The Fed is Just KILLING Us With These Low Interest Rates!

This morning, on Bloomberg Radio, I heard that old, well worn refrain again: “the Fed is hurting savers with these low interest rates.” Not only that, “they're pushing people into riskier investments.” Both statements are false, but as with most memes, they take on a life of their own, and people just repeat it without ever thinking to question it. It becomes “received wisdom.”

While it IS true that the Fed essentially nationalized the yield curve for a time, it wasn't for the diabolical purpose of forcing Ma and Pa Kettle to start trading futures contracts. Low interest rates DO make “saving” less attractive, but there are two flaws to this accusation:

1) Americans with real assets to invest don't put the bulk of them in Bank CDs.

2) Americans don't save to begin with. In fact, they're usually over-leveraged wastrels.

If low interest rates “hurt savers,” they also “help borrowers.” And unfortunately, most Americans are debt junkies, and since the recession, they have furiously thrown assets (savings) at crushing their debt service. In a time when wage inflation is non-existent, this is the best way to give yourself a raise. We're going back to more of a “pay as you go” lifestyle. This chart shows how drunk with leverage the nation was before the Great Crash in 2008, and how quickly they wound it down afterwards. What spurred consumption for people to act like drunken sailors, also had the effect of sobering people up quickly once they saw this wasn't sustainable.

How's that for correlation?

As an aside, (and damn any accusations of partisanship) you have to ask yourself what caused this massive debt spike after an overgenerous Federal tax policy was instituted, replete with “stimulus checks” and lowered tax rates on wage earners and dividend income. In my opinion, (and yes, this is an opinion) a good deal of this was caused by rising health insurance costs that greatly eroded purchasing power for the average American. This had to made up somewhere to compensate, and with stagnating wages, people just maintained their lifestyles with more leverage, with some measure of contentment that their rising home values would counterbalance this trend. Look at the chart again to see what happened once housing values fell. Quite a rush for the exits.

So, it seems not only did Fed policy not “hurt savers,” but it did help borrowers who really needed it. I don't have the most up to date figures, but I queried the industry magazine “Inside Mortgage Finance” awhile back if they knew the total value of refinanced mortgages in raw dollars. They tweeted back in less than 5 minutes: from 2009 to 2012, $4.69 TRILLION of mortgages were refinanced. From that time period alone, billions of dollars a month were lopped off homeowners' debt service. That is a stimulus bigger than any “tax cut” even Larry Kudlow could fantasize about. Lower rates AFTER this period no doubt created even more savings. This was an important policy tool: it amounts to aiding the recapitalization of America's housing stock, which was sorely needed. Of course, the Fed's policy led to the asset reflation of housing too, and that was no bad thing.

So which would you rather see? Getting another 2% on your “savings,” or lopping 2% off your $250,000 mortgage? Because if you have $250,000 to invest, you're not putting it in the Christmas Club at your local bank.

And that's the flaw with maligning the Fed: if a 2% swing in interest on your cash holdings makes a difference in your life, you're doing it all wrong.

Lastly, the Fed is the wrong target here. While one could accuse the Fed of suppressing yields with it's purchases of mortgage backed securities and medium term Treasuries- to facilitate the deleveraging America sorely needed- the Fed has ended these programs and the markets are back at the helm, making the decisions on the cost of money. And with every commodity from Light Sweet Crude to sweet Sugar itself declining in price, there's just no reason market participants should believe that yields should be higher than they are now. In fact, it's absurd. But, we all need a scapegoat, so have at it.