Fed’s zero interest rate bails out Wall Street and Treasury, sinks middle classby James A. Bacon

The Federal Reserve Board announced plans last Tuesday to keep short-term interest rates at near zero for another three years and said it might embark upon another bond-buying program to drive down long-term interest rates. The stock market rallied and President Obama’s supporters hailed the rising stock market as a sign of his brilliance as a manager of the economy.

Call me a party pooper, but I see nothing good coming from this. Let’s set aside fears that the Fed’s jam-down-the-pedal monetary policy might drive down the dollar or ignite a monster credit bubble and focus on the topic that seems to preoccupy Washington’s political class these days: the distribution of wealth.

There will be winners and losers from the Fed’s monetary policy. The winners will be the nation’s debtors. The losers will be the nation’s creditors and savers. Debtors will continue to pay rock-bottom interest rates. Creditors and savers will earn rock-bottom returns on their investments. Indeed, with the Fed’s stated objective of maintaining a 2 percent inflation rate, many small savers will see the real value of their savings erode.

The largest debtor and biggest beneficiary of the Fed policy, of course, is the federal government, which owes more than $15 trillion and is on track to owe $16 trillion before the year is out. When compiling the fiscal 2012 budget, the Office of Management and Budget assumed that the interest on 10-year Treasury notes would average 3.6 percent this year while 91-day Treasury bills would average 1.0. percent. Compare that to actual interest rates today under the Fed’s easy-money policy: 2.1 percent for 10-year notes and 0.4 percent for T-bills. That averages out to roughly a full percentage point less than forecast – cutting Uncle Sam’s anticipated interest payments by about $150 billion.

That’s not the end to the Fed’s largesse. As the Fed purchases more long-term bonds, it collects more interest on the bonds, which it kicks over to the Treasury. In 2010, the interest amounted to $79.3 billion. As the Fed pushes bond purchases well past the $2 trillion mark, that number is likely to rise. Thus, Chairman Ben S. Bernanke’s contribution to deficit reduction could approach $250 billion this year – and yet more in 2013 and 2014.

So, how has this economic stimulus worked out? American consumers are huge debtors, too, but they haven’t seen remotely the same benefit. Total consumer credit outstanding in the third quarter of 2011 stood at $2.47 trillion – the same level as in 2009. But interest rates are lower, right? Yes, but only marginally:

  • The average interest rate on a four-year auto loan declined from 6.7 percent to 5.9 percent over the same period.
  • The average interest rate on personal loans slipped from 11.1 percent to 10.8 percent.
  • The average interest rate on credit cards eased from 13.4 percent to 12.3 percent.

If consumer spending has boosted gross-domestic-product growth over the past year, it’s not because marginally lower interest rates have made it so much cheaper for consumers to borrow. It’s because lower interest rates have devastated the incentive to save. What’s the point of setting aside money to earn a half-percent interest in a bank certificate of deposit or money-market fund when inflation trotted along at 3.0 percent in 2011 and, if the Fed is right, will continue at 2.0 percent this year? Your savings are losing value. Why not spend the money instead?

Mr. Obama bemoans the difficulties of America’s middle class. His answer: Raise taxes on rich people. Meanwhile, he says nothing as Fed policy eviscerates the savings of middle-class families who don’t have $1 million or more to invest in exclusive hedge funds or private-equity accounts that generate higher returns.

Mr. Obama bashes the greed-meisters on Wall Street yet says nothing about Fed policy that props up bank profits with hundreds of billions of dollars of low-interest lending.

The American people understand what they have to lose from higher tax rates, but they have no concept of how the Fed is fleecing them. Monetary policy is opaque even to those who follow it for a living, and it’s simply beyond the comprehension of most Americans – including a brain-dead press corps that is all too happy to peddle Mr. Obama’s narrative of a growing income gap and the injustice of the tax rate paid by Warren Buffett’s secretary.

