Getting Shafted in Other Ways

When people talk about how Washington has helped its friends on Wall Street (and elsewhere) at the expense of the little guy, the discussion usually centers on taxpayer-funded bailouts and the various liabilities taken on by the government (think AIG and Fannie Mae) that are bleeding the public coffers dry.

But that is not the only way that the masses are getting shafted. Other policies that have been described as good for the economy as a whole have had unwelcome consequences. Aside from delaying the inevitable and creating even bigger imbalances than those which spawned the financial crisis to begin with, ultra-low interest rates are costing Americans who have taken a responsible approach to managing their finances a lot of money, as the New York Times' Gretchen Morgenson reports in "Debt’s Deadly Grip":

For consumers who are cutting debt and trying to save, it is dispiriting...that they generate so little on their money. Those living on fixed incomes are also in a bind.

It is not lost on these consumers that their minuscule returns are a direct result of the Federal Reserve’s attempt to shore up troubled banks’ financial standing. Sharply cutting interest rates vastly increases banks’ profits by widening the spread between what they pay to depositors and what they receive from borrowers. As such, the Fed’s zero-interest-rate policy is yet another government bailout for the very industry that drove the economy to the brink.

Todd E. Petzel, chief investment officer at Offit Capital Advisors, a private wealth management concern, characterizes the Fed’s interest rate policy as an invisible tax that costs savers and investors roughly $350 billion a year. This tax is stifling consumption, Mr. Petzel argues, and is pushing investors to reach for yields in riskier securities that they wouldn’t otherwise go near.

In short, the Fed’s interest rate policy may be causing more economic problems than it’s solving.

Here’s how Mr. Petzel calculated the amount that savers are losing: Some $14 trillion in debt issued by the Treasury, federal agencies and municipalities is held by investors here and overseas. Rates are currently near zero on short-term Treasuries, compared with an average of 3 percent over time. Therefore, Mr. Petzel says, it is reasonable to estimate that rates are too low by 2.5 percentage points. On $14 trillion, that’s $350 billion a year in lost income.

Yes, we’re talking real money. It’s more than 2 percent of gross domestic product and almost 3 percent of disposable personal income, Mr. Petzel noted.

“If we thought this zero-interest-rate policy was lowering people’s credit card bills it would be one thing but it doesn’t,” he said. Neither does it seem to be resulting in increased lending by the banks. “It’s a policy matter that people are not focusing on,” Mr. Petzel added.

One reason it’s not a priority is that savers and people living on fixed incomes have no voice in Washington. The banks, meanwhile, waltz around town with megaphones.

Savers aren’t the only losers in this situation; underfunded pensions and crippled endowments are as well.

Of course, the federal government is a huge beneficiary of low rates; if they were higher, our already ballooning deficits would be heftier still. Nevertheless, raising interest rates a bit would be beneficial on several counts, Mr. Petzel maintains. It could help increase consumption and would reduce the appeal of higher-yielding and dicier investments.

THE Fed may be fearful, Mr. Petzel surmised, that higher interest rates could push some teetering banks off the cliff. “But saving a few more zombie enterprises with strong Washington voices at the expense of millions of savers’ consumption may be missing the forest for the trees,” he said.

Comments

[Casey]

Borrow money at zero, lend it at 20 + % plus "penalty" and "fees".

How do I get into this game ?

Bring Back Usury Laws.

[macstibs]

And people wonder why "strategic default" has entered the vernacular.

Banks pay virtually nothing on deposits but charge 10-25% on credit cards. The ZIRP has only WIDENED the spread for banks. There is ZERO pass-through to consumers, so let's not pretend that anything the Fed does is consumer-friendly.

[francismarion]

I want to pull the lid off the Fed and see what's inside.

[Bill Mcdonald]

I really am starting to think that it's time to begin sharpening OUR pitchforks.

[wolfie52]

Actually I think these low rates are part of the stratagem of the Fed to prop up the stock market, not a by-product. I have argued for years that low rates on bank deposits are a large reason why we are such poor savers. I personally find myself investing funds, that I would probably leave in a MM account if it paid 3-4%, instead in stocks/etfs.

[Gibbon1]

My take on interest rates is the Fed is stuck. Raise rates and a whole slew of loans suddenly go bad.

Business loans and lines of credit are all short term. If the fed raises rates, the banks raise the interest rate when CRE loans and lines of credit roll over. Businesses unable to pay will implode.

Higher interest rates will send home prices lower, causing more people to be under water driving defaults higher. Lower home prices, lower property taxes, causing state and local budgets to implode.

On the other hand monetary policy only works when the economy has some bounce to it. This economy has all the bounce of the proverbial dead cat. Current stimulus is mostly going to entities that have every incentive to horde and little to spend.

So what happens is the slow sideways grind, until the next leg down.

[kevinearick]

The Motherland Propaganda Machine:
Education Union, Demographic Control, & Financial Outcomes

If individuals have ideas, how is it that ideas end up being the property of the corporation, for biased gate distribution at the discretion of its controllers? Why are nation/state higher education systems designed to implement the transfer? Why do nation/state education systems bombard poor little critters with corporate propaganda right out of the womb? Why does the motherland systematically strip its children of father figures? This version is a little more subtle, but fascism is fascism, whether it’s coated with crony communism, socialism, or capitalism. It stops the real economy in its tracks every time, because it can only produce cancerous replication.

A healthy democracy is not a function of majority vote for contrived outcomes; it is a function of unique participation. Talent is not a function of force; it is a function of liberty. The planet does not work for us; we work for the planet. If we want to get promoted to the next level, we had better figure out our job.

The macroeconomic dc continuum depends upon microeconomic quantum evolution, which means that communities cannot be simple extensions of multinationals on a one-way road. When communities fail to balance the corporations, fascism is the result. When individuals fail to protect the liberty of others when it is a simple matter to do so, their own liberty is lost as the burden on others grows beyond bearing, and the community economy is placed on the heap with all the others, for ultimate recycling by economic algebraic reduction.

Once these participants realize they are in the black hole, it is way too late to learn how to swim out of it. Ignorance, compliance, and entitlement are hallmark promises of the dc bus. Enter at your own risk, and carry a knife in case you need to cut the strings.

Why is it that when the real economy stops, unprotected individuals are forced out onto the street with no access to resources, and those on the multinational line are subsidized, in a cycle of economic self-destruction?

The problem lies in the looking glass. Fascism grows on a viral curve because per unit weight grows exponentially on the remainder as individuals abandon their responsibility, and the return on responsibility falls exponentially as corporate profit-accounting transfers community wealth to the fascists, who find themselves in a catch-22; they can neither admit their participation in a fascist enterprise, nor can their carry their own weight. The number of producers dwindles, while viral greed grows, and when those two curves cross, the virus hits the wall.

So, as the wealth’s non-productive assets are increasingly exposed, they terminate / layoff another layer, assuming the increasing pressure will re-ignite the economy, while the government protects their minions, iteratively shrinking the closed circle on themselves, exactly the wrong thing to do.

There has been no real economy in this country for forty years; it’s all been economic activity, tearing down the internal walls (communities) to feed the furnace (multinational expansion). Now, from force of habit, they are dismantling the exterior walls to feed the furnace, and wondering why the temperature in the room keeps falling, treating their minions to a closer seat by the fire, who have no idea that the furnace is going to blow up, and the rest of the world is laughing its arse off watching the show, even though they are going broke as well, because the US has been acting like a petulant elementary school bully for the last 25 years.

What was that comedy about that stooge Hitler …. we are way past WW III as a solution. They simply cannot keep up, and get exponentially farther behind every day, propping up the price of oil.