STOP your bellyaching.
That was the message delivered last Thursday to Americans who today make almost nothing on the savings in their bank accounts.
It came from Sarah Bloom Raskin, an insider at the Federal Reserve. Ms. Raskin, one of the governors on the Fed board, made the usual disclaimer that her comments reflected her own thinking. But Fed watchers said her remarks probably mirrored views inside the central bank.
The issue — as anyone looking for income-producing investments knows — is that the Fed drove down interest rates to almost zero to shore up big banks and an economy that those banks helped drive off a cliff. Now savers, who did nothing to create the financial crisis, are being punished.
This is one of the more troubling paradoxes of the Fed’s rescue of the financial system. And, according to Ms. Raskin, it is likely to continue for some time.
So suck it up, America: If it’s good for the financial system, it’s good for you.
Read it at The New York Times
By Gretchen Morgenson
Early in Econ 101, when students are introduced to opportunity cost, they learn that economics is generally not win-win and is often zero-sum — "you can't have your cake, and eat it too." Rather economics involves making reasoned choices among various options. This often results in trade-offs involving costs and benefits, efficiency wrt means and effectiveness wrt policy goals, with some rivals winning and others losing.
In the case of monetary policy, savers are being told that not eating their cake is required to save the bakers who make the cake, that is, the banks that create credit and the financial system that allocates capital. These institutions are integral to the economy while Joe and Jane Saver and their children are much less important when considering the big picture, as the Fed has to do in setting monetary policy.
What they are not told is that this is unnecessary in the first place, and secondly, that it has shown itself to be ineffective. MMT economists would also argue that it is actually counter-productive because it reduces interest payments to non-government and leads to a decrease in non-government net financial assets that would add to effective demand if paid out.
What savers should be told is that monetary policy is ineffective in stimulating effective demand in downturns in comparison with fiscal policy and the opportunity cost of choosing monetary policy over fiscal policy under present circumstances not only disadvantages savers but also hobbles the entire economy through ignorance or cronyism.
MMT economists would also argue that it is actually counter-productive because it reduces interest payments to non-government and leads to a decrease in non-government net financial assets that would add to effective demand if paid out.
ReplyDeleteWon't raising interest rates also savage people with adjustable rate debt (e.g. all student loans) and cause a general redistribution of wealth from net borrowers to net lenders?
What they could do is establish a new series of savings bonds for individuals only. That paid a decent risk free rate. Put caps on them so it wouldnt get out of hand. Keep the policy rates at zero for "lenders".
ReplyDeleteResp,
Let me translate: Let Them Eat Cake!
ReplyDeleteHoading cash serves no public purpose, thus people who hoard cash deserve no reward for doing so. Warren Mosler said that the natural rate of interest is zero.
ReplyDeleteInvesting in some sort of productive asset is another matter. That does serve public purpose. And those who save in this way deserve some sort of interest or dividend and normally get one.
It seems that Milton Friedman agreed with Mosler. At least in describing his ideal monetary system, Friedman said “government expenditures would be financed entirely by either tax revenues or the creation of money, that is, the issue of non-interest-bearing securities. Government would not issue interest-bearing securities to the public…” See:
http://nb.vse.cz/~BARTONP/mae911/friedman.pdf
Following Warren, I have recommended setting the overnight rate to zero and ceasing to issue tsys in deficit offset.
ReplyDeleteBut I would also offer E-bonds to the retail public at a fixed rate, say 3% on a 20 yr bond, similar to what Treasury already does and has for a long time. These bonds used to be very popular, but they have fallen out of use pretty much these days.
I would only add that the govt has trained a generation of savers (and their actuaries) to plan for their retirement by saving and then expecting to earn a decent yield on USTs in retirement, now that many have done that, they set these rates at zero.
ReplyDeleteSo to be FAIR, they should make these securities available to these individuals (and their actuaries) for a while, until a MUCH larger public pension program can be implemented for the current generation (current generation is getting so screwed due to the external sector that they will never be able to save the amounts that the previous generation was able to save)....
Resp,
Wait until they steal the pensions and 401Ks, and then we will see some real whining. You will be handed a shit sandwich known as the "Save America Bond" which pays a stated rate, but won't buy crap, as they debase the currency as fast as possible in a race to the bottom with our trading partners.
ReplyDelete1. Currency Wars
2. Trade Wars
3. WAR
"Hoading cash serves no public purpose, thus people who hoard cash deserve no reward for doing so. Warren Mosler said that the natural rate of interest is zero."
ReplyDeleteWell, I guess you can go with that posture, but all the velocity measurements I look at(Money Stock, M2,MZM) are in the toilet about to hit the event horizon.
Have you ever heard of someone that goes by the name of John Galt? Something about human nature.
"Have you ever heard of someone that goes by the name of John Galt? Something about human nature"
ReplyDeleteYeah go figure. Investors don't want to invest unless they have willing and able customers. Which they don't.
Investors…err, um, con men aren't stupid; why go after marks that have no money.
Ralph,
ReplyDeleteYou forget a key reason why people save. People save to tide them over hard times, when work is hard to find, and to cover periods of their life when they will not be working. Earning interest on financial savings is a luxury. Financial investments should be on an equity basis, and not on the time value of money, even though for any investment, there can always be an imputed interest rate ex post facto.
Have you ever heard of someone that goes by the name of John Galt? Something about human nature.
ReplyDeleteDo you realize that Ayn Rand modeled her heroes on a sociopath?
I know that human nature is what it is, and the John Galts of the world will always do what is in their own self interest just as it is with countries. I only mentioned the character to illustrate the point.
ReplyDeleteWell, we've see that well-illustrated in the GFC and the people that provoked it.
ReplyDeleteBarry Ritholtz, Psychopaths Caused the Financial Crisis
Tom,
ReplyDeleteSee also Political Ponerology
Tom, I know exactly what caused this, and my point still stands concerning human nature and John Galts of the world. I don't do biographies, as I find macro history much more interesting. You should try it some time, as you will learn how all Empires die.
ReplyDelete@ Anonymous
ReplyDeleteAgain, as Matt and I have asked you several times, put a clock on it. Otherwise, this is meaningless dribble. Of course, nothing lