GUEST COMMENTARY: The Fed’s easy-money, low-interest rate policy simply benefits the rich

Monday, November 21, 2011 | 6:54 p.m. CST

 Almost like a deadly infusion of carbon monoxide into a happy, functional household — and without much warning — the banks in the United States of American began to decrease interest on all forms of savings.

The drop in interest rates was slow, and there was always the constant bump in the stock market and the applause of the banking system to reward the action of the Fed and its chairman, Ben Bernanke.

Apparently he is judged by this applause, and he recently promised there would be no increase until 2013. More applause, slight bump in the Dow and then back to the base line.

Not all the federal banking people support his ideas, however.

Recently Thomas Hoenig, the president of the Federal Reserve Bank in Kansas City, retired. In a series of comments he made on public radio, he said he has voted against the low-interest-rate policy for years. Now that he has retired, he feels free to speak openly against these policies. 

A couple of years ago, he wrote a paper called “Too Big Has Failed," a critique of propping up big banks. He also bucked the Fed’s easy-money, low-interest rate policy for years. 

He says keeping interest rates artificially low has actually enabled the problem. Further, he says, “We need to add jobs, but the problem is you just don’t add jobs. You produce things, you make things, and from that, jobs come."

That is the voice of wisdom, but it is apparently unheeded by the powers at the Federal Reserve Bank. Hoenig is being considered a candidate for the University of Missouri System presidency, and he would be a good choice. However, with his streak of common sense and regard for the common man, it is unlikely that he will be selected.

It is difficult to define the Federal Reserve System because it functions both as a private corporation that is not officially a part of the U.S. government but has quasi-government affiliations.

It appears committed to the success and continued profit of established money, the stock market and banks. We have been duped into believing that it is committed to the common citizen. No such thing.    

When I started my fiscal life, almost all savings programs were based on a safe return — 5 percent to 7 percent. Most retirement plans are based on those safe assumptions.

Most long-term life insurance plans promising retirement benefits are based on those assumptions. University and union plans are based on the promise of safe money from investments.

But now, with a single swipe of a pen, retirements have been decimated for large numbers of hard-working people. To quote from Woody Guthrie's song, “Pretty Boy Floyd,” some people will rob you with a six-gun and some with a fountain pen.  

Alan Greenspan, former head of Fed, reportedly said once that the only thing that counts is the Dow. Maybe for him and his friends that is true but not for the majority of working Americans.

What to do? Many of us are afraid to retire. We would have no renewable income, and to spend savings is to eat the seed corn of the future.

Because we are not leaving the work force, fewer jobs are available for young people. We are afraid to spend down our money. If we had a decent interest rate, we could spend this money, improve the economy and keep our seed money safe.

We are pressured to invest in reckless and unpredictable business ventures because we hear that leaving money in the bank is actually costing us because of inflation.

The average investor lacks the skills necessary to invest and might not have the option of waiting out the market. The rich buy when it is low and sell when it is high. The inexperienced generally wait until the market is peaking, then panic when the market drops and end up selling low.

The advantage of inside trading is left to a few. The rest of us are uninformed and simply play a crap game stacked against us.

The concept of picking companies with great products and dividends has been replaced by speculative gambling fostered by a widely fluctuating market. Those privy to massive computer trading appear to alter the market, so the small investor simply provides the fodder for their profits.

The Fed claims that by lowering the interest rate, all will benefit. Not homeowners who desperately need to decrease their interest rates. Even after bailouts of the banks, executives did not sense any obligation to help them stay in their homes.

Lower interest rates only seduce unqualified buyers to purchase large energy-inefficient homes they cannot pay for and do not need. They have been sold on the American dream, and it has become their fiscal nightmare.  

We need to raise the interest rates on savings, CD and bonds to between 5 percent and 7 percent. Those with good savings skills can retire. That will provide openings for new workers and allow the savers to spend the interest on their money.

Banks should once again require a 20 percent down payment on loans and assume the responsibility for those loans. The loans should not be sold; that only frees banks of their moral obligation to make safe loans to customers.

There was a time when a loan from a bank was a contract involving trust and good judgment on both sides. Perhaps if the big banks had failed, smaller banks with traditional values would have filled the gap.

It is not surprising that there is the spontaneous generation of protesters against Wall Street and its policies. These protests represent the general discontent and confusion of hard-working people who expect more than they are getting

Sometimes we need to go back to the past to salvage the future. 

Eddie Adelstein is a Columbia resident and an associate professor of pathology at MU.









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Jimmy Bearfield November 22, 2011 | 11:33 a.m.

"The average investor lacks the skills necessary to invest and might not have the option of waiting out the market."

This is why they should work with a financial services firm (e.g., Edward Jones).

"When I started my fiscal life, almost all savings programs were based on a safe return — 5 percent to 7 percent. Most retirement plans are based on those safe assumptions."

Yes, many plans assume 5%-7%, but that's based on investing in stocks and bonds, not CDs.

(Report Comment)
Ellis Smith November 22, 2011 | 12:27 p.m.

If what I'm about to say is incorrect, someone please amend it, but the last time I recall interest rates on saving accounts reaching 10% (on a few, not all, plans) was in the final year of the Carter administration - when we also had the greatest boost in inflation we've had in modern times. Most Americans, indeed most retired Americans, would rather see lower returns and enjoy a low rate of inflation.

I agree that enlisting professional help (I use Morgan Stanley Smith Barney) is worthwhile. Doing so can also make it easier for the investor to sleep nights :)

(Report Comment)
Jimmy Bearfield November 22, 2011 | 12:44 p.m.

