Mauldin and Tepper’s Code Red Reviewed
January 28, 2014
If you aren’t already unnerved by what Bernanke & Co. have been doing for the last five years – things like quantitative easing (QE), a zero-interest policy (ZIRP) and large-scale asset purchases (LSAPs) – then reading John Mauldin and Jonathan Tepper’s latest, Code Red, may leave you seeing red. It’s a maddening tale of the harm that has already befallen savers as well as a warning about the longer-term damage that may be in store for all of us down the road.
As always, Mauldin and Tepper are fun to read. They don’t just excoriate the Fed for propping up banks with trillions of dollars created out of thin air, they deliver the message with fecal flair, using metaphors like, “free money is like a unicorn that leaves trails of tasty chocolate droppings wherever it goes.”
But they’re also taking on a serious (and to my mind dangerous) narrative that’s being promulgated by scores of economists, journalists and others, who are working hard to build the case that, like Colonel Jessup in A Few Good Men, Chairman Bernanke was the brave warrior we all needed, the one who’s policies (however distasteful) ultimately protected us all from greater harm.
Mauldin and Tepper do an excellent job of denying this narrative by pointing out that the Fed’s “unconventional” (or Code Red) policies “worked” not by improving the economic well being of the masses but by massively enriching those at the very top. Low, and sometimes negative, real rates chased investors into riskier assets in the hope that a rising bubble would lift all boats. It didn’t. Wealthy asset holders are wealthier than before, but the gains haven’t trickled down to everyone else as Bernanke hoped. Instead, the Fed’s policies widened the already gaping divide between the very well off and everyone else.
The hardest hit? Savers. “[T]hese unconventional policies are generally good for big banks, governments and borrowers, but they are very bad for savers.” The problem, the authors maintain, is that Code Red policies have taken away the free lunch, risk-free return that savers used to be able to count on when buying government bonds. This is considered an unjust form of “financial repression” that’s devastating for those who rely on interest income to build their net egg. “Try retiring at 60 at today’s interest rates,” they lament. “We live in a world where it’s no longer necessary for the market to decide short rates or long rates.”
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