choice but to set the short-term interest rate somewhere.
Re: Bernanke's Blog: why are interest rates so low?
What a great country this is!
This reminds me of the photo of the new US ambassador to China. He was at the airport, getting ready to fly to China. He was getting a coffee at Starbucks and he had a piece of luggage with him. The photo made huge news in China because their officials wouldn't be getting their own coffee or hauling around their own luggage.
Ben (can I call him that?) is one of the most consequential people of the 21st Century and he is patiently writing and teaching and taking questions about his tenure at the Fed. Thanks Ben!
This reminds me of the photo of the new US ambassador to China. He was at the airport, getting ready to fly to China. He was getting a coffee at Starbucks and he had a piece of luggage with him. The photo made huge news in China because their officials wouldn't be getting their own coffee or hauling around their own luggage.
Ben (can I call him that?) is one of the most consequential people of the 21st Century and he is patiently writing and teaching and taking questions about his tenure at the Fed. Thanks Ben!
-
- Posts: 5463
- Joined: Wed Dec 28, 2011 8:56 am
- Location: North Carolina
Re: Bernanke's Blog: why are interest rates so low?
The article makes sense and is well written. Thanks for sharing. What the article does not address is the Fed's QE which did impact interests rates by buying up huge amounts of treasuries, and driving down the interest rates.
Re: Bernanke's Blog: why are interest rates so low?
"They" often are wrong. Most faculty at top research universities are both doers and teachers in their area of expertise; this is certainly true for Bernanke.HongKonger wrote:However, don't they say that those who can, do. Those who can't, teach.Levett wrote:This single blog post by Ben Bernanke tells me why he must be a great teacher.
Lev
-
- Posts: 25625
- Joined: Thu Apr 05, 2007 8:20 pm
- Location: New York
Re: Bernanke's Blog: why are interest rates so low?
Agree - it's one thing to label a group, it's quite another to try and smear that label on "the" expert on the topic in question. I'll say this much, had he followed the typical playbook of the Fed back in the '30's, we likely would not be having this conversation today, many of us would be living under a bridge with a tarp over our heads and don't confuse luck with outcome. You have no idea how close we really came to going over the cliff, let me give you a hint, it was millimeters, not inches and certainly not feet.hexagon wrote:"They" often are wrong. Most faculty at top research universities are both doers and teachers in their area of expertise; this is certainly true for Bernanke.HongKonger wrote:However, don't they say that those who can, do. Those who can't, teach.Levett wrote:This single blog post by Ben Bernanke tells me why he must be a great teacher.
Lev
As for Greenspan, while he is not entirely to blame for the mess, he certainly played a leading role. The Fed forgot their true role in regulating monetary policy and they failed to use their toolbox in an appropriate manner. Here we are 7 years later - are we Japan or something else? The Fed's going to raise rates - sure they are, I mean eventually one would expect that, to go lower would suggest something more catastrophic lies in wait........and then losing 5.4% or less in your fixed income holdings should be the least of your worries.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: Bernanke's Blog: why are interest rates so low?
+1.Grt2bOutdoors wrote: Agree - it's one thing to label a group, it's quite another to try and smear that label on "the" expert on the topic in question. I'll say this much, had he followed the typical playbook of the Fed back in the '30's, we likely would not be having this conversation today, many of us would be living under a bridge with a tarp over our heads and don't confuse luck with outcome. You have no idea how close we really came to going over the cliff, let me give you a hint, it was millimeters, not inches and certainly not feet.
As for Greenspan, while he is not entirely to blame for the mess, he certainly played a leading role. The Fed forgot their true role in regulating monetary policy and they failed to use their toolbox in an appropriate manner. Here we are 7 years later - are we Japan or something else? The Fed's going to raise rates - sure they are, I mean eventually one would expect that, to go lower would suggest something more catastrophic lies in wait........and then losing 5.4% or less in your fixed income holdings should be the least of your worries.
