Monday, September 17, 2012

Fed Throws Granny Off The Cliff

At last week's press conference, Fed Chairman Ben Bernanke defended his low-interest rate policy even though it is punishing savers. Specifically, he said, "My colleagues and I are very much aware that holders of interest-bearing assets, such as certificates of deposit, are receiving very low returns. But low interest rates also support the value of many other assets that Americans own, such as homes and businesses large and small. Indeed, in general, healthy investment returns cannot be sustained in a weak economy, and of course it is difficult to save for retirement or other goals without the income from a job. Thus, while low interest rates do impose some costs, Americans will ultimately benefit most from the healthy and growing economy that low interest rates help promote."

A liberal group that supports the Democrats recently ran an ad that shows a Paul Ryan stand-in throwing an old woman in a wheel chair off a cliff. The message was that Ryan doesn't care about elderly Americans.

But isn't the Fed's low interest rate policy sending the same message? Elderly Americans are the ones that depend most on income from interest. They are the ones that keep their savings in relatively safe assets, such as savings accounts and the certificates of deposit that Chairman Bernanke talked about. Bernanke believes that his low interest rate policy is good for America in the long run. So far, the evidence on that is debatable. What is clearly true, however, is that for elderly Americans, the long run is not very long. They have already saved for retirement. Now they must depend on the income their savings generate, which thanks to Mr. Bernanke, is virtually zero. Does the Fed Chairman really want people in their 80s and 90s taking money out of the bank and putting it into the stock market?

Karen Dynan of the Brookings Institution has a paper out titled, "What's Been Weighing on Consumption?" Here's an interesting line from her paper: "Although interest income typically falls along with interest rates in cyclical downturns, the decline in such income in the current cycle has been materially larger than in the past (just as the sustained low level of interest rates is unusual by past experience)."

And here's an interesting paper from William McBride of the Tax Foundation titled, "The Great Recession and Volatility in the Sources of Personal Income." He includes an interesting table that breaks down income from source. The data is from the IRS and unfortunately it only goes up to 2009, yet is shows interest income falling precipitously after 2007. No doubt, an updated table would show an even sharper drop.

Is the Fed's low-interest rate policy really helping the economy? Perhaps a little. Since high interest rates are not what ails the economy, it isn't clear why the Fed keeps trying to drive them lower. What is perfectly clear, however, is that low interest rates are punishing savers, especially elderly savers. Now who's really the one "throwing Granny off the cliff?"