Savers pay for federal reserve policies to inflate house prices and save the banks
Federal reserve policy of zero percent interest rates inflates asset values and diverts money from savers to bankers.
When the federal reserve buyers Treasury notes or mortgage-backed securities, it merely prints money. Unlike ordinary banks or citizens, the federal reserve doesn’t need money in its accounts in order to buy things. The federal reserve doesn’t usually print a great deal of money; it usually tries to print enough to match the increase in value of goods and services in the economy. The first policy response of the federal reserve in a downturn is to lower interest rates to stimulate the economy, but when interest rates hit zero, the only tool available is the printing press, and they aren’t afraid to use it.
Monetary Deflation from the Housing Bubble
The collapse of the housing bubble caused a great deal of mortgage debt to vanish because when banks make loans that don’t get repaid, and they cannot recover the loan amount through foreclosure and resale of the asset, deflation results. In effect, the losses unprint money. The main reason we haven’t seen inflation from the federal reserves endless quantitative easing (fancy term for printing money) is that the new money being printed is merely offsetting money being destroyed by bank write downs from consumer deleveraging. (Also, some inflation is being exported to countries with a currency pegged to the dollar.) For six straight years, deleveraging was ongoing, but in the 4th quarter of 2013, the trend reversed. Is inflation right around the corner?
The federal reserve can keep printing money as long as bond investors don’t believe printing money is inflationary. Now that consumer deleveraging stopped, money is no longer being destroyed faster than the federal reserve can print it. In my opinion, the main reason the federal reserve decided to taper its asset purchases and thereby print less money is due to the increase in debt shown in the chart above.
The federal reserve works to prevent deflation by stimulating borrowing or printing money when the economy contracts; however, the federal reserve must be very careful: If the federal reserve prints too much money, inflation expectation will cause investors to abandon the bond market, bond prices would crash, interest rates would spike, nobody could afford today’s house prices at 10% interest rates, and the resulting housing market crash would rival 2008.
Not everyone is happy with the federal reserve’s policies. Every economic policy has consequences. Usually, these are short-term, the economy recovers, and we get back to a somewhat freer market; however, this time around the short-term policies have become the new normal, and the consequences create chronic pain for many, but mostly savers.
Al Lewis, April 23, 2014, 7:00 a.m. EDT
Our financial system is so corrupt you might say that a fish rots from the Fed.
How else can one describe a regime that punishes savers and rewards borrowers and speculators for years on end? Our central bank is essentially taking billions of dollars a year from average Americans, who are still struggling to get by in a bombed-out economy, and it is giving it — yes, giving it — to the very banks that helped cause the 2008 financial crisis in the first place.
The federal reserve controls short-term interest rates through buying and selling Treasury notes. These rates determine how much interest people earn in savings accounts, the asset class favored by senior citizens. The federal reserve lowered interest rates to zero to force money out of savings accounts in hopes this money would seek out riskier asset classes and stimulate the economy. Since seniors are risk adverse, most have left their savings in place, and those that need those savings to survive — which is most seniors — are depleting their savings accounts to make ends meet.
Richard Barrington, an analyst with Moneyrates.com, estimates the Fed’s policies have cost savers $757.9 billion since the crisis, in an analysis released Tuesday . That’s approaching $1 trillion, which used to be considered a lot of money, even to bankers, before the crisis. The Fed, meanwhile, has only given the world a little assurance that its policies will change at some point in the distant future.
“It’s a stealth bailout,” Barrington said. “Low-interest-rate policies have helped bail out banks, the stock market and real estate, but the Fed has not publicly acknowledged the cost of those policies.”
Of course, not. Because the costs are staggering.
Money-market rates have been stuck between 0.08% and 0.10% but the annual inflation rate has been, at least nominally, 1.5%. That’s pretty low for inflation, yet this spread eroded the purchasing power of American deposits by $122.5 billion over the last year alone, Barrington said.
Barrington’s analysis, by the way, is conservative. It only counts what inflation has done to savers. It does not include what savers might have made if interest rates were closer to historic averages. And after five years, these costs are only mounting.
“Unlike the other bailouts we’ve seen, this one has become open-ended,” Barrington said.
He does not attribute this ongoing folly to corruption, as I do. He sees it, more charitably, as the result of “thinking that’s trapped in the past.” Our economic problems are unprecedented, and yet the Fed is still making comparisons to what they think should have been done in the 1930s.
