Bernanke’s Easy-Money Moves: The Crucial Reality

Federal Reserve Chairman Ben Bernanke has not kept short-term interest rates at record lows for the past four years just so companies with no need for cash can borrow great sums of it for next to nothing.

So it was understandable, and even predictable, that this week's move by Amazon.com (AMZN) to issue $3 billion worth of bonds due in three, five and ten years at trivial rates scaling from 0.65% to 2.5% would be greeted with complaints about the misapplication of monetary succor.

Here, after all, is a company so dominant and capital rich that, only 18 years after its founding, it can borrow billions at less than one percentage point more than the United States Treasury does — while retirees and other blameless paragons of thrift are deprived of safe income from their savings by the Fed's anchoring of rates near zero.

The Crucial Reality

This formulation, casting Bernanke as a Robin Hood in reverse, misses the crucial reality of what the Fed has been trying to do and the ways in which these efforts have been effective. Sure, rock-bottom rates and a banking system overstuffed with free money have acted as a sort of subsidy to large corporate borrowers. But this is only a secondary result of Bernanke's main objectives to ease consumer debt-service burdens, enliven the markets for homes and cars and — vitally but less obviously — strangle financial-market volatility as a way to promote business and investor risk-taking.

Amazon is only the latest big company to accept some of the ultra-cheap cash that bond investors are desperate to hand over. Google Inc. (GOOG) last year also sold $3 billion in paper with little use for the money, at yields even closer to Treasury rates than Amazon got.

In total, since 2007, lower interest expenses alone have increased the pretax profits of Standard & Poor's 500 companies by nearly $160 billion since 2007, according to calculations by Avondale Asset Management. That's money that, to some unknowable degree, has gone toward equipment purchases, hiring, dividends and other uses of more benefit to the economy than if it stayed in bond investors' money-market accounts. And applying an average stock-price multiple on those additional earnings means $1 trillion in stock-market value could be attributed to the interest savings.

The Top Priority

The charge that the Fed is unjustly penalizing well-behaved savers by capping deposit yields is beside the point. His mission coming out of a financial crisis and brutal recession whose animating feature was an excess of debt compared to income was to dispense the medicine that would ease the damage. In a country where consumer debt even today is double the amount in savings deposits, and in a world where loan rates always exceed CD yields, making debt service easier for the economy as a whole becomes the top priority.

The household debt-service ratio, a quarterly measure of what percentage of disposable income is required to service outstanding debts, has been dragged below 11% this year from above 14% in 2007, and is now lower than it's been since 1993.

Mortgage refinancing application volume has tripled since before the crisis and is higher than it's been in all but a handful of months since 1990. The going is slow in approving and processing many of these applications, but the Fed has put many more homes "in the money" for potential refinancing. Tuesday's Conference Board consumer confidence survey showed a record 6.9% of respondents saying they are planning to buy a home.

Auto-loan activity has reached a five-year high, according to credit tracker Equifax, and annual car sales are climbing back toward the 15 million pace that marked a healthy market in the mid-2000s.

Not a Cure

Of course, such windfall effects from radically low rates and the unprecedented creation of free money by central banks are not signs of a cure. And, of course, the result has been sluggish overall U.S. economic growth rates. Yet given the tools available to any Fed chairman, the policies have at least helped things move in a positive direction, and it's unfair to suggest zero rates have merely padded corporate coffers and punished savers.

On a macro scale, what Bernanke clearly has wanted is to tame volatility in credit and stock markets. These markets were about as mercurial as they had ever been during the several months before and after the 2008 Lehman collapse. This raised the cost of capital throughout the economy and froze decision making.

By slashing rates and promising they'll stay low for years, by absorbing massive quantities of bonds and backstopping crucial money-market functions, Bernanke is trying to impose a boring predictability on the capital markets.

It hasn't always been easy or effective, given flare-ups in European debt markets and recession scares arriving uninvited every several months. But a look at the steep if jagged downtrend in the St. Louis Fed Financial Stress Index and in other gauges of anticipated market volatility suggests progress has been made.

The idea that Bernanke most wants stock prices to shoot higher to make well-off people feel wealthier and then spend more is common enough, and is somewhat supported by public statements. But he probably is more focused on suppressing market volatility to the point where economic play callers sense enough stability to spend, hire, merge and become their risk-seeking, sometimes reckless selves again.

As one veteran of a quarter-century on Wall Street said this month over lunch at a near-empty New York steakhouse: "Bernanke wants people to feel every day is the same as the next," so they're no longer flinching in advance of the next shock and will just get on with business.

We're not fully at that point yet, which is probably why free money, with all its promised benefits and regrettable unintended consequences, will be all around for some time to come.