Einhorn Taps Homer Simpson To Blast Bernanke's 'Jelly Donut Policy'?

Zero interest rates may have a necessary and useful place in a crisis, but the U.S. is well past the point at which that logic holds, and the Federal Reserve’s stubborn maintenance of its current policy isn’t just not helpful, it’s hurtful.

That’s the view from Greenlight Capital’s David Einhorn, who features The Simpsons to make his case for why Chairman Ben Bernanke and the Federal Reserve are doing more harm than good with their pledge to keep interest rates ultra-low at least until 2014.

Bernanke On BubblesSteve SchaeferForbes Staff

Fed's Funny Money Makes Housing A Huge BargainBill BonnerContributor

Consider jelly donuts, Einhorn suggests ina column for the Huffington Post: One might be a good snack; a few something of an overindulgence. But the Fed’s interest rate policy, the hedge fund manager says, “is presently force-feeding us what seems like the 36th Jelly Donut of easy money and wondering why it isn’t giving us energy or making us feel better.”

To illustrate his point, Einhorn brings uses the Simpsons, whos patriarch is known for his fondness for donuts. Einhorn sees a world where a retired Marge and Homer are struggling to generate enough returns to live on while Lisa and Maggie have no incentive to invest or take risks like starting business. Bart meanwhile, is coasting by on loans he can’t really afford thanks to the ultra-low rates, but it would be better for everyone if he had to pay the piper for his unsustainable debts.

Back in the real world, Einhorn argues that the fundamental flaw in Bernanke’s vision is that when monetary policy proves inadequate the Fed has resorted to even more aggressive efforts, like two rounds of quantitative easing and Operation Twist.

That stance has the U.S. in a condition with an economy growing 2-3%, with inflation about the same. Nominal growth, Einhorn says, is probably 5-7%. The worst part is, Bernanke & Co. are painting themselves into a corner.

In the face of this, we have a policy of near zero cost money with promises to keep it that way for years, and an open debate as to whether we need more quantitative easing. When this monetary policy is combined with a large fiscal deficit, it leaves policy makers very little flexibility should we enter another recession or encounter another crisis.

I know this isn’t conventional thinking, and it certainly isn’t the way the Fed looks at it, but I believe that raising short rates — not to a high level, but to a still low level of 2 or 3% — would be much more conducive to both growth and stability.

via David Einhorn: The Fed’s Jelly Donut Policy.

source: forbes.com

please give me comments thanks

Posted in: Ben Bernanke