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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Bernanke Tries to Justify Zero Interest Rate to House Committee


Bernanke Tries to Justify Zero Interest Rate to House Committee

Fed Chairman Ben Bernanke testified today before the House Committee on the Budget on the economic outlook for 2012. Most of the meeting dealt with representatives trying to get Bernanke's opinions on fiscal policy issues. However, monetary policy was brought up a few times. There was one exchange between Rep. Diane Black (R-TN, 6th District) and Chairman Bernanke that I found most interesting. Rep. Black tried to understand how it can be helpful for the economy in an environment where savers have no incentive to save. Her question seemed to irritate Chairman Bernanke, and his reply was confusing.

I don't expect anything to come out of the exchange that will directly help savers, but it does show there are members in Congress who think the Fed has gone too extreme with the zero interest rate.

You can view the full 152 minutes of Bernanke's testimony at this C-Span video library page. The exchange between Rep. Black and Chairman Bernanke starts at time 2:17:00 into the video. I've transcribed the exchange below. The committee chair is Paul Ryan (R-WI, 1st District), and I included his statement that ended the exchange:

Black: On the other end, does a zero interest rate encourage savers to save?

Bernanke: It may, because there's both what economists call substitution effects and income effects, because you may need to save more to get the same return, but...

Black: I'm not sure that putting my money into accounts where I'm going to get a zero return is probably what I would want to do especially in an economy that's so uncertain.

Bernanke: Let's think this through. Suppose in order to solve savers problems, suppose the Fed raised interest rates sharply. That would almost certainly throw the economy back into recession. It would mean the stock market would decline. It would mean returns on other investments would go down. And it might mean increase deficits might lead to more concerns about our federal government. So, again, we understand the concern that savers have, but we are trying to deal with a bad situation, and this is one of the tools we have to try to get the economy back to full employment.

Black: I know my time is out, but I'm not advocating a sharp increase. I'm just saying that there's not an incentive right now if there's zero percent interest. Thank you.

Ryan: There's a case for normalizing policy.

Bernanke appeared to take Rep. Black's question as if she was advocating high interest rates. As Rep. Black said at the end of the exchange, she wasn't "advocating a sharp increase". Also as Rep. Ryan said, "there's a case for normalizing policy". The representatives weren't trying to debate the usefulness of low interest rates to help the economy. There's a big difference between low interest rates and never-ending zero interest rate.

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me1004   |     |   Comment #1
Black's comments highlight a point I've made in the past: at some point in the dropping of interest rates, you hit a level below which there is no more boost to the economy, because if people are not borrowing and investing at that level, the interest rates are NOT the reason they are not borrowing, and so a lower rate will not start that borrowing. 

This was actually one of the reasons why Greenspan never went nearly so low as Bernanke has. I had read about Greenspan's reasons back then.

If Bernanke would just raise rates to Greenspan's levels, we savers would be better off than we are now! That's still too low at this point, but it is better than Bernanke is doing.
Anonymous   |     |   Comment #3
A lot of people could construe the Fed policy, that we need zero interest rates to mean we are in deep deep trouble.  There by the zero interest rates do more harm than good. 
scottj   |     |   Comment #4
One of the big reasons they give for not raising rates is due to the high unemployment numbers. Many are still working or have gone back into the workforce since their savings are no longer generating enough income to live on. Raise rates some and you would see some people call it quits opening up positions the unemployed could fill. This whole thing is just more class warfare, Lets face it the poor and much of the lower to middle class do not have enough savings that it really matters to them what rates are since they are living paycheck to paycheck. This zero rate is having a much bigger negative effect on the upper middle class and the wealthy, and Obama will do nothing to help us
Anonymous   |     |   Comment #5
@me1004 - That is an incredibly foolish comment.  People are borrowing more than ever because of low interest rates.  Unless of course you consider the government to be detached from the people.  As I understand it we have a government that is "OF THE PEOPLE".  And the government is borrowing more than EVER on our behalf.  If rates went up, the government would implode and not be able to borrow anything.

The low interest rate is ABSOLUTELY leading to increased borrowing (by the government ON BEHALF of the people).

