It was necessary to bail out the banks. It never should have been necessary, and once it was, it should have been done a lot better than it was, but thats all hindsight. Bailout part I is pretty much over, and, in the best traditions of liberalism, it was a community effort, and everybody got a chance to lend a hand. Now were having part II, which is a sort of afterparty, and the elderly and poor get a special invitation. People with no ties to the banking industry except a savings account, are being asked to make sacrifices. On Dec. 16, the Federal Reserve announced that it was going to keep interest rates at around 0%. This means that banks can get interest-free loans, or very close to it. The problem is, if the Federal Reserve is willing to lend money to Wells Fargo and JP Morgan Chase at 0%, Wells and JP feel that everybody else should be equally generous, whether they can afford to or not.
In theory, when the Fed lowers its interest rates, banks offer cheaper loans. Then, when businesses want to borrow money, it costs them less, and so they expand, hire people, and everybody is happy. For a long time it seemed to work. Economists talked about rational markets and fair market price. Assets were marked to market. There was a general belief in the collective wisdom of investors, as if the price of a share of Berkshire-Hathaway stock, or a Texas Housing Finance Agency bond could be determined by democratic elections.
The study of behavioral economics, which demonstrates that we make economic decisions based on emotion as well as on mathematics, was ignored. First, the banks offered loans to people who couldnt hope to repay the money. Then, the banks sold the loans to innocents who thought they were making a safe investment. Then the whole thing went sour, and we all started acting like Donald Ducks Uncle Scrooge, and started saving.
The banks did too. Where once they had been more than glad to lend money, they began refusing loans, and cut back on lines of credit. The Federal Reserve is offering the banks money for almost free, but they dont want to part with it. As a result, the amount theyre willing to pay in interest on deposits has dropped to almost nothing. Citibank advertised Open a Savings Plus Account today and get a great rate.
Thats true, if you consider 1.2% a great rate, and if you have a minimum of $25,000 to deposit. Bank of America offers a High Yield CD: 12 month term with 0.90% APY. You can get that rate with a deposit of just $5,000. Wells Fargo will spring for 0.05% on a basic savings account. Since some experts recommend that everybody keep an emergency fund, cash that can be accessed immediately, of 3 to 6 months basic living expenses, that means that everybody has an opportunity to participate in bail-out part II. The weight falls mostly on those who dont have alternative investments, either because they dont have very much money, because they have no choice but keep a lot of their resources liquid, or because they cant afford any risk at all, and need the safety of a government insured account. Those people are the poor, the elderly, or the elderly poor. Where a low Fed Rate is supposed to make more money available, its effect is to reduce the income of millions of people and inhibit their ability to spend.
While Congress is debating how to handle the inheritance tax for the wealthy, others have no choice but to spend down their principal, meaning there will be less for their children to inherit. There was a time when $1 million in the bank at 5% would bring in a reasonable income for elderly people, and an inheritance for their children and grandchildren. The same $1 million at 0.025% means going to the bank each week and watching your life savings dwindle, and your grandchildrens college fund depleted. It means that people who might once have gone out to dinner on Tuesday nights for the Senior Citizens Discount stay home. Stores have fewer customers because potential customers have no income.
Instead of loosening the money supply, current policy is effectively Trickle Down Economics Redux. Maybe, this time around, raising the rates to the banks would provide more money to everybody else.
Sam Uretsky is a writer and pharmacist living on Long Island, N.Y.
From The Progressive Populist, Febuary 15, 2010
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