Belfast Telegraph

Growth of financial hedonism

By James Saft

A financial adviser who counsels 57-year-olds to lock themselves into large loan payments until they are approaching 90 probably ought to be looking for another line of work.

And yet here we have Ben Bernanke, perhaps the most powerful man in the global economy, following exactly that course.

The Federal Reserve chairman is putting his own assets on the line to walk that reflationary walk in a move that tells you a lot about the theory, practice, risk and rewards of the economic remedies he champions.

Mr Bernanke (58) refinanced his mortgage in September, less than two years after the last time he refinanced, according to a report in The Wall Street Journal, citing public records.

Mr Bernanke owes $672,000 (£435,600) on his house, about 80% of its value. The mortgage has a 30-year term, implying that repayments are fixed and that it probably carries an interest rate of about 4%.

The most recent refinancing came not long after Mr Bernanke launched Operation Twist, a Federal Reserve bond-buying programme partly intended to drive down mortgage rates and thus hopefully stimulate the US economy.

To be clear, I see no conflict of interest in Mr Bernanke refinancing his mortgage.

That said, what we have here is a man who was approaching 58 saddling himself with a debt that will have to be paid down over 30 years, at the end of which time he will be a hopefully sturdy 87-year-old.

That is not the way in which mortgages were originally intended to be used.

Typically borrowers would time their mortgages so it would be retired shortly before they did, thus leaving them better able to cope with reduced retirement income.

An important thing to note is that repeated refinancings bring with them more risk to the borrower because every time you refinance your mortgage into a fresh loan you extend the term over which you will repay the loan, getting ever further away from repaying it.

So here we have US monetary policy made manifest: keep borrowing and let the future look after itself.

It's absolutely true that mortgage refinancings at lower rates - and US 30-year rates have dropped to below 4% from 6% in 2007 - help to stimulate the economy.

It's also true that those debts must eventually be repaid, though if monetary policy is aggressive enough that repayment will be in dollars that are worth less.

It's also fair to note that Bernanke is not your typical guy pushing 60.

While he makes a good salary of about $200,000 (£130,000) as Fed chairman, his earnings parabola will not follow the usual course. As Alan Greenspan has amply demonstrated, the late-in-life post-government-service income of former Federal Reserve chairmen is a fair bit higher than that of the average 58-year-old.

In this way it may just be a clever example of shifting consumption forward, while not taking undue risk.

That may be true for well-paid professionals in finance but the risks for the rest of us have obviously risen.

The world we live in, in which housing and the means to finance it are used in essentially speculative ways, is one with far more risks and inherent instability.

Housing tends to get ever more expensive, and people tend to take ever greater risks to obtain it.

Mr Bernanke did not create this world, but his policies helped to foster its growth.

It's unclear if or how the US goes back to being a place where your typical 60-year-old is coming close to having paid off her house, but we can be sure that the forces that might make that happen will be opposed by almost everyone making economic policy now.