There is a lack of appreciation for just how much of our livelihood today we owe to the fact that Bernanke was willing to do what few others were willing to do. He took major risks, both economically and politically, and it absolutely had the potential to blow up in his face. As a result of this actions, he will likely never hold public office of any kind again as he has become too controversial. But there is no doubt in my mind that his actions were directly responsible for the fact that the US economy is not in a 1930s-type depression right now.
He wasn't the central bank manager we deserved, but he was the central bank manager we needed.
-
- Posts: 353
- Joined: Sun Oct 24, 2010 4:04 pm
- Location: So Cal
Re: Bernanke's Blog: why are interest rates so low?
Or he kicked the can down the road...time will tell. Remember that when Greenspan left everyone hailed his tenure at the Federal Reserve and then turned on him after realizing a credit bubble had been growing for many years under his watch. What happens next will define if Bernanke's tenure was good or bad. Also, Bernanke was a Fed Governor since 2002 and was the Federal Reserve Chairman since Feb 2006 which was two years before the financial crisis occurred. He either failed to see the issues, speak up, and/or take preemptive action.toto238 wrote:+1.Grt2bOutdoors wrote: Agree - it's one thing to label a group, it's quite another to try and smear that label on "the" expert on the topic in question. I'll say this much, had he followed the typical playbook of the Fed back in the '30's, we likely would not be having this conversation today, many of us would be living under a bridge with a tarp over our heads and don't confuse luck with outcome. You have no idea how close we really came to going over the cliff, let me give you a hint, it was millimeters, not inches and certainly not feet.
As for Greenspan, while he is not entirely to blame for the mess, he certainly played a leading role. The Fed forgot their true role in regulating monetary policy and they failed to use their toolbox in an appropriate manner. Here we are 7 years later - are we Japan or something else? The Fed's going to raise rates - sure they are, I mean eventually one would expect that, to go lower would suggest something more catastrophic lies in wait........and then losing 5.4% or less in your fixed income holdings should be the least of your worries.
There is a lack of appreciation for just how much of our livelihood today we owe to the fact that Bernanke was willing to do what few others were willing to do. He took major risks, both economically and politically, and it absolutely had the potential to blow up in his face. As a result of this actions, he will likely never hold public office of any kind again as he has become too controversial. But there is no doubt in my mind that his actions were directly responsible for the fact that the US economy is not in a 1930s-type depression right now.
He wasn't the central bank manager we deserved, but he was the central bank manager we needed.
-
- Posts: 25625
- Joined: Thu Apr 05, 2007 8:20 pm
- Location: New York
Re: Bernanke's Blog: why are interest rates so low?
The greatest volume of issuances that went bad were those of the 2004-2005 variety. The seeds of destruction were sown years before Bernanke had significant voting influence, as those on the board were following group think instead of individual self-appraisal. It did not help that the NY Fed had the wrong management in place, too much influence and supervision of the banks was non-existent, in fact they were in bed with the banks. It was a virtual revolving door where employees were playing ring around the rosie working on the Street then going to work for the Fed in positions of power. Working for the public good, we all see how that turned out. The dissolution of Glass-Steagall amplified the problems experienced in the economy, having Wall St. banks controlling mortgage lenders, having insurance companies controlling banking enterprises and vice-versa - all of that could have been avoided. There was a reason why that Act was passed in the '30s.Busting Myths wrote:Or he kicked the can down the road...time will tell. Remember that when Greenspan left everyone hailed his tenure at the Federal Reserve and then turned on him after realizing a credit bubble had been growing for many years under his watch. What happens next will define if Bernanke's tenure was good or bad. Also, Bernanke was a Fed Governor since 2002 and was the Federal Reserve Chairman since Feb 2006 which was two years before the financial crisis occurred. He either failed to see the issues, speak up, and/or take preemptive action.toto238 wrote:+1.Grt2bOutdoors wrote: Agree - it's one thing to label a group, it's quite another to try and smear that label on "the" expert on the topic in question. I'll say this much, had he followed the typical playbook of the Fed back in the '30's, we likely would not be having this conversation today, many of us would be living under a bridge with a tarp over our heads and don't confuse luck with outcome. You have no idea how close we really came to going over the cliff, let me give you a hint, it was millimeters, not inches and certainly not feet.
