On April 25, 2014, Al Lewis writes on MarketWatch:
Our financial system is so corrupt you might say that a fish rots from the Fed.
How else can one describe a regime that punishes savers and rewards borrowers and speculators for years on end? Our central bank is essentially taking billions of dollars a year from average Americans, who are still struggling to get by in a bombed-out economy, and it is giving it — yes, giving it — to the very banks that helped cause the 2008 financial crisis in the first place.
Richard Barrington, an analyst with Moneyrates.com, estimates the Fed’s policies have cost savers $757.9 billion since the crisis, in an analysis released Tuesday . That’s approaching $1 trillion, which used to be considered a lot of money, even to bankers, before the crisis. The Fed, meanwhile, has only given the world a little assurance that its policies will change at some point in the distant future.
“It’s a stealth bailout,” Barrington said. “Low-interest-rate policies have helped bail out banks, the stock market and real estate, but the Fed has not publicly acknowledged the cost of those policies.”
Of course, not. Because the costs are staggering.
Money-market rates have been stuck between 0.08% and 0.10% but the annual inflation rate has been, at least nominally, 1.5%. That’s pretty low for inflation, yet this spread eroded the purchasing power of American deposits by $122.5 billion over the last year alone, Barrington said.
Barrington’s analysis, by the way, is conservative. It only counts what inflation has done to savers. It does not include what savers might have made if interest rates were closer to historic averages. And after five years, these costs are only mounting.
“Unlike the other bailouts we’ve seen, this one has become open-ended,” Barrington said.
He does not attribute this ongoing folly to corruption, as I do. He sees it, more charitably, as the result of “thinking that’s trapped in the past.” Our economic problems are unprecedented, and yet the Fed is still making comparisons to what they think should have been done in the 1930s.
The Fed has been purchasing tens of billions of dollars per month in U.S. Treasurys and mortgage-backed securities from banks. It has been cutting back this program, and many Fed watchers expect it to end by October, but so far these purchases have totaled more than $3.3 trillion.
And what does the Fed have to show for this? Economic growth averaging only about 2% a year. A sluggish labor market. And artificially raised stock and real estate prices that may not hold if the Fed ever stops manipulating interest rates to such historic lows.
Most Americans, by the way, haven’t participated in these lofty stock market gains that continue to widen the gap between rich and poor.
Bankrate.com on Monday released a survey of more than 1,000 households that showed 73% are “not more inclined to invest in stocks.” It was the third year in a row that this survey uncovered negative sentiments regarding the stock market, even as the Standard & Poor’s 500 Index SPX -0.80% has doubled since hitting bottom in 2009.
After getting burned twice in one decade — the 2001 Internet bust and the 2008 financial crisis — it is easy to see these gains as part of yet another financially engineered scheme. Average Americans either don’t have money to risk or they simply refuse to be herded into a casino, even at a time when money-market rates and bank deposits are delivering negative returns relative to inflation.