But give Mr. Obama credit for this: While his handmaiden Bernanke plunders the middle class in order to prop up Wall Street and the U.S. Treasury, the president has exploited the resulting uncertainty and unease by posing as a champion of Middle America. That’s more than you can say for Newt Gingrich, who is attacking Mitt Romney for the sin of being a successful, wealth-creating capitalist, or for Mr. Romney, who seems incapable of defending himself. Like Sherlock Holmes and Professor Moriarty at Reichenbach Falls, they are locked in a death grip that will plunge them to their political demise.

I’ve never been much of a fan of Rep. Ron Paul, but the man is making more and more sense when he says it’s time to abolish the Fed.

This column was published originally in the Washington Times.

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19 responses to “Fleeced by the Fed”

  1. DJRippert Avatar


    You’ve got it! The Fed is most definitely playing Robin Hood in reverse. Of course, middle class investors can buy shares of bank stock or mutual funds so you somewhat hyperbolic declaration that average people can afford hedge funds is a bit over the top.

    The other issue is that artificially cheap credit ALWAYS creates a bubble. The only question is, “A bubble in what?”. As the economy continues to improve (even if anemically), the artificially low cost of capital will cause the over-investment in something. The trick is to figure out what is being excessively inflated and be ready to pounce when the latest bubble bursts.

  2. Well I’m investing in two bubbles. The first is paying for my kids college in the hopes they will find a good enough job to support my retirement. It seems the country has mutated in the past hundred years, from Ag farming to book farming. The result is still the same for old folk.

    The second bubble is paying for a small place in a third world country, in case Plan A doesn’t pan out.

  3. for those who wonder about the stimulus – you might find this worth reading:

    ” Mitch Daniels says Steve Jobs created more jobs than the stimulus”


    what I hear is the Bush-appointed Bernanke and the rest of the Fed is walking on eggshells and think the economy is exceptionally fragile and can go down in flames if more bad stuff happens.

    I’m not sure who you blame that on but I don’t think this President. You might blame this guy for not “fixing” the greatest recession since the great depression … in 3 years but that sounds pretty churlish to me.

  4. The Fed is walking on eggshells because Europe is running out of time to fix their issues. Having the Germans demand that Greece sign up for the EU version of credit counseling, followed by Spain, Portugal and a host of others, is not exactly inspiring a positive future. Especially once the Deutsche diktats begin demanding the same from us. Ah heck, revolution begets evolution. Is 2012 the beginning of the end, or a Fourth Turning of rebirth?

  5. If you make huge returns n your investments, you have to subtract out infation anyway, so the real rate of retrn may be no different.

    There are plenty of fine companies churning out dividends higher than the fed is paying, and with todays investing tools even small investors can go this way.

    Steve Jobs created a lot of jobs, in China. In the US, not so much.

    Of course, if you beleieve we are facing an apocolyptic economy, then no investment is safe _ not yur mattress, not your government, not big business, and not even your home.

    I believe people are going to get up tomorrow and want breakfast. After that, the world will continue.

  6. DJRippert Avatar

    LarryG reprises Saul Alinski in his commentary.

    He writes, “…what I hear is the Bush-appointed Bernanke…”.

    Bush did appoint Bernanke to his first term.

    However, Bernanke was confirmed for a second term as Chairman on January 28, 2010, after being nominated by President Barack Obama.

    Bernanke was confirmed by the US Senate 70-30. The “nays” were 11 Democrats, 18 Republicans and 1 independent.

    On the basis of his personal beliefs, Bernanke is considered a Republican.

    The problem with terminology like “Bush appointed” is that it misses the big point. The big point is that both parties are heavily beholden to Wall Street and both parties will do everything in their power to ensure Wall Street’s success.

    In the minds of America’s political elite:

    If success for Wall St turns into success for the average American, so be it. But if success for Wall St does not constitute success for teh average American – well, so be that, too.

  7. Darrell, you ask, “Is 2012 the beginning of the end, or a Fourth Turning of rebirth?” America is a great nation. We will survive. There will a rebirth, a fourth turning. The question is how low will we sink and how much needless suffering there will be before that rebirth.

