Annaly February Commentary

In this environment, we are reminded of a speech given by Ben Bernanke in November 2002 when he was still a Fed Governor. The speech, entitled “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” laid out the rationale for lowering Fed Funds to an emergency rate in order to stave off deflation and its corrosive effects on the economy. The prescription, he said, could include bringing the target rates as low as possible, even zero. But beyond that, there are a variety of alternate tools it could use, including expanding the scale and menu of asset purchases, including Agency debt and MBS, making low interest-rate loans to banks or directly to the private sector (through the discount window, for example), working with fiscal policymakers, committing to holding short term rates at zero for a specified period (a la Japan), or establishing interest-rate ceilings on long-term Treasuries. As he concludes, even though these ideas are relatively unfamiliar, using them to prevent deflation is far preferable than having to cure it. “I hope to have persuaded you that the Federal Reserve and other economic policymakers would be far from helpless in the face of deflation, even should the federal funds rate hit its zero bound.” To us, even though he was talking about general price deflation, he could have been referring to the possible toolbox for fixing the asset deflation/deleveraging that is currently plaguing the financial markets. Today, the title of that speech would be “Deleveraging-induced economic depression: Making sure ‘it’ doesn’t happen here.”