Bernanke's Zero Interest Rate Designed To Spark Investors

Bernanke dropped interest rates virtually to zero, surprising almost everyone, as part of a very smart – albeit risky – plan to spark institutional and individual investors to get out of treasuries and into other investments. He is betting that in short order the absence of a return from holdings in government securities will push people to start investing in alternative vehicles and institutions to start lending again.

Bernanke dropped interest rates virtually to zero, surprising almost everyone, as part of a very smart – albeit risky – plan to spark institutional and individual investors to get out of treasuries and into other investments.  Individuals have fled to the safety of treasuries in record numbers; banks and other institutions have frozen all credit and investment activity.  Benanke is betting that in short order the absence of a return from holdings in government securities will push people to start investing in alternative vehicles and institutions to start lending again.

 

I find his move particularly compelling from the individual investor perspective.  Like many, I bought into short term treasuries and planned to continue with these for some time, given how bad things are at present.  Now, with virtually no return from my treasuries, I know that I will soon start investing elsewhere – certainly in CDs, but also in munis, sound corporate bonds and the like.  In fact, it was incredibly smart of Bernanke to move us all to new investments.

 

Reviews

  • Sam Cass

    December 21, 2008

    Bernanke's move was the cart following the horse. The Treasury bond market had already pushed rates to 0%. The reality is that the world is scared and money if flowing into US assets. That is depressing the price.

    As bad as things are here, they are 10x worse in developing countries where there is no bank insurance, no protection, etc. Billions can evaporate in minutes.

    The Fed may be printing money but its based on the enormous assets and strength of the US economy. The value of this economy is not in trillions but in whatever denomination comes after that.

  • JBG

    December 21, 2008

    Bernanke's didn't do this to move your investments to other asset classes. He did this to enable the government to print more and more money without needing to pay any interest on it.

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