    Don is right about both parties being in hock to Wall Street and also that the “Bush did it, too” defense is wearing thin. Obama has been president three years now. If he or anyone in his economic team has a problem with Bernanke’s gas-pedal-to-the-floor monetary policy, they have yet to express it. To the contrary, Obama has appointed regional Fed officials who are in sync with Bernanke’s priorities. For better or worse, Obama will have to own the Fed policy. If Bernanke can jolt the economy back to life without running the economy off the cliff, Obama will deserve credit for backing him up. If he runs the car back into the ditch, to borrow a phrase, the nation will have to take the keys away.

  8. re: ” The problem with terminology like “Bush appointed” is the VERY SAME problem as ” Obama’s lackey Bernanke”.

    what I do is point out the blatant double-standard hypocrisy in effect these days when Obama gets hammered as a socialist crony capitalist for doing essentially the same things that Bush did but Obama is aid to be “worse”.

    that’s all. You’ve got 3 people who support individual mandates – Obama, Romney, and Gingrich and Obama is the one that is said to be the European Socialist.

    All I do is point that out.

  9. ” If he runs the car back into the ditch, to borrow a phrase, the nation will have to take the keys away.”

    ha ha ha… who did this last?

    you’ve got folks whose only education in economics is what they read in right wing blogs – questioning a guy who has spent his entire life “learning” and has the credentials to back it up – and most mainstream economists agree with him to boot.

  10. the “Bush did it, too” defense is wearing thin. Obama has been president three years now.


    Oh, come on. these guys ae steering an ocean liner with an oar. It takes a long time to get it truning, and a longer time to complete the turn. Anything Obama is actually responsible for won’t show up for thre to five years later —–same as for Bush.

    Besides, you give these guys way too much credit and way too much blame. they are no more truly responsible for suceess or failure than the CEO’s that bring down huge salaries for marginal results.

  11. Gee, I don’t remember Democrats using the “steering an ocean liner with an oar” logic when George W. was president and the post Internet bubble economy collapsed months after he came into office. I do remember endless Democratic Party talking points about a “jobless recovery” … which turned out to be not as jobless as the current one.

    Under Obama, the economy has consistently under-performed his economic team’s projections of what it would do. Obama’s fall-back position is that “things were worse than I thought,” but that’s hard to buy, given the fact that Obama ran on the platform that the recession was “the worse since the Great Depression.”

    Any reasonable person would concede that Obama inherited a bad situation and that the problems were not easily remedied. Any reasonable person would agree that Republicans and Democrats shared responsibility for the mess the country got in. And any reasonable person would concede that Obama’s policies have made matters worse. Solyndra, anyone? Keystone Pipeline?

    1. Solyndra – in retrospect it was a bad investment, but many venture capital deals go bad. The whole point of the green initiatives was to encourage new technologies, and backing new technologies is always a risky proposition. As any good capitalist knows, risk is a part of any deal. How many rockets did NASA crash until it got it right?

      Keystone Pipeline will go through if it meets State department and EPA guidelines. This is a huge deal and ought to get the regular scrutiny of any huge deal that has environmental impacts and risks. Unfortunately the Repoblicans, who have nothing legitimate to back up their “job-killing” claims, always fall back on the EPA, which after all has at its job the protection of the environment for all of us.

      1. Richard, you make an interesting argument drawing an analogy between Solyndra and a venture capital investment. We can’t expect all venture capital investments to work out, so why should we get all torqued up about Solyndra? The argument has a respectable pedigree. Not long ago, I ran into Mike Schewel, former secretary for commerce and trade under Mark Warner, and now an attorney who works extensively in alternate energy deals. He made the identical argument. (So, pat yourself on the back.)

        There are a couple of problems with the argument. First, Solyndra isn’t the only “venture” investment that has crashed and burned. There are others, though they haven’t gotten as much publicity. Second, where are the winners? I haven’t seen any big winners yet. Third, venture capitalists are not swayed by campaign contributions and political influence. Politicians and bureaucrats are. Fourth, venture capitalists are trained to appraise and weigh alternatve investments. Government officials are not. There is no way anyone could reasonably expect government investments to have a comparable success rate to venture capitalists. Venture capital, I maintain, should be left to the venture capitalists.

        Now, just so you know I’m not prejudiced against alternate energy resources, I have a huge problem with the massive government loan guarantees given to nuclear energy projects. There might not even be a nuclear energy without government loan guarantees.

        The only legitimate role for government in energy is to underwrite basic research to advance the state of knowledge and create new technologies. Government is not well adapted to figuring out how to commercialize those technologies or what business models might best suit them.

        1. If you don’t try something new, how do you know whether it will work? The primary goal of government these days seems to be to protect what’s not working – it’s safer to do nothing and not fail and not be criticized (or attacked), than to actually try to fix something. Number one example of this is health care reform – Obamacare.

  12. Under Obama, you’ve had the deepest, most severe recession short of a depression in the history of the country.

    You have a President who pretty much took the policy options recommended by a majority of mainstream economists.

    and you have a very large and virulent right wing echo chamber who never accepted him as President from the get go and who are committed to getting rid of him no matter what happens.

    the main complaint against him is that he “should have done better”.

    than what? than who? the current crop of challengers? the Republicans in Congress? who?

  13. it’s NOT the “Bush did it too” idea.

    it’s this simple. This was by far the worst recession in the history of the country and the critics are saying that Obama made it worse or did not do what he should have done instead – and it’s purely speculation and opinion without a scintilla of evidence other than what boils down to a pure ideological different view.

    Anyone who think John McCain and Sara Pallin would have fixed it better is deluding themselves.

    it’s basically a jihad against nearly EVERYTHING this President has done or stands for even though much of it is no different than what Bush did nor what McCain or any other President in the same circumstances likely would have done.

    You’ve got a structural 1.5 trillion dollar deficit that was IN PLACE when he came into office – but it’s HIS FAULT for not cutting it – in the middle of a near depression …

    how fair is this? He comes into office in the middle of a near depression with a already-created deficit of 1.5 trillion and he did not fix it in 3 years and so he is a “failure”.

    and the thing that really scares the people who hold this view?

    the economy is recovering… and that’s bad… right?


  14. Many good points. A couple of extra ones: 1. The banks are in much worse shape than anyone (Dem or Rep) can admit. All those little banks out there whose main clients are homebuilders, commercial real estate developers, and mortgage companies are underwater. The low interest rates are a back-door subsidy that allows them to build up their capital to the point that they might actually be able to lend again (or to foreclose). 2. Neither political party can or will do anything about it. Our financial system is broken- but it’s the emperor with no clothes – neither party is willing to address it because the country is too invested in it. [Perhaps I’m wrong about this – some Republicans are willing to let our major institutions fail so that we can start over again – see Romney and GM – but failure of our banks would be very hard on middle America and I don’t think anyone would actually do it.]

  15. real GDP vs employment

    It’s pretty clear things are still not good.

    one of the reasons neither party will address the problems is a starkly different ideological view as to what to do – or not do.

    If the Republicans had their way – we’d have no GM or Chrysler right now.. probably 20% unemployment and a full blown depression … and lots of that wonderful “creative destruction” they seem prone to blather about these days.

    I do not think the Republicans are fit to govern these days and this is coming from someone who has voted Republican in the past but the moderate Republicans are gone and the hard right has taken over the party AKA night of the living dead zombie type …..

    the proof of this is the current Republican Primary… where espousing a moderate approach to governance will get you the Guillotine.

    When you have a bomb-throwing wacko threatening to push out the only reasonable candidate in the field – you know something really bad has happened to the Grand Old Party and in turn, to America.

  16. ” Solyndra – in retrospect it was a bad investment, but many venture capital deals go bad. The whole point of the green initiatives was to encourage new technologies, and backing new technologies is always a risky proposition. As any good capitalist knows, risk is a part of any deal. How many rockets did NASA crash until it got it right?”

    you make an excellent point here Richard.

    and let me pile on.

    Whose bright idea was it to subsidize ethanol and sugar?

    and you have to ask the question…. if NASA was still putting rockets up and having them fall to the ground … would the same folks who slam Solyndra, slam NASA?

    Hell they already do when it comes to climate science.

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