Attention, savers: Ben Bernanke owes you $100 billion.
That’s how much interest income Americans have foregone in the two years since the Federal Reserve slashed short-term interest rates to zero, according to one reading of the national personal income accounts.
As it happens, the inspiration for that analysis comes from a Fed economist, Kevin Kliesen of the Federal Reserve Bank of St. Louis. He tots up the pros and cons of the Fed’s embrace of low rates in the latest edition of the St. Louis Fed’s Regional Economist column.
Those are worth considering once again because the Federal Open Market Committee is expected to vote Wednesday to take yet another step to hold down interest rates, in the form of a plan to buy Treasury securities its second round of quantitative easing, dubbed QE2. Among the leading proponents of QE2 has been James Bullard, Kliesen’s boss
There is considerable disagreement, even within the Fed, over whether QE2 is even remotely likely to succeed. But with unemployment near 10%, inflation falling and politicians long having abdicated any responsibility for actually addressing our national problems, it is clear that Ben Bernanke & Co. feel they must step into the breach.<!-- more -->
Low rates are good, Kliesen writes, because they push up demand for goods and services, help restore the banks to good health and generally raise asset prices. But they aren’t helpful, he concedes, savers or for investors who consider themselves risk-averse but ill advisedly succumb to the temptation to reach for yield.
“Low interest rates provide a powerful incentive to spend rather than save,” he writes. “In the short-term, this may not matter much, but over a longer period of time, low interest rates penalize savers and those who rely heavily on interest income.”
This, then, is where we calculate Bernanke’s bill. Kliesen notes that data compiled by the Commerce Department (see chart, right) show that personal interest income has dropped sharply since its mid-2008 peak.
The decline runs as large as $170 billion by one measure, but it hardly seems fair to hold Bernanke responsible for the whole shebang. After all, the economy was under bubbly influences through the middle of the decade, so income of all sorts was bound to decline even without his assistance.
What’s more, the fed funds rate was still 2% when Lehman Brothers collapsed. It wasn’t till Dec. 16, 2008, that the Fed cut the overnight bank lending target to a range of zero to 0.25%, where it is now and where it seems likely to stay for many moons.
So that’s when the Bernanke meter will start rolling. A look at the personal income data shows that at the start of December 2008, interest income was flowing to Americans at a seasonally adjusted annual rate of $1.28 trillion.
By this past September, that flow had slowed in four straight months to an annual rate of $1.17 trillion – putting it on par with levels seen in late 2006. That’s around $110 billion below the rate that prevailed when the Fed cut rates to zero.
But since the Fed didn’t actually cut the fed funds rate till halfway through December and personal interest income was falling at a monthly rate of about $20 billion at that stage, it seems only fair to knock around $10 billion off the difference. That brings the Bernanke penalty to $100 billion.
This is not meant as an indictment of Bernanke, by the way. Anyone with half a brain will admit that the Fed had to do something in 2008 to keep the economy from going into free fall, just as it feels compelled to do something now lest we give in to the total gridlock promised by Tuesday's electoral results.
Yes, taking money from savers and giving it to the banks fairly reeks. But three years after the collapse of the credit bubble, what is the alternative? Raising rates, at a time when one in six are underemployed? Good luck with that.
Now, as the sobering reality of a slow-growing, debt-addled economy starts to sink in, the blame game is only going to get more popular. If unemployment fails to come down soon, squeezing the savers is, let's face it, probably the least of Ben Bernanke’s worries.