Ellis, I recall double-digit interest rates during at least Reagan's first term, too. I was a kid during the Carter administration and Reagan's first term, but I remember the interest rates because my parents made me put all of my Christmas and birthday money in a savings account. Between that and money from my job as a teenager, I didn't have to borrow a dime for college.

And lest Eddie assume that I grew up with a silver spoon in my mouth, I didn't. We were what today would be called lower middle class.

(Report Comment)
Michael Williams November 22, 2011 | 12:48 p.m.

EddieA says, "We would have no renewable income, and to spend savings is to eat the seed corn of the future."

Me says, "The middle class has been eating its seed corn for decades by buying crap instead of assets. This is not a recent phenomenon; indeed, it is the cause of much that we experience today. Worse, there is no change in attitude or strategy, so the problem will continue."

EddieA says, "We need to raise the interest rates on savings, CD and bonds to between 5 percent and 7 percent."

Me says, "Sure, go ahead. Do it tomorrow. You'll have more money to spend, but the cost of borrowing goes up, also, for everyone...including the businesses that support your lifestyle. How much more will you pay retail? Can you say "inflation"?

EddieA says, "Banks should once again require a 20 percent down payment on loans and assume the responsibility for those loans. The loans should not be sold; that only frees banks of their moral obligation to make safe loans to customers."

Me says, "I agree with the 20% down payment notion. If you don't have the down payment, you get no loan for a home. Period.

The issue of selling those mortgages is more difficult. In times past, banks kept the mortgages. But, this causes problems outside of a local economy (i.e., we're global now). Let's look at it. If you were a bank and had a million bucks in deposits, you can make ten $100,000 loans for homes. On that million dollars, you could collect...say, at 5%...$50K in interest/year plus get back some of the principal. Problem is, unless the bank...borrow more money (and pay interest on it) or get more depositors, you are out of the loan business. All the money you had to loan out is already loaned out!

So, the banks securitize the loans and sell them to folks willing to gather interest over the long haul.

This works so long as (1) the bonding agency makes good decisions about the risk associated with the bonds and (2) folks continue to pay their original mortgages.

Unfortunately, Eddie's wish is a wish to return to the 1850s when it comes to banking. Ain't gonna happen. It's pure fantasy.

(Report Comment)
Michael Williams November 22, 2011 | 12:58 p.m.

Jimmy: I remember my father-in-law buying the small machinist company he worked for (after the owner died) during the Carter years. He paid a million for it. His loan interest rates at one point his 20%/YEAR!!!!!!

Holy cow!

But, he made it and paid off the loan. Over the next 10 years, he was a real success story. Not bad for a HS grad with a "C" average.

PS: Your "story" about your own history the other day resonated with me. My story is almost exactly the same...except my first job was a buck twenty-five per hour at a KCMO retail store called Spartan Atlantic. When I got a job at Armco Steel and made $2.75/hour, I could finally afford a girl friend. Now THAT'S inflation!

Keep in mind that it is not necessary to go with an investment firm like Ed Jones or MSSB. Many local banks can perform this service for you, and they are much friendlier. For me, major firms charge an arm and a leg for each trade (buying, then selling) that can amount to as much as 10% of the total buy. I cannot tolerate ANYONE making more money off my money than I do. That will get you fired.

(Report Comment)
Ellis Smith November 22, 2011 | 1:50 p.m.

Some miscellany:

I think the high rate of interest in the Reagan administration was carryover from the last year of the Carter administration. Stated another way, it originated with the Carter administration.

Michael, as an American you have every reason to say "Wow!" over a 20% interest rate on a commercial loan, but 20% is NORMAL for business loans in various venues in Latin America. I remember asking my friends about that when I first found it was common practice. "How," "I asked, "can you live with that?" "We're used to it." was the answer.

While there have been more, three instances of hyperinflation are locked in my mind:

Germany, following World War I.

Greece, immediately after World War II.

Brazil, about 1960.

The first one I only know from the same sources you may know it. Few people, even in Germany, are now alive who experienced it. I have a late uncle, Constantine Alexopoulos, who had the misfortune of being caught up in the second. A friend of mine (an American, fortunately paid by an American employer) witnessed the third while temporarily working in Brazil.

Americans need to "get out" more.

(Report Comment)
Michael Williams November 22, 2011 | 2:22 p.m.

Ellis: 'Tis true, the legitimacy of "Holy Cow!" depends upon the originating perspective.

Raise gasoline to $3.29 from $0.75 overnight, you get a hearty "Holy Cow!"

Do it over 30 years?

Not so much.

(Report Comment)
frank christian November 22, 2011 | 4:32 p.m.

Fed Chair, Paul Volcker created the 20% interest rates to "burn" the inflation,created by Volcker and Fed by printing dollars to pay debt of Carter Admin., out of the economy. Inflation occurs after an economy is decimated by action such as incurred by Carter, then finally takes off again (dollars chasing goods). Only way to stop it is to slow economy down again by making borrowing so expensive producers will "pull in their horns" again.

I built my last home 1980. My primary lender did me a favor by closing my loan before building of home was complete, thus "locking in" my interest rate at 15%. I paid that for approximately three years while rates did indeed rise to over 20% (22)? As Ellis says, if what I said is inaccurate, feel free. We shall, I'm afraid, soon learn first hand, the effect (we know the cause) of inflation and hopefully how to end it.

(Report Comment)

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