The Fed has been purchasing tens of billions of dollars per month in U.S. Treasurys and mortgage-backed securities from banks. It has been cutting back this program, and many Fed watchers expect it to end by October, but so far these purchases have totaled more than $3.3 trillion.
And what does the Fed have to show for this? Economic growth averaging only about 2% a year. A sluggish labor market. And artificially raised stock and real estate prices that may not hold if the Fed ever stops manipulating interest rates to such historic lows.
Most Americans, by the way, haven’t participated in these lofty stock market gains that continue to widen the gap between rich and poor.
Bankrate.com on Monday released a survey of more than 1,000 households that showed 73% are “not more inclined to invest in stocks.” It was the third year in a row that this survey uncovered negative sentiments regarding the stock market, even as the Standard & Poor’s 500 Index (SNC:SPX) has doubled since hitting bottom in 2009.
After getting burned twice in one decade — the 2001 Internet bust and the 2008 financial crisis — it is easy to see these gains as part of yet another financially engineered scheme. Average Americans either don’t have money to risk or they simply refuse to be herded into a casino, even at a time when money-market rates and bank deposits are delivering negative returns relative to inflation.
It just doesn’t make sense to the average mind. The Fed has responded to a crisis caused by too much borrowing by encouraging even more borrowing. It has allowed too-big-to-fail banks to become even bigger. It has helped inflate the national debt to nearly $18 trillion with its monthly asset purchases. It has created a junkie economy that seems hopelessly addicted to historically low interest rates, ever-increasing borrowings, and a non-stop printing press rolling out dollars.
You’d think banks would show some gratitude for all the dramatic adjustments made in the economy just to save them, but no. They have responded by raising fees and overdraft charges on customers, wrongfully foreclosing on homes, charging usury rates on credit cards and other consumer loans whenever possible, cheapening customer service, suing each other for the shoddy mortgage-backed securities they sold each other, laying off thousands of their own rank-and-file employees, and handing out fat bonuses to their top executives.
“Like any other economic decision, the Fed’s low-interest-rate policies should be looked at in cost-benefit terms,” said Barrington. “So far, the net benefits appear debatable in light of the costs.”
Boisterous cheers for rising asset prices, largely fueled with the Fed’s funny money, have shouted down the debate. Payoffs are how corruption spreads.
Now some might ask, what do I mean by corruption? Janet Yellen, she seems like a nice lady. Ben Bernanke, he seems like a nice guy. Other people at the Fed, they seem all right when you hear them speak. Do you really mean to tell me they’re corrupt? That they’re bad people?
Well, let’s put it this way: Ugly people don’t always know they’re ugly. Fat people don’t always realize that they’re fat. Stupid people truly don’t know that they’re stupid. That’s just part of being stupid. And people who’ve been completely co-opted by the wealth and power of a globalized banking system, do you think they know when they’ve become tainted by the normalized corruption all around them? Do you think they even want to know that they are captured regulators?
They may appear well-intentioned. They may even have good intentions, for all I know. But I’ve noticed they rarely, if ever, use the term “moral hazard” anymore. It’s just not part of their calculus. They have blinded themselves even to the law of gravity with the sheer amount of brain power that they put into everything they say and do. And they’re completely trapped in this thinking that trillions for the banks will solve everything.
The federal reserve’s highest priority is the preservation of the banking system, no matter the consequences. They are trapped in thinking that trillions for the banks will solve everything because that is the only thing that will solve the problems at the banks — whatever happens to the rest of the economy is a secondary concern.
You don’t need to take a class in economics, or even history, to suspect that the Fed can’t hold interest rates to zero for more than half a decade without consequences. And that it can’t keep printing money forever.
The Fed argues it’s all part of a necessary evil, without fully conceding that it is evil nonetheless. The Fed will also say that it saved the world from a financial crisis that could have been far worse. But this remains a hypothetical argument.
What if instead of bankers, we gave trillions of dollars to ordinary citizens running small businesses? Wouldn’t that have saved us from a financial crisis, too? Or what if instead we just let the little people earn a little interest on their savings accounts?
“Wouldn’t that three-quarters of a trillion dollars have been better off in people’s hands where they could spend it?” Barrington asks.
The Fed is supposed to intervene in the supposedly free-market economy when there’s a crisis. That’s what the Fed was created to do. But for how long? Barrington said it’s about time to do the math and figure out if the price America paid to bail out its banks and its economy was worth it.
That the Fed has gone this many years without counting it up smells like rotting fish to me.