As for Greenspan, while he is not entirely to blame for the mess, he certainly played a leading role. The Fed forgot their true role in regulating monetary policy and they failed to use their toolbox in an appropriate manner. Here we are 7 years later - are we Japan or something else? The Fed's going to raise rates - sure they are, I mean eventually one would expect that, to go lower would suggest something more catastrophic lies in wait........and then losing 5.4% or less in your fixed income holdings should be the least of your worries.
There is a lack of appreciation for just how much of our livelihood today we owe to the fact that Bernanke was willing to do what few others were willing to do. He took major risks, both economically and politically, and it absolutely had the potential to blow up in his face. As a result of this actions, he will likely never hold public office of any kind again as he has become too controversial. But there is no doubt in my mind that his actions were directly responsible for the fact that the US economy is not in a 1930s-type depression right now.
He wasn't the central bank manager we deserved, but he was the central bank manager we needed.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: Bernanke's Blog: why are interest rates so low?
The most interesting part of the Summers/Bernanke exchange to me is if I understand Summers correctly, he thinks the natural rate of return to capital should be -2% real or lower for the foreseeable future. If that's correct and you assume a 4% ERP, then a 50/50 portfolio should be expected to return 0% real for the foreseeable future.
Re: Bernanke's Blog: why are interest rates so low?
Which is only fair. Why should people expect a positive real return for doing nothing? You save so much productivity, you get that much back at a later time. We've been spoiled by the good times where capital was scarcer.robert88 wrote:The most interesting part of the Summers/Bernanke exchange to me is if I understand Summers correctly, he thinks the natural rate of return to capital should be -2% real or lower for the foreseeable future. If that's correct and you assume a 4% ERP, then a 50/50 portfolio should be expected to return 0% real for the foreseeable future.
- Clearly_Irrational
- Posts: 3087
- Joined: Thu Oct 13, 2011 3:43 pm
Re: Bernanke's Blog: why are interest rates so low?
That would actually be a serious problem, it would mean that businesses are having a hard time finding positive NPV projects which in turn would have negative implications for increasing total societal wealth and likely exacerbate inequality issues as everyone spends more time fighting over the size of their share of the existing pie.zeugmite wrote:Which is only fair. Why should people expect a positive real return for doing nothing? You save so much productivity, you get that much back at a later time. We've been spoiled by the good times where capital was scarcer.
Re: Bernanke's Blog: why are interest rates so low?
Politics aside, if the expected return to a 50/50 portfolio is 0-1% real, then that may be fine if you're over 70 and have already "won the game", but if you're still in the accumulation phase, that's a complete game changer in how we need to think about saving and investing for retirement.Clearly_Irrational wrote:That would actually be a serious problem, it would mean that businesses are having a hard time finding positive NPV projects which in turn would have negative implications for increasing total societal wealth and likely exacerbate inequality issues as everyone spends more time fighting over the size of their share of the existing pie.zeugmite wrote:Which is only fair. Why should people expect a positive real return for doing nothing? You save so much productivity, you get that much back at a later time. We've been spoiled by the good times where capital was scarcer.
Re: Bernanke's Blog: why are interest rates so low?
When people predict that returns can't be as high as they were in the past, I think of the guy who predicted that by 1900 everything of importance that could be invented had already been invented. Or when Bill Gates asked "Why would anyone need more than 4K of RAM?".robert88 wrote:Politics aside, if the expected return to a 50/50 portfolio is 0-1% real, then that may be fine if you're over 70 and have already "won the game", but if you're still in the accumulation phase, that's a complete game changer in how we need to think about saving and investing for retirement.Clearly_Irrational wrote:That would actually be a serious problem, it would mean that businesses are having a hard time finding positive NPV projects which in turn would have negative implications for increasing total societal wealth and likely exacerbate inequality issues as everyone spends more time fighting over the size of their share of the existing pie.zeugmite wrote:Which is only fair. Why should people expect a positive real return for doing nothing? You save so much productivity, you get that much back at a later time. We've been spoiled by the good times where capital was scarcer.
