Magazine article The American Prospect

Hating the Hand That Enriches You

Magazine article The American Prospect

Hating the Hand That Enriches You

Article excerpt

Ever since the Federal Reserve embarked on its campaign to try to juice the recovery with very low interest rates and bond purchases, it's been subject to withering criticism from a group of billionaires. Criticism of the Fed is nothing new, of course, but this criticism comes from hedge fund chiefs, money managers, and other stewards of financial assets--a group that has seemingly benefited from everything the Fed has done.

Front and center among such professional critics is Paul Singer, head of the $25 billion Elliott Management, who recently claimed, in a letter to his investors, that central bankers around the world (including at the Fed) have created an "illusory" prosperity built on "wishful thinking" and "fake prices" that can only end in another bust.

Then there is David Einhorn, also a well-known billionaire manager, who has accused the Fed of succumbing to a "jelly donut" approach, the operative metaphor being that while jelly donuts and expansionary monetary policy both provide a pleasing sugar high at the moment, they can result in nasty aftereffects: either a Homer Simpson waistline or an episode of raging inflation. And I could go on--David Tepper has called the Fed "complacent"; Stanley Druckenmiller, formerly top gun for George Soros, has called the Fed's policy totally outrageous and inappropriate. And so on.

The unifying theme of these criticisms is, of course, that the Fed's policies to reinvigorate the economy will lead to inflation. Wall Street sages have been making this claim since 2010, when Ben Bernanke, the Federal Reserve chairman, announced a second stage of "quantitative easing" (bond purchases) to try to bring down long-term interest rates.

Quantitative easing probably had only a modest effect on the economy, and so far as these things are discernible, its effect on inflation was even less--call it zero. Yet the voices of doom from well-heeled investment suites continue. Cumulatively, their blogs, letters, and public comments describe a range of opinion from prudent aversion to inflation to, in some cases, hysterical loathing for liberal fiscal and monetary policies. Axel Merk, president of Merk Investments, has likened faith in the Fed to faith in the "central bankers in the Weimar Republic." During the Weimar era in pre-war Germany, inflation peaked at well more than 1,000 percent. During the Bernanke era, and continuing into Janet Yellen's tenure, inflation has hovered in the neighborhood of 2 percent.

The point is not that some hedge fund managers made a (thus far) inaccurate call. Market forecasting is notoriously difficult, and no investor can be right all the time. Bernanke himself was famously wrong about the likelihood of a recession, and also wrong in asserting that central bankers had engineered a new era of stable output. Moreover, some risks are worth insuring against even if, in hindsight, they don't materialize. Good investors are right to be cautious.

What interests me is why so many successful investors are so bitterly aligned against the agency that, arguably, single-handedly revived the capitalist system. I know some of these managers and have investments with a couple of them. They are super-smart and genuinely concerned. Many meet the acid test of sincerity, having backed their anti-Fed views by deploying a chunk of their portfolios into gold. As a political cause, gold has enjoyed a spirited revival, spearheaded by Fed-hating libertarians such as former Representative Ron Paul. The investment argument echoes the political one--it's a bet that the Fed will fail. But the investment performance has been mediocre. Over the last 25 years, for instance, an investor in the Dow Jones Industrial Average would have multiplied his or her capital six times, in addition to dividends of a couple percent a year. The price of a brick of gold has risen three times, and it does not generate dividends.

Perhaps of more relevance, in the four years since Bernanke announced the bond purchase program known as QE2, the stock market has soared and gold has been dead money, its value right around where it was in late 2010. …

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