Federal Reserve efforts to boost liquidity in the banking system haven’t shown proof of helping the economy and are punishing savers, Alleghany Corp. (Y) Chief Executive Officer Weston Hicks wrote to shareholders.
“Much like Theodoric of York, the medieval barber on ‘Saturday Night Live’ whose solution to every health problem was more bloodletting, central bankers continue to force liquidity in the banking system without any objective proof that it is helping,” Hicks said in a letter posted on the New York-based insurer’s website, referring to the character played by comedian Steve Martin on the U.S. television show. “We do know that it isn’t helping retirees, pension funds, or insurance companies.”
Hedge-fund manager David Einhorn and Tad Montross, CEO of Berkshire Hathaway Inc.’s General Re unit, have also said central bank monetary policy hurts savers. The Fed, led by Chairman Ben S. Bernanke, has kept interest rates near zero since December 2008 and expanded its balance sheet to more than $3 trillion for the first time through bond purchases.
Bernanke defended the Fed’s interest-rate policy in an Oct. 1 speech in Indianapolis, saying it will spur growth and support employment. Savers may also own homes, run businesses, have jobs or hold stocks in their portfolios, meaning they will benefit from a stronger economy, Bernanke said.
“I know that people who rely on investments that pay a fixed interest rate, such as certificates of deposit, are receiving very low returns, a situation that has involved significant hardship for some,” Bernanke said. “Only a strong economy can create higher asset values and sustainably good returns for savers.”
Home values in 20 U.S. cities rose 5.5 percent in the 12 months from November 2011, the most in more than six years, according to the S&P/Case-Shiller index of property prices. The Standard & Poor’s 500 Index climbed to a five-year high on Feb. 19 and unemployment fell below 8 percent last year for the first time since 2009.
Hicks joined Alleghany in 2002 and helped build the insurer through investments and takeovers, including the purchase of Transatlantic Holdings Inc. last year for more than $3 billion. The insurer has a market value of more than $6 billion after posting an annualized return of 8.5 percent in the 10 years ended Dec. 31, beating the S&P 500’s 7 percent.
Persistent low interest rates will push Alleghany to invest more in equities, said Hicks, who became CEO in 2004. The insurer’s fixed-income portfolio was valued at about $16 billion at the end of December, according to a regulatory filing.
“While the equity market remains expensive by historical standards, it appears to be less overvalued than the bond market, which now discounts all but the most extreme deflationary scenarios,” he wrote. “If this environment persists, we would expect over time to increase our allocation to equity securities.”
Einhorn said in May that the Fed’s interest-rate policy was “no longer useful” and risked inflation. Montross, the CEO of reinsurer Gen Re, said last year that low rates were hurting insurers and spurring companies to raise the cost of coverage.
Hicks’s criticism overlooks the damage that could be caused by higher rates, said Josh Feinman, the global chief economist for DB Advisors, the Deutsche Bank AG asset management unit that oversees $228 billion, and a former Fed senior economist.
“If you were to raise rates that would really be a bloodletting,” Feinman said. “The overall economic situation would be worse if the Fed were prematurely and artificially trying to jack up rates.”
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