I don't know for sure what the future holds. But people predicting a long-term stagnation in the capital markets is as old as capital markets. Could it happen? Sure. But what use is that information to me? I'm already saving all I can afford to save. I don't control the economy by myself. I control what I can control, and hope for the best.
Re: Bernanke's Blog: why are interest rates so low?
On a minor point, the statement should be "640 K" of RAM. See: Bill Gatestoto238 wrote:...Or when Bill Gates asked "Why would anyone need more than 4K of RAM?".
Re: Bernanke's Blog: why are interest rates so low?
Thank you for that clarification. A common misquote I fell for.LadyGeek wrote:On a minor point, the statement should be "640 K" of RAM. See: Bill Gatestoto238 wrote:...Or when Bill Gates asked "Why would anyone need more than 4K of RAM?".
But the overall arching point remains. We can't predict the future. The "doom and gloomers" have been around since the beginning of time. And whenever something bad happens, as eventually something bad WILL happen, they gloat about how right they were. But they ignore the decades they spent being wrong before being right for one year, and then go back to being wrong for a decade.
Sure the markets may not produce as great returns going forward as they have in the past. But what's the actionable lesson here? If i'm not investing my savings, what else can I do with that money? I need to be able to provide for myself when I'm older. I'm not crazy about the "have a bunch of kids and hope one of them will support you" route.
Re: Bernanke's Blog: why are interest rates so low?
You're investing your savings into other people who have a bunch of kids and hoping one of them will support you because their folks wrote you a piece of paper. Doesn't inspire more confidence, really.toto238 wrote:If i'm not investing my savings, what else can I do with that money? I need to be able to provide for myself when I'm older. I'm not crazy about the "have a bunch of kids and hope one of them will support you" route.
-
- Posts: 49038
- Joined: Fri May 11, 2007 11:07 am
Re: Bernanke's Blog: why are interest rates so low?
This is the point Barry Eichengreen makes in his new book: comparing 1930s to now and the financial crises. This time, the regulatory response has been more muted.Grt2bOutdoors wrote:The greatest volume of issuances that went bad were those of the 2004-2005 variety. The seeds of destruction were sown years before Bernanke had significant voting influence, as those on the board were following group think instead of individual self-appraisal. It did not help that the NY Fed had the wrong management in place, too much influence and supervision of the banks was non-existent, in fact they were in bed with the banks. It was a virtual revolving door where employees were playing ring around the rosie working on the Street then going to work for the Fed in positions of power. Working for the public good, we all see how that turned out. The dissolution of Glass-Steagall amplified the problems experienced in the economy, having Wall St. banks controlling mortgage lenders, having insurance companies controlling banking enterprises and vice-versa - all of that could have been avoided. There was a reason why that Act was passed in the '30s.Busting Myths wrote:Or he kicked the can down the road...time will tell. Remember that when Greenspan left everyone hailed his tenure at the Federal Reserve and then turned on him after realizing a credit bubble had been growing for many years under his watch. What happens next will define if Bernanke's tenure was good or bad. Also, Bernanke was a Fed Governor since 2002 and was the Federal Reserve Chairman since Feb 2006 which was two years before the financial crisis occurred. He either failed to see the issues, speak up, and/or take preemptive action.toto238 wrote:+1.Grt2bOutdoors wrote: Agree - it's one thing to label a group, it's quite another to try and smear that label on "the" expert on the topic in question. I'll say this much, had he followed the typical playbook of the Fed back in the '30's, we likely would not be having this conversation today, many of us would be living under a bridge with a tarp over our heads and don't confuse luck with outcome. You have no idea how close we really came to going over the cliff, let me give you a hint, it was millimeters, not inches and certainly not feet.
