Bernanke’s Legacy

"Mr. Bernanke, on the way out, don't let the door hit ya, where the good Lord split ya!" That's what I've imagined my former coworker Charley—a brilliant Alabamian who was proud to be called a redneck—might have said as the former Fed chairman stepped down.

In case you missed it, here's Bernanke's highlight reel:

• The Federal Reserve jumped in and bailed out "too big to fail" banks that made bad business decisions.
• The Fed continued to buy Treasury bonds in order to keep interest rates down.
• The Fed openly acknowledged that their policies force seniors to put their life savings at risk.
• Around 25% more baby boomers and Generation Xers will not have enough money because of Fed policies.
• The Fed is creating a stock market bubble that will eventually burst.
• Bankers are making record profits and paid out record bonuses for 2013.
• Bernanke left behind a 100-year money supply that is continuing to double annually.

During his tenure, Bernanke essentially acted as the chairman of a corporation owned by banks and bankers. I’ve touched on the difference between the Fed's published goals and how it actually behaves before. The party line: the Fed is a government agency acting in our best interest. Mr. Bernanke is just one of many chairmen who have continued to foster that illusion.

In Code Red, authors John Mauldin and Jonathan Tepper pull the curtain on Zero Interest Rate Policy (ZIRP) to reveal a merciless wizard. Basically, the Federal Reserve has deliberately driven interest rates so low that safe government bonds and government-backed CDs offer interest rates that do not keep up with inflation—which translates into true negative yield for investors. Historically, these fixed-income investments made up the majority of retirees' investment portfolios.

In the words of the authors:

"When real rates are negative, cash is trash. Negative real rates act like a tax on savings. Inflation eats away at your money, and is, in effect, a tax by the (unelected!) central bankers on your hard-earned money. Leaving money in the bank when real rates are negative guarantees that you will lose purchasing power. Negative real rates force savers and investors to seek out riskier and riskier investments merely to tread water. It almost guarantees people don't save and stop spending.

In fact, Bernanke openly acknowledges that his low-interest-rate policy is designed to get savers and investors to take more chances with riskier investments. The fact that this is precisely the wrong thing for retirees and savers seems to be lost in their pursuit of market and economic gains."

On the other hand, if you are a banker you will love his legacy. Sheraz Mian broke down the Q2 2013 earnings reports of the S&P 500 companies in Zacks' Earning Trends:

"Yes, the total earnings tally reached a new quarterly record in Q2 and the rest of the aggregate metrics like growth rates and beat ratios look respectable enough. But all of that was solely due to one sector only: Finance. … Finance results have been very strong, with total earnings for the companies that have reported results up to an impressive +30% on +8.5% higher revenues."

Too big to fail banks were certainly succeeding on Bernanke's watch. Mian continued:

"Earnings growth was particularly strong at the large national and regional banks, with total earnings at the Major Banks industry, which includes 15 banks like J.P. Morgan and Bank of America."

While banks were making record profits, seniors and savers had been left to fend for themselves. What did Bernanke have to say about this? Well, in January 2011, he said:

"Policies have contributed to a stronger stock market just as they did in March 2009, when we did the last iteration of this. The S&P 500 is up 20%-plus and the Russell 2000, which is about small cap stocks, is up 30%-plus."

He continued along that same vein in 2012:

"Large-Scale Asset Purchases (LSAP) also appear to have boosted stock prices, presumably both by lowering discount rates and by improving the economic outlook; it is probably not a coincidence that the sustained recovery in US equity prices began in March 2009, shortly after the FOMC's decision to greatly expand securities purchases. This effect is potentially important because stock values affect both consumption and investment decisions."

I guess that means Mr. Bernanke, through the asset purchases of the Federal Reserve, is now responsible for propping up the stock market. So now both the big banks and Wall Street are their primary concern?

Perhaps he thought he was doing us a favor by forcing us to risk our money in the market. That's the kind of favor we sure don't need.

Good for Bankers, Bad for Anyone Who Wants to Retire

In the summer of 2013, the Employee Benefit Research Institute published a survey about low-interest-rate policies and their impact on both baby boomers and Generation Xers who are following right behind. The bottom line:

"Overall, 25–27 percent of baby boomers and Gen Xers who would have had adequate retirement income under return assumptions based on historical averages (emphasis mine) are simulated to end up running short of money in retirement if today's historically low-interest rates are assumed to be a permanent condition, assuming retirement income/wealth covers 100 percent of simulated retirement expense."

Seniors and savers have yet to experience the long-term impact of Bernanke's policies. Tim Price summed it up this way in an article from Sovereign Man:

"Why do we continue to keep the faith with gold (and silver)? We can encapsulate the argument in one statistic.

Last year, the US Federal Reserve enjoyed its 100th anniversary, having been founded in a blaze of secrecy in 1913. By 2007, the Fed's balance sheet had grown to $800 billion.

Under its current QE programme (which may or may not get tapered according to the Fed's current intentions), the Fed is printing $1 trillion a year.

To put it another way, the Fed is printing roughly 100 years' worth of money every 12 months. (Now that's inflation.)"

While Bernanke may have gotten out while the getting was still good, the effects of his policies on seniors and savers may be felt for years to come. Inflation is a huge—potentially catastrophic—tax on our savings.

Mr. Bernanke protected the banking system profits at the expense of several generations of hard-working people. If I am ever at an event where he is speaking and he sees me raise my hand, he'd be well advised to call on someone else…

But, it’s not all doom-and-gloom. There are ways to invest safely in order to produce returns well above inflation – and receive solid dividends – without exposing your nest egg to undue risk.