Jelly donuts: an allegory on why the Fed's policy is unhealthy in the long run

Wall Street Has A New Worry Now That The Economy Is Recovering

Excerpt:

Before the Federal Reserve lowered rates to keep money flowing during the recession, it was easy for people to retire on their savings. The interest on their money could fund visits to grandchildren and tennis club memberships — life was good. ... And the longer rates stay low without a clear sign from the Fed as to when that policy will change, the more people are beginning to think that savers need saving. While Robertson has been saying this for some time, this hasn't always been an issue people felt they needed to take up. Now it's as if there's a new sense of urgency about it. "I want to get off the lower bound as soon as possible, in part because it will benefit savers," said Dudley. Back in 2012 David Einhorn blasted Ben Bernanke for this issue in a column that used The Simpsons and jelly donuts as an allegory for why the Fed's policy could be unhealthy in the long run. "I know this isn't conventional thinking, and it certainly isn't the way the Fed looks at it, but I believe that raising short rates -- not to a high level, but to a still low level of 2 or 3% -- would be much more conducive to both growth and stability," Einhorn wrote.

The Fed's Jelly Donut Policy

Excerpt:

A Jelly Donut is a yummy mid-afternoon energy boost. Two Jelly Donuts are an indulgent breakfast. Three Jelly Donuts may induce a tummy ache. Six Jelly Donuts -- that's an eating disorder. Twelve Jelly Donuts is fraternity pledge hazing. My point is that you can have too much of a good thing and overdoses are destructive. [The Fed] is presently force-feeding us what seems like the 36th Jelly Donut of easy money and wondering why it isn't giving us energy or making us feel better. Instead of a robust recovery, the economy continues to be sluggish. ... Consider my neighbors, Homer, Marge, and their three adult children, Bart, Lisa and Maggie. Homer has retired from the nuclear plant, and he and Marge live off savings and Homer's pension. Bart is in a bit of trouble with too much credit card debt and an underwater mortgage. Lisa has been putting away her salary and has enough for a downpayment on her first home. Maggie owns her own business and is ready to expand. When interest rates are high, Homer and Marge park their savings in CDs or Money Market accounts and get a decent return. There is no incentive for them to take much risk with their money. Bart gets into trouble very quickly and defaults on his loans. Lisa decides she can't afford a mortgage until rates fall. And Maggie, who's been helping out Bart with some of his expenses, believes that she'd make money if she grew the business, but possibly not enough to service the debt she'd be undertaking. When interest rates are low, everything changes. Homer and Marge are getting only a little interest on their savings, and are struggling to live off Homer's pension. They need to rethink their finances. Bart can manage to keep up the minimum payments on his credit cards and stay in his house. Lisa can get a cheap mortgage, and Maggie doesn't need to make such optimistic assumptions in order to expand her business.

Comment: The 2nd article is 2 years old. But the point still stands. Wouldn't it be nice to make 3% on a savings account?! Mortgages would be at 6% and the stock market would decline.