As for Greenspan, while he is not entirely to blame for the mess, he certainly played a leading role. The Fed forgot their true role in regulating monetary policy and they failed to use their toolbox in an appropriate manner. Here we are 7 years later - are we Japan or something else? The Fed's going to raise rates - sure they are, I mean eventually one would expect that, to go lower would suggest something more catastrophic lies in wait........and then losing 5.4% or less in your fixed income holdings should be the least of your worries.
There is a lack of appreciation for just how much of our livelihood today we owe to the fact that Bernanke was willing to do what few others were willing to do. He took major risks, both economically and politically, and it absolutely had the potential to blow up in his face. As a result of this actions, he will likely never hold public office of any kind again as he has become too controversial. But there is no doubt in my mind that his actions were directly responsible for the fact that the US economy is not in a 1930s-type depression right now.
He wasn't the central bank manager we deserved, but he was the central bank manager we needed.
I attended a talk by him when the book came out-- very interesting man, one of the great economic historians of international money and the 1930s.
-
- Posts: 49038
- Joined: Fri May 11, 2007 11:07 am
Re: Bernanke's Blog: why are interest rates so low?
The volatility of returns is so great, empirically, that I don't think we can make generalizations. Look at the history of 10 year returns achieved, and how volatile they have been (stocks, bonds, real estate).Clearly_Irrational wrote:That would actually be a serious problem, it would mean that businesses are having a hard time finding positive NPV projects which in turn would have negative implications for increasing total societal wealth and likely exacerbate inequality issues as everyone spends more time fighting over the size of their share of the existing pie.zeugmite wrote:Which is only fair. Why should people expect a positive real return for doing nothing? You save so much productivity, you get that much back at a later time. We've been spoiled by the good times where capital was scarcer.
It's perfectly possible we are going through a period, like the late 1960s/ early 70s, or the 1930s, or the 1870s, when capital just does not earn a positive return.
In some theoretical economic sense that's irrational (but only in the long term), but the macroeconomy has moved to that point, and that's what's available to people who are investors (accumulators of capital) at this stage in their life cycle. Japan as a country seems stuck in this point.
Essentially I am arguing for the 'Secular Stagnation' thesis and I think it's quite real. If you want to go all Marxian, this is your surplus accumulation crisis-- too much capital chasing too little return.
We are also at the dawn of an amazing technological transformation (the internet, 3d printing, robotics, mobile services, implications of mass data storage and mining, etc.) and that historically has destroyed the return on capital of the previous incumbents. The new fields attract so much investing that the entrepreneurs don't do well either, except for a small number of winners.
Think of the 100s of software companies that were in the office or OS field-- down to Microsoft, basically. Or the hundreds of PC manufacturers. All those online retailers and Amazon is still far and away the dominant one. Search engines? All those handheld computers (Psion, Palm?) and we wind up with Apple owning the market. etc.
-
- Posts: 118
- Joined: Wed Apr 09, 2014 7:35 pm
Professor Damodaran's on Fed's control of interest rates
Hey folks,
I came across an interesting article by Professor Aswath Damodaran written in 2013 titled, " The Fed and Interest Rates: Lessons from Oz ". http://aswathdamodaran.blogspot.com/201 ... -from.html .Professor Damodaran referred to it in one of his recent NYU MBA Valuation classes when discussing how everybody seems to be 100% sure that when the Fed raises the rates it will affect the interest rates on bonds, stating that the Feds influence is not as powerful as everyone thinks, and the fact that bonds lose value is just a response to people thinking that the Fed is I control, but the intrinsic value has not necessarily changed. My first question is he is the only person I've ever come across to make such a statement, and therefore, event ought he data seems to back him, I am skeptical. Furthermore, even after reading the article a few times, I cannot honestly say I understand why the Fed should not have a considerable amount of control over interest rates. Any input would be greatly appreciated.
