Fed Sustains ‘Fool’s Paradise’ With Rates, Miller Says

Record-low borrowing costs that helped fuel the stock market rebound are insufficient to sustain a U.S. economic recovery, said Steve Miller, the chairman of American International Group Inc. (AIG)

“It’s a fool’s paradise,” Miller said on Bloomberg Television today. “We’re basically printing money to keep everybody happy in the short term.”

The Federal Reserve has kept its target interest rate near zero since December 2008 and embarked on three rounds of bond purchases to stimulate the economy. The central bank has slowed the pace of bond buying and Fed Chair Janet Yellen said yesterday that further changes will proceed in “measured steps.”

“Janet is going to keep rates low for a while,” Miller said in an interview with Tom Keene and Scarlet Fu. “But you can’t keep that going forever. So we need to get real on government spending.”

The 10-year Treasury (USGG10YR) yields 2.75 percent, up from 1.98 percent a year ago. That’s still below the average of about 3.5 percent over the past decade. The U.S. economy expanded for a fourth straight year in 2013, after contracting in 2008 and 2009, and the Standard & Poor’s 500 Index (SPX) advanced 30 percent.

Executives from some of the largest insurers -- which invest mainly in bonds -- have cited the harm of low rates. In September, Axa SA Chief Executive Officer Henri de Castries said he’d welcome higher rates as an end to “financial repression.” MetLife Inc. CEO Steve Kandarian said in March that low rates impose a tax on savers and hurt the ability of companies like his own to offer some guarantees.

‘Fundamental Reason’

In response to a question about how keeping the main interest rate low affects savers and those on fixed incomes, Yellen said yesterday that the larger issue is restoring economic growth, which will eventually lead to higher rates.

“It’s important to recognize that interest rates are low for a fundamental reason,” Yellen told lawmakers in her first public remarks since replacing Ben S. Bernanke. “Our objective in keeping interest rates low is to promote a stronger recovery, and in a stronger economy savers will be able to earn a higher return, because the economy will be able to generate it.”

Miller, 72, has been chairman of New York-based AIG since 2010 and worked with CEO Robert Benmosche to help repay the insurer’s government bailout in 2012. He titled his autobiography “The Turnaround Kid,” and previously oversaw the bankruptcy of auto-parts supplier Delphi Corp. and helped Chrysler Corp. return to profitability after taking government loans in 1980.

Puerto Rico

Miller said he’d avoid the bonds of Puerto Rico, which has been downgraded to junk status. The government there needs to spread the burden of taxes rather than raising them and must deal with unemployment to help bolster its economy, he said.

He cited the territory’s different legal status from the city of Detroit, which was able to file for bankruptcy protection.

“Puerto Rico, like it or not, is a territory of the United States,” Miller said. “It’s our problem collectively and we’re going to have to deal with it, I think, at the national level.”

The island’s creditors may be pushed by Puerto Rico’s economic conditions to accept new terms on their investments outside of a formal bankruptcy process, he said.

“It may have to go through a restructuring where the bondholders don’t get their interest payments and then everybody will come to the table and work it out,” Miller said. “It won’t have court supervision like you would have in a Chapter 9 case, but you still are going to have the economic necessity to do something about it.”

To contact the reporter on this story: Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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