James Grant: The Federal Reserve’s Most Outspoken Critic

September 28, 2012

Federal Reserve Chairman Ben Bernanke has been widely credited with playing a key role in saving the global financial system from spiraling into a deeper recession. As a recent Financial Times headline read, “Central Bank Action Lifts Gloom”; “Bold Fed and ECB Moves Cheer Investors- Confidence Increases in U.S. and Europe.” There is no question that the Fed and to a lesser degree the ECB, the European Central Bank, are pulling out all stops to boost economic growth, investor confidence, and stock returns, going far beyond what their critics maintain is their proper role. As this week’s guest, financial journalist and historian James Grant told me, “Central bankers have morphed into central planners.”

The Fed, unlike other central banks around the world, has a dual mandate. Starting in 1977, Congress stipulated that, similar to other banks, it is supposed to ensure price stability, i.e. keep inflation in check. More recently, the Fed has focused on preventing deflation and has said its targeted inflation rate is 2%. Its second and unique mandate is to “promote effectively the goals of maximum employment.” With unemployment at more than 8% and long term unemployment near 15%, the Fed is a long way from meeting that goal; which is why the Fed recently pledged to keep short term interest rates near zero until mid-2015, an unprecedented seven year stretch, continue buying U.S. treasury bonds to keep interest rates low, and purchase $40 billion dollars a month of mortgage backed securities until the labor market “improves substantially”; in other words, it’s an open ended commitment.

Perhaps the most stunning statement by the Federal Reserve Chairman came in a recent speech in Jackson Hole, Wyoming. We will have the full text on our website, wealthtrack.com. In describing all the unusual policy actions taken he said: “Central bankers in the United States, and those in other advanced economies facing similar problems, have been in the process of learning by doing.”

This week’s guest is appalled by the Fed’s expansionist policies and worried about its known and unknown consequences. He is Financial Thought Leader James Grant, editor of Grant’s Interest Rate Observer, a twice monthly, self-described “independent, value oriented and contrary minded journal of the financial markets.” It also happens to be a must read among top professional investors. Jim is also an historian and author. His most recent book is Mr. Speaker!: The Life and Times of Thomas B. Reed
. I began the interview by asking Jim if the Fed wasn’t just doing its job: promoting maximum employment and price stability.

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WEALTHTRACK Episode #914; This program was originally broadcast on September 28, 2012.

Listen to the audio only version here:
James Grant #914

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[wptabs mode=”horizontal”] [wptabtitle]Guest Info[/wptabtitle] [wptabcontent]James Grant
Founder & Editor
Grant’s Interest Rate Observer[/wptabcontent] [wptabtitle] Newsletter[/wptabtitle] [wptabcontent]Consuelo Mack“Shake hands with the government” was the advice PIMCO bond king Bill Gross shared with WEALTHTRACK viewers during the financial crisis explaining why he was buying U.S. Treasury securities and mortgage backed bonds, which turned out to be very good investments. The same advice could hold true today. The Federal Reserve’s plan to buy $40 billion a month in mortgage backed securities has pushed prices on the bonds up and their yields down to record lows, as well as yields on mortgage rates themselves. As top ranked independent research firm ISI told clients this morning “MBS yields are now basically equal to treasury yields”… “down to an incredible record low of 1.67% and mortgage rates are down to 3.38%!…” putting them in “uncharted territory”.

How are the Fed’s actions affecting homebuyers and owners however, the people Chairman Ben Bernanke is trying to help? Bill Gross tweeted his take: “Fed buys Mtges but banks fail to pass through lower yields to future home buyers.”  And a story in Bloomberg news this week pointed out that the “latest mortgage bond purchases so far are helping profit margins at lenders including Wells Fargo & Co. and JPMorgan Chase & Co. more than homebuyers and property owners looking to refinance.”

None of this comes as a surprise to this week’s WEALTHTRACK guest. He is appalled by the Fed’s expansionist policies and what he sees as its intrusion in the credit markets. He doesn’t believe the Fed will be effective in reducing unemployment and he is very worried about the known and unknown consequences. He is financial journalist and historian James Grant, editor of Grant’s Interest Rate Observer, a twice-monthly, self-described “independent, value oriented and contrary minded journal of the financial markets,” which is a must read among many professional investors. Jim’s critique of the Fed is definitely worth hearing.

As we have mentioned before, we have a new and improved feature on our website. In our WEALTHTRACK Extra section we ask our guests for additional insights that we don’t have time to include in our weekly program. This week, I will continue my conversation with Jim Grant. And for those of you who would like to see our program 48 hours in advance of the broadcast, you can subscribe to our WEALTHTRACK Premium subscription service.

Have a great weekend and make the week ahead a profitable and a productive one!

Best regards,


[/wptabcontent] [wptabtitle]Action Point[/wptabtitle] [wptabcontent]

Morningstar recommends:
Vanguard REIT Index ETF (VNQ)
VNQ Chart

VNQ data by YCharts

Morningstar also recommends holding REITs in a tax deferred account, such as a 401k, because their dividends are taxed as regular income.

Watch This Episode

[/wptabcontent] [wptabtitle]One Investment[/wptabtitle] [wptabcontent] REASONABLE RISK FOR INCOME

Portfolio of mortgage-backed REITs:
– Annaly Capital Management, Inc. (NLY)

NLY Chart

NLY data by YCharts

– American Capital Agency Corp. (AGNC)

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– Hatteras Financial Group (HTS)

HTS Chart

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– MFA Financial Group (MFA)

MFA Chart

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[/wptabcontent] [wptabtitle]Transcript[/wptabtitle] [wptabcontent]WEALTHTRACK transcripts are now included in WEALTHTRACK Premium subscriptions. Sign in to access this weeks transcript.You can also purchase and download the transcript separately safely and securely with your credit card or PayPal account. You will need the free Adobe Acrobat Reader (Mac/Win) or Preview (Mac) to view and print the transcript.
WEALTHTRACK transcripts are available individually for $4.99. Click here to purchase a copy.
[/wptabcontent] [wptabtitle]Bookshelf[/wptabtitle] [wptabcontent]Mr Speaker: The Life and Times of Thomas B. Reed The Man Who Broke the Filibuster

Mr. Market Miscalculates: The Bubble Years and Beyond

John Adams: Party of One

[/wptabcontent] [wptabtitle]Purchase DVD[/wptabtitle] [wptabcontent]Please check back for availability.[/wptabcontent] [wptabtitle]Archive[/wptabtitle] [wptabcontent]#742- 4/15/11
Financial Thought Leader James Grant explains why he believes the Federal Reserve’s easy money policies will wreak havoc on the economy and markets. The dangers of inflation creep and how to protect yourself against it are the focus of this week’s Consuelo Mack WEALTHTRACK.

#624 06-11-10
Why the dollar, gold and the ballooning federal deficit are critical issues for investors. Consuelo sits down for a rare one-on-one interview with contrarian market observer and historian James Grant, publisher of the influential newsletter, Grant’s Interest Rate Observer.

327 | 01-04-08
We greet the New Year with two top portfolio managers and a highly-respected observer of the financial scene. BlackRock’s Chief Investment Officer and three fund manager, Bob Doll will be back to share his usually prescient predictions and strategies for the New Year. The Wintergreen Fund’s David Winters will tell us why he continues to emphasize international investing. And Jim Grant, the Editor of Grant’s Interest Rate Observer will pull no punches about the outlook for the credit markets in 2008.

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