I came across an interesting article by Professor Aswath Damodaran written in 2013 titled, " The Fed and Interest Rates: Lessons from Oz ". http://aswathdamodaran.blogspot.com/201 ... -from.html .Professor Damodaran referred to it in one of his recent NYU MBA Valuation classes when discussing how everybody seems to be 100% sure that when the Fed raises the rates it will affect the interest rates on bonds, stating that the Feds influence is not as powerful as everyone thinks, and the fact that bonds lose value is just a response to people thinking that the Fed is I control, but the intrinsic value has not necessarily changed. My first question is he is the only person I've ever come across to make such a statement, and therefore, event ought he data seems to back him, I am skeptical. Furthermore, even after reading the article a few times, I cannot honestly say I understand why the Fed should not have a considerable amount of control over interest rates. Any input would be greatly appreciated.
The Biggest Risk is to not take one
Re: Professor Damodaran's on Fed's control of interest rate
You may be interested in reading from a certain Bernake himself about interest rates and the role of the Fed, including a four-part "why are interest rates so low?" series here. Whether you believe what he says or not, the perspective should at least explain some things:
http://www.brookings.edu/blogs/ben-bernanke
I've seen the arguments from others also that the Fed's power with respect to setting longer-term interest rates is limited. That said, even if the primary driver is economic fundamentals, the Fed still has some influence (and furthermore, the perception of influence is self-fulfilling and amplifies any effect), which more than some people would prefer and enough to upset them. Furthermore, what does "considerable amount of control" really mean? Two people who have the same understanding of the Fed's influence may disagree about whether that constitutes a considerable amount or not.
http://www.brookings.edu/blogs/ben-bernanke
I've seen the arguments from others also that the Fed's power with respect to setting longer-term interest rates is limited. That said, even if the primary driver is economic fundamentals, the Fed still has some influence (and furthermore, the perception of influence is self-fulfilling and amplifies any effect), which more than some people would prefer and enough to upset them. Furthermore, what does "considerable amount of control" really mean? Two people who have the same understanding of the Fed's influence may disagree about whether that constitutes a considerable amount or not.
-
- Founder
- Posts: 11589
- Joined: Fri Feb 23, 2007 12:06 pm
- Location: Chicago
- Contact:
Re: Bernanke's Blog: why are interest rates so low?
Merged above two posts to this thread. This whole discussion of the Feds power to set interest rates is borderline off-topic macroeconomic theory. But forecasting inflation is part of what is going on here, which may have an impact on portfolio construction, so we'll keep it open. But let's at least keep it to one thread - admin alex.
-
- Posts: 302
- Joined: Sat Jul 19, 2014 1:36 pm
Re: Bernanke's Blog: why are interest rates so low?
Can anyone explain how, as a previous poster mentioned, rates increased from 2003-2007 but most bond fund NAV's rose in value? Was it because the rate changes turned out to be much less/slower than expected?
Re: Bernanke's Blog: why are interest rates so low?
The post above was about Total Bond Market. Unfortunately, that's not necessarily a good example, because the 2003 starting point was pretty bad for corporate bonds (Enron having just happened), so from those high yields reflecting risk wariness in 2003, the yield of TBM actually rose very little over the period. Clearly, this is not the case today and TBM (and inv-grade bonds) are almost Treasury-like.nobsinvestor wrote:Can anyone explain how, as a previous poster mentioned, rates increased from 2003-2007 but most bond fund NAV's rose in value? Was it because the rate changes turned out to be much less/slower than expected?
A better example is the Treasury fund VFIUX, which did see much deeper NAV losses (up to 12% at one point), but in terms of total return it was quite reasonable -- maximum drawdown vs market-rate cash (which itself was returning more and more) was only about 5.7%, and you had to be fast to catch/avoid even that amount.
In general, it's not productive to look at the NAV movements in isolation, because they also depend on the composition of the fund -- VFIUX had a lot of premium bonds in 2003 owing to the preceding period of higher rates. Premium bonds are expected to lose some value in exchange for their higher coupons, but this doesn't affect their total return (except wrt taxes). And there are other effects to consider. More on this in this recent thread: viewtopic.php?f=10&t=162728#p2450813 .