Federal Reserve Board Chairman Ben Bernanke went before House and Senate committees this week and talked about a factor that seems to be helping banks at the the expense of life insurance companies: A prolonged period of artificially low interest rates.
Bernanke said, in response to a question from one of my own senators, Sen. Robert Menendez, D-N.J., that questions about ultra-low interest rates can cause problems by, for example, causing some investors to “reach for yield” — by investing in overly risky assets — is a complicated one.
The Fed is using “regulatory and supervisory tools” as the first line of defense against dangerous reaching for yield, Bernanke said.
It seems to me that maybe this answer is close to the heart of the current troubles plaguing issuers of long-term disability insurance, long-term care insurance, fixed annuities, and pretty much any product offering long-term financial guarantees.
One problem is that Congress requires the Fed only to think about the job market and monetary stability. The Fed’s mission statement says nothing about insurance companies, pension plan managers, 401(k) plan account holders, and others who are trying to save for obligations that are likely to materialize many years in the future.
A suggestion: Maybe someone should get someone in Congress to add “the interests of long-term savers” to the list of goals the Fed ought to think about.
Another problem is that I think the Fed is trying to use the hammer of low interest rates to fix the economy, because the ability to lower rates is the hammer it has, and the Fed is not noticing that what the situation really calls for is a chisel.
One of the factors crippling the economy is that lenders are terrified of getting hauled before a congressional committee or thrown in prison because they made a foolish loan.