OK; Now About QE 3 1/2

Posted: Oct 03, 2012 12:01 AM

Ben Bernanke, in his latest public appearance, says it’s OK that grandma and grandpa are not earning any interest on their savings account. 

For years, non-risk takers were able to support pensions and Social Security with interest earned on savings.  Right now, of course, that’s no longer possible. 

In essence, Ben said “What’s the big deal, most folks are actually better off.” 

Say what? 

I reread Bernanke’s Indiana economic speech in order to try and understand his convoluted Keynesian logic.         

I then reread it a few more times, and finally, I was able to grasp why grandma and grandpa are better off.  So, please, allow me to enlighten you. 

If grannie and gramps had a $100,000 CD and were earning 5%, then at the end of the year they would be credited with $5,000. 

If you assume no spending during the year that would mean that their net worth would have increased by $5,000.  OK?  So far, so good. 

Now, let’s assume that under Bernanke they could only earn 0.5% on the $100,000.  That means they would only earn $500, increasing their net worth by the same amount, a mere $500. 

Not so good. 

Under Ben, however, there is much more to the picture. 

Through their purchases of mortgage-backed securities, the Federal Reserve has forced mortgage interest rates lower, thus making a home purchase more appetizing, and as the theory goes, it creates more buyers. 

Thus, with more buyers, it should drive the value of houses even higher and that’s apparently what’s happened over the past few months. 

So, let’s revisit grandma and grandpa’s example.  More than likely if, in fact, grandma and grandpa did own a house and were not living in an apartment or an assisted care facility, Ben is sure that their property has appreciated by at least $10,000. 

OK, let’s do the math. 

Again, with interest rates at 0.5%, the amount earned on a $100,000 CD = $500.  Nevertheless, we must now include the appreciation amount of $10,000. 

Thereby, $500 plus the $10,000 appreciation = $10,500.  So, under Ben, it’s $10,500 vs. $500.  And obviously, according to Bernanke’s math, it’s much, much better.

 Who wouldn’t want to be ahead by $10,500 vs. $500? 

That’s awesome! 

On the other hand, I have a major problem with this way of thinking. 

Will it now mean that prior to going to the grocery store for a loaf of bread; grandma and grandpa must first call their banker for a home equity loan? 

And what if they don’t own a house? 

Oh well, maybe Ben can address that issue in QE 3½.