In its lonely effort to fight unemployment, the Fed recently announced that it would purchase more Treasury and corporate bonds, a policy called quantitative easing. It is the second time the Fed has announced it would do this, so the shorthand is QE II. This policy hurts small savers and retired people with modest savings. I discussed the impact on them here and here.

QE II hurts wealthy retirees and big savers too, by forcing them into riskier investments, some of which are certain to cause losses, and all of which reduce the feeling of security.

This group has most of the money. According to the Fed’s Survey of Consumer Finance, in 2007, people in the second decile (the top 80-90%) of income, had a mean wealth of $609,100, (table 4) and financial assets of $237,600 (table 6.07 Means). People in the top decile had mean wealth of $3,315,600 and financial assets of $1,368,000. Just guessing, I’d say that as a group, retirees skew towards the high side of the mean, especially in the first 10 years of retirement. Their portfolios aren’t limited to savings accounts and CDs.

Standard advice for retirees is to get out of the stock market and into fixed income securities, like taxable bonds and municipal bonds. The idea is that once you retire, you are dependent on income from your investments or from sale of investments. You can’t build wealth from work, so your risk tolerance is lower. If you have to sell stocks at a low ebb, you will lose money you can’t replace. If you can live on your Social Security plus the income from your portfolio, you will feel safer, and you will be able to leave something for your family.

If you took this advice 10 years ago and moved heavily into bond funds, you have a problem. As bonds mature, the funds will buy new bonds with lower yields. Many bonds have call features, which permit the corporation to call them at some point. With interest rates very low, companies can refinance their bonds at lower rates. These two factors lead to lower income now and in the future.

What are you going to do? The only place you can look is investments that carry more risk. In fact, Ben Bernanke, the Fed Chair, says if we push people into the stock market, stock prices will go up, people will feel wealthier and will spend more. Retirees have enough money that if they are forced into stocks, stock prices would go up. It sure seems like overt bubble blowing.

Rising stock prices might encourage some younger people to buy, but this is bad for retirees. They don’t need stuff, so they won’t buy more. They don’t want more risk, and for good reasons, they don’t trust the stock market. It’s certain that a significant number of retirees will make mistakes or get swindled trying to increase their investment income. These losses will be caused by QE II.

There is widespread concern about whether QE II will work in our current situation, with low demand for credit by businesses and consumers. Michael Gerson, writing for the Washington Post, says that progressives think objections from conservatives are evidence of a conservative conspiracy to destroy the economy and President Obama’s reelection prospects. The column is a hack job, as my colleague Bill Egnor writes. Republicans are not interested in whether QE II will work. Their big concern is that it will debase the dollar. It’s hard to believe that they want to maintain the value of the dollar when other nations are ruthlessly propping up their currencies at the expense of US workers. Sovereign nations act in their interests with respect to their currencies, including most obviously China. Republicans argue that US decisions about its currency should be guided by what China might think, and they do it solely for political purposes.

Conservatives of both parties want us to adopt austerity policies, Herbert Hoover’s approach, now being followed by England and Ireland; and maybe we could reduce the minimum wage, like the Irish. They refuse to use fiscal policy, which would work, and would rebuild our infrastructure and prepare the nation for the future. Austerity won’t accomplish anything except preserve the privileges of wealth.

At least the Fed is trying to carry out its mandate under the Humphrey-Hawkins Full Employment Act and is trying to do something about employment. Let’s hope it works. When the likes of Savonarola Gerson propose policies that will help the millions of unemployed people, they can rejoin the Adult Conversation about the economy.