Think it through man.  Bernanke will raise only when congress decides to balance.  The problem ISN'T Bernanke.
Kaight   |     |   Comment #6
With this once great, now hopelessly indebted, nation taking on an additional $1T of debt each year, the entire enterprise will capsize, it will collapse completely, more quickly if rates rise.  Since Bernanke does not wish himself at the helm when the inevitable occurs, ultra-low rates are his only recourse.  How would you like to be Fed chair with the USA having to finance $16T of debt while facing interest rates at historical norms?  Bernanke is presiding over the Titanic and he knows it.  Bernanke could not care less about us savers.  We are his piggy bank.  We are his cash cow.  Bernanke cares first and foremost about Bernanke.
Anonymous   |     |   Comment #7
All I can say is that everyone better get prepared.....because this economy is going to collapse in a few years...maybe less. We are going to see the likes of something we cant even imagine. Our way of life will come to an abrupt end and be replaced with something terrifying. Go ahead and laugh it off......say it wont happen. Well....you need to wake up. Don't believe me? Look at the numbers. Not if....when.  And while you're laughing........think of this. I can guarantee there were people laughing in Moscow in 1916 when they were told the communists were coming. Think they were laughing in 1917?
Anonymous   |     |   Comment #8
Bernanke thinks the extremely low rates are the answers for our economy,
Obama thinks new and higher taxes are the answer,
GOP in Congress thinks lower taxes are the answer,
Wall street needs no or low interest rates to function,
Savers and retirees need high interest rates to support a better life style,
The treasury needs the money from taxes collected on higher interest rates paid by the taxpayers, but also needs low interest rates to borrow freely. (conflict of interest)

However, the main problem is the national deficit and everyone is afraid to address it.

It is obvious, there is no single answer to our bad economy that needs to be saved from collapse in near future.
What we need is not political, but economical solution, which only can be solved by the people, by sending this Congress and the current President home and elect some one who knows what we know as reasonable and rational citizens.
Anonymous   |     |   Comment #9
Fairly clear by now....Bernake is looking at this from his PHD standpoint....pump up the stock market with easy money, at the savers and conservative folks expense, and the charts are bound to follow through with an upward trend that his handy classroom pointer can illustrate for all of us to see.  Problem - we don't need a PHD to solve our problem with theories, outdated term papers and such, rather someone with an ounce or two of plain old common sense.  Raise the rates and raise them NOW!
Anonymous   |     |   Comment #10
bernanke has destroyed my int income which i need in my retirement, that is why i saved in the first place. why should we the savers get raped because the average young american spent themselves to death ex i phones , eat out 5 days a week . kids in 5 plus after school programs, bot homes could not afford etc IT HAS BEEN  YEARS NOW SAVERS NO INCOME MANY OF THEM SENIORS WE DESERVE AT LEAST 3% ON A ONE YR CD NOT .25  THE PEOPLE WHO DESTROYED THIS ECON THE BANKS THE BROKERS ARE STILL GETTING RICHER<HALF THE POP IS ON FREE UNEMPLOYMENT FOR TWO PLUS YEARS< WE SEND MONEY ALL OVER THE WORLD WE SPENT TRILLIONS ON STUPID WARS THAT CANNOT BE WON   AND WE STARVE THE SAVERS THE GOOD PEOPLE WHO DID THE RIGHT THING BERNANKE HAS NO COMMON SENSE AND MUST BE REPLACED
Anonymous   |     |   Comment #11
What we need is a government that stops wasting money bailing out everybody and creates policy that encourages job growth.
Anonymous   |     |   Comment #13
Anony #12:  Since you are sooo smart, why aren't you in Washington helping to continue to ruin our country instead of wasting your time bragging in this forum?  Sooner or later your long term CDs will mature and you just may be whinning your way to the banks with the rest of us!  It is very offensive to think anyone could "laugh" at others who may not be as fortunate as yourself!  You are ALL heart!
Anonymous   |     |   Comment #15
Anon #13.....oh look everyone......it's the resident do-gooder......Ha! You're hilarious. I have years to go on my 5.5% CD's and will be laughing for years. I was smart enough to see this coming. And when my CD's mature? Well.....unlike you.....I'm already prepared and I'm 10-20 moves ahead of you. I will make money regardless of what rates are..... and I wont come on here to whine and complain and blame everything on someone else.  I have forgot more than you will ever know about interest rates.


Anonymous   |     |   Comment #16
Anon #14......nope......you can't. Too bad so sad. I am a master of interest rates......a scholar if you will. I could teach a class I' so good at predicting interest rates. But I wont.  I will tell nobody my strategy. Never. it's mine!
Anonymous   |     |   Comment #17
#16 After that comment - i know now that i am way smarter than you. nuff said
Nobama   |     |   Comment #18
You must first change presidents in order to get rid of bernake.  Clearly neither of them have our 'interest' in mind!!!
Anonymous   |     |   Comment #19
Looks like we either have a new interest rate prodigy among us today or some third grader playing hooky....either way, get lost. 
Anonymous   |     |   Comment #20
It appears we have a bunch of unverified experts with mental deficiency issues.  It would be nice if people stuck to the facts.
Anonymous   |     |   Comment #21
Since there's no easy way to solve the many opinions already stated, since trying to solve one issue most likely means affecting other groups...then from my point of view, aside from what we can learn, and support each other in this forum, maybe part of the solution would be to diversify beyond what banks can provide, aside from savings, checking, cds...or other instruments like bonds, t-bill, and stuffs, to go into none FDIC stuffs, like mutual funds, speculative markets like stocks, forex, futures, etc...but of course, in moderation...Will it require hard work? absolutely...! But if you have any better, or like some people like to say "more better" suggestions, please do share it here...thank you!

me1004   |     |   Comment #22
Anonymous #5: Bernanke is not looking for Congress to balance the budget! He has literally called on Congress NOT to do so -- not at this time anyway. 

