uncle sam

(photo: neauthor77)

The Federal Reserve Board announced today that it would try to push long-term interest rates down by purchasing long-term Treasuries and corporate bonds, a policy called “quantitative easing.” The Fed intends to purchase about $600 billion worth of bonds, 20% more than anticipated, over the next nine months. That puts an additional $75 billion per month into the banking sector, which is supposed to help unemployment.

Who gets hurt? Savers, the people who husbanded their income during the long boom period, putting money away for retirement. Who gets helped? Wall Street traders and banks, and anyone who bet that they would be the groups targeted for protection by the US government.

Savers first. According to the most recent Fed Flow of Funds Report (.pdf), the personal sector, consisting of households and nonprofit organizations, non-farm non-corporate businesses, and farm businesses, held $8.393 trillion in checking accounts, currency, savings accounts, and money market funds. Interest rates on those funds are already close to zero. The Fed plans to keep those rates down for the foreseeable future. Quantitative easing by purchase of existing medium and long-term Treasuries and corporate bonds will drive up their prices, and will drive down their yield. That means that small savers are stranded, unable to improve their returns, even if they are willing to take more risk.

The numbers are staggering. An increase of one percent in interest rates means that banks would pay additional interest of $657 billion annually on time and savings deposits, and money market funds would pay an additional $118 billion in interest. We know that wealth in the US is highly concentrated, so only a small part of that goes to regular Americans, and the poorer you are, the less you would get. Numbers that big don’t mean anything, so let’s look at an example. [cont'd.]

A 75-year-old widow owns her own home, worth $150,000 in today’s market, and has $90,000 in a 6-month CD at her local bank. She has average Social Security income, and a $300 per month pension from her husband. Say she retired in November, 2000, at age 65. Her CD was paying about 6.61%, giving her annual interest of $500 per month. The average Social Security check at that time was $804, so her monthly income was $1,604.

To keep up with inflation, she would need $1,978 (I used 2001 as the base for the CPI deflator). The average Social Security check is now $1,164, a good bit more than inflation. The CD is now paying 1%, $75 per month, and the pension is unchanged. Her income is now $1,539. She is falling behind. Either she finds some way to cut back on spending, or she has to eat into her savings or tap the value of her house, perhaps with a reverse mortgage. Either way, what should have been a comfortable retirement is now a confusing mess.

See how wonderful this is for Wall Street traders? When they saw the idiots in the US government abandon the use of fiscal policy to help the economy, they started bidding up the prices of bonds and Treasuries. Now it’s too late for small savers to protect themselves. Wall Streeters will see a nice profit as people buy bonds or mutual bond funds, and then another nice profit in out years when people try to sell their bonds because interest rates are up. Of course, bond prices fall as interest rates rise, so it’s lose-lose for the small saver.

Once again, the people who did what they were supposed to, worked hard and saved for retirement get screwed by the government, while those who did the screwing make huge profits.

The worst part is that the New York Times can’t find anyone to say that quantitative easing is likely to work. The best they can do is this

But Scott E. Pardee, an economist at Middlebury College, said Mr. Bernanke was correct to do all he could. “As long as unemployment is so high, and the housing market is not standing on its own two feet yet, the Fed has no other choice,” he said.

Jamie Galbraith says this:

“Quantitative easing will accomplish nothing beyond flooding the banks with cash which they will use, if at all, for speculating rather than lending.”

The evidence supports Galbraith: bank loans have fallen steadily from a high at the end of 2008 of $1,671 trillion to $1,137 trillion at the end of June. Flow of Funds Report, p. 72.

Screw small savers, help banksters. No wonder people are furious.