Shutterstock photo
Markets

Bill Gross: low rates doing more harm than good (BAC, KBE)

Shutterstock photo

Shutterstock photo

Pimco chairman Bill Gross is at it again, intoning that, "Ultra low, zero-bounded central bank policy rates might in fact deliver instead of relever the financial system, creating contraction instead of expansion in the real economy."

Writing in the Financial Times , Gross wonders whether "ultra-cheap money" is the problem and not the solution.

For over half a decade, he argues, the Federal Reserve -- under Chairman Ben Bernanke -- and other central bankers around the world have deployed trillions in an effort to save the financial system.

The magnitude of these efforts have certainly not been reflected in financial stocks as one would have expected. The financial sector has been the worst performing group in the Standard & Poor's 500 Index for 2011.

Bank of America ( BAC , quote ) has been the "dog" of the Dow Jones Average, down almost 60% for the year, despite billions from Warren Buffett.

Exchange-traded funds for the banking industry are all off, too, including SPDR KBW Bank ( KBE , quote ) and non-traded indices like KBW European Large Cap Banks.

Gross notes in his Financial Times piece that, "If a bank can borrow at near zero percent, then theoretically it should no problem making a profit. What is important, however, is the flatness of the yield curve and its effect on lending across all markets. Capitalism would not work well if Fed funds and 30-year Treasuries coexisted at the same yield."

In conclusion, Gross cautions that, "all central banks should commonsensically question whether ultra-cheap money continually creates expansions as opposed to destroying liquidity, delevering and obstructing recovery."

In plain speech, that means the market can be distorted by short term events but over the long term will revert to the mean with pricing based upon fundamental economic demand, which in this case negates the salutary aspects of near zero rates.

That is why the SPDR KBW Bank ( KBE , quote ) and its global counterparts are trading far below the highs for the year.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Stocks

Latest Markets Videos