And the goal of low interest rates isn't to get government to borrow! It is to get consumers and businesses to borrow to get the economy and free market economic activity growing again. But the low interest rates have not gotten consumers to spend or businesses to invest -- which is the goal of the low interest rates.
Anonymous   |     |   Comment #23
Instead of whining and crying about interest rates.....find another way to make money. There are always ways.....find them! Or do you prefer being dependent on Fed poliocy to determine your income?

Necessity is the parent of invention!!  Now go out and do it!!  NOW!!!   DO IT NOW!!!!!!!!!!!!!!!
Anonymous   |     |   Comment #24
I guess with the 0% rates, Helicopter Ben feels that for dinner tonight, it is acceptable for Grandma to choose between dog food and cat food.  At the same time enriching the bankers.  Really sad.
Bear Knake
Bear Knake   |     |   Comment #25
 The Bernank is little more than a mugger, stealing from the savers to prop up everyone else.


lou   |     |   Comment #26
I started to watch the video and turned it off because I can't stand to listen to the guy. Paul Ryan tried to get him to answer what if they do not tighten in time and and they lose control of inflation and interest rates, does he see the correlation between zero interest rates today and that doomsday scenario. Of course , our magician saw no correlation, because the Fed in his view is omniscient and all-knowing. In his view, the ultra low rates earlier in the decade had no relationship to the later crisis. The Fed will mange everything. The hubris of this guy is breathtaking.
Shorebreak   |     |   Comment #27
Re: lou - #26, Saturday, February 4, 2012 - 4:47 AM

I wholeheartedly agree. Having to listen to Bernanke testify and answer questions in a committee hearing is worse than fingernails on a chalkboard.
oldiesrock   |     |   Comment #28
Black, Diane Lynn - U.S. Representative, Said it all when she said, were not looking for a sharp increase, just enough to make it worth while to save,0 percent does not cut it, see if him and the members of congress were in the working man shoe's if they would have a different attitude. Bernanke, Ben S. - Chair, needs to get his head out of his a--. If savers got a fair return that would get more people to spend from the extra interest that they received and to get retirees to go on trips, buy other items as well, and help the economy grow in it's own little way.
Anonymous   |     |   Comment #29
My home loan intrerest is at 4.5%

Credit card charges 10%

HELOC is at 8 %

Car loans is at 4%

FED charges 0%

Where I can sign up for the 0% interest money?
Anonymous   |     |   Comment #31
Hal:  We can also express our indignation with a Petition from this group if and when it gets posted.  I am sorry if I am over-eager about it but I hate getting my hopes up about something and it doesn't seem to be happening.  If we don't put one on here by next week, I will just go to IPetitions and come up with something on my own.  I just signed two others on there from other people on healthcare issues and I think a lot of folks read that webpage.  We all know what needs to be said so why aren't we saying it with our own Petition??  I really appreciate having a forum like this to help with CD research but I frankly think we could help a lot with this savers interest problem if we get the ball rolling and actually "do" a Petition.  If Ken does not have time to put it together, there seems to be a lot of other members who have great ideas about what needs to be said.  So why not get one of them to come up with the Petition so we could SIGN IT??    Doing nothing is not an option for me and the longer we wait, the less chance we have of being heard, imo.
Anonymous   |     |   Comment #32
I want the last 5 minutes of my life back
Anonymous   |     |   Comment #33
What's the problem? Maybe if we keep this up for a few more years, we'll starve to death millions of seniors-- then we can proclaim lots of savings thru medicare not being used by the old geezers, and raise interest rates for all the debtor bums who deserve nothing and get everything.
GM   |     |   Comment #34
Bernanke's comments re: savers remind me of what Marie Antoinette reportedly said when asked what the poor citizens were to do as they had no bread. "Let them eat cake"! We know what happened to M.A.  I don't suppose she was very happy as the citizens of France jeered and cheered when she was taken to the Guillotine. Are you listening, Mr. Bernanke?
Kaight   |     |   Comment #36

Be circumspect and vigilent.  There are severe penalties in this country for threatening the life of a Federal officer.
Anonymous 99
Anonymous 99   |     |   Comment #37
This is the new norm. wallstreet & big corp. want  it this way. There making big money on zero interest rate scheme. The economy is not going to get better.  For the last10 years the stock market has done nothing.  Savers are being boiled slowly. In the end their going to get your money! One way or the other. They bail them selve out but not you. I hope you keep your paid TV to watch ball players being played 1000 times what average workers get paided. What concessions will you make to save your job! Hey how that gobilization working for you now.