MIND THE GAP! American tourists no doubt grow weary of the constant refrain on London’s Underground. But Federal Reserve chairman Ben Bernanke must have wanted to holler it this week as the central bank embarked on its latest attempt to save the world. Bernanke’s gap – chasm may be a better word – is potentially just as dangerous as any on London’s subway system. It’s the distance between the size of the economic ills the Fed remains tasked with healing and what the central bank has left in the medicine cabinet.
September has provided Americans with a stark illustration of it. Firstly, a couple of the symptoms. Three weeks ago, Wal-Mart said it would be reintroducing layaway plans in the countdown to the Thanksgiving holiday and Christmas, the busiest time of the year for retailers. If you’re not familiar with them, layaway plans allow people to pay a fee and in return pay for goods over a period of time without being charged interest. Wal-Mart, America’s biggest retailer, ditched the plan in 2006 when more and more of its customers were using credit cards.
Then last week, the US Census Bureau published its survey of incomes and poverty for 2010. Amid the reams of statistics, it emerged that the number of households that are “doubling up” has risen sharply since the financial crisis began. These households are defined as those with at least one extra person who is over 18, not at school and neither the spouse or partner of the homeowner. Their number has increased 11pc to 21.8m since 2007 and now account for almost 20pc of all households in the US.
These are just two of the ways in which this crisis has changed daily life for millions of Americans as unemployment rises and incomes are squeezed. And there are plenty more. So it’s little wonder that this week stock markets finally woke up to the Bernanke gap when the Fed chairman gave everyone a peek inside the bank’s arsenal.
Operation Twist, launched on Wednesday, will see dealers at the Fed buy $400bn of longer-dated US government bonds and then sell the same amount in debt maturing in one to three years. The aim is simple: drive yields to such miserably low levels that investors are forced to take more risk to ensure a return that outpaces inflation. Shares, property, private equity – almost anything will do. As Jim Vogel of FTN Financial says “the Fed is turning the screws to make it that much more painful to just leave your money in the Treasury market.”
It’s certainly helped drive down bond yields. Those on the 30-year have tumbled 45 basis points this week, while 10-year yields are close to their lowest since the 1950s. But it’s hard to believe that Bernanke & co believe it will make much difference in an economy where interest rates have been at a record low since December 2008 and are set to stay there until at least 2013.
Operation Twist may make a difference at the margin, which is the space in which any future policy from the Fed is likely to play out in. The Fed will no doubt empty its arsenal further should the economy deteriorate from here. But Bernanke should spell out to Americans even more clearly that these are not magical healers for a country emerging from its worst recession since the 1930s. Failure to do so risks a crisis of confidence in the central bank at a moment when the country can ill-afford it.
It may also provoke some more imaginative thinking in The White House and in Congress about the sorts of policies that might make a difference.
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