Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
We’ve been writing about the punitive measures the Federal Reserve has taken against the saver class for multiple years now [Mar 31, 2010: Ben Bernanke Content to Sacrifice American Savers to Recapitalize Banks and Benefit Debtors] but actually quantifying the punishment has been less discussed. Banking analyst Chris Whalen had, I believe from memory, a figure in the $300-400B range from an analysis I saw maybe 12 months ago, but the data presented in this WSJ story shows an even more dramatic impact of roughly $500B – annually.
When you think how huge some of the fiscal operations have been the past 3-4 years (i.e. $787B spent over about 2-2.5 years for the Obama stimulus) you can really see how huge of a hole this policy is having to the pocketbooks of Americans who are ‘responsible’. Now, proponents of the policy can say – yes but the bankers and debtors are benefiting, which is true. Of course measuring the benefit is much more difficult – for example, if one refinanced to a lower rate on a mortgage but defaulted anyhow 2 years later (as many have done) – is that an economic benefit? Also, where is the ‘fairness’ quotient – why do we enact policies that favor deficit spending at the individual level over savings? Effectively this is just a transfer of wealth from the saver’s pockets to the debtor’s.
Interestingly, I’ve seen the first real pressing on Bernanke the past few weeks on this issue from both the media and politicians (last week Paul Ryan brought it up sternly in testimony). But in so many words, Bernanke simply answers if there is not growth than it hurts everyone, including savers. I found it a poor answer.
In congressional testimony on Thursday, Fed Chairman Ben Bernanke acknowledged that low rates penalize savers. “We understand it’s an issue for many people,” he said. “That being said, our savers collectively have to hold all the assets in the economy and a strong economy produces much better returns in general.”
And in last week’s press conference, when asked by the media – the answer was essentially “well these policies drive up asset prices, so why don’t you get an Etrade account and partake?!” I am sure Linda, the 82 year old retiree really wants to speculate in some stock rather than get her 4% on a 3 year CD.
Based on Bernanke’s policies he has to be tickled pink by stories such as this, in which he is finally getting through to the saver class that they must be herded into riskier assets:
Robert Marcotte can’t afford to play it safe anymore. With interest rates likely stuck near zero for nearly three more years, the 61-year-old retired telephone-company manager is about to ramp up his holdings of stocks and municipal bonds, using money now at the bank in certificates of deposit. “It gets me a little uneasy,” says Mr. Marcotte. “Since I’m not working, I am very risk-averse, but still need to generate income.”
Don’t worry Mr. Marcotte – based on the Fed’s actions the past 15 years, really what could go wrong?
- The Federal Reserve is presenting a broad swath of conservative investors, from retirees and college savers to banks and insurance companies, with a tough choice: move into riskier investments or continue coming up short from low-risk investments that aren’t even keeping pace with inflation.
- The central bank has held short-term interest rates near zero since late 2008 to spur the economy and help the housing market. One side effect of that policy is lower returns on savings accounts and other low-risk investments.
- When the Fed announced last week that it likely will keep rates at rock-bottom levels through 2014—almost three full years from now—some risk-averse investors began to abandon hopes that rates would rise soon. The Fed has “removed the last shred of possibility that interest rates were going to revert to normal in the near future,” says Johns Hopkins University economics professor Christopher Carroll.
- Brent Burns, an investment manager who builds bond portfolios for financial planners, says that since the Fed announcement he has fielded a flurry of questions from advisers considering high-yield and international bonds, and real-estate investment trusts. “I don’t think that’s a fair trade” for money intended to be invested safely, he says.
- All told, Americans collected interest income from CDs, savings accounts, insurance products and other sources at a seasonally adjusted, annualized rate of $976 billion in the fourth quarter of 2011. That’s down nearly a third from the peak rate of $1.42 trillion in the third quarter of 2008.
- Yields on four-year CDs have fallen to 0.88% currently from 2.74% in February 2008, according to Bankrate.com. Yet inflation has averaged about 2% over the period. (i.e. welcome to negative real returns… and many consider government data on inflation understated so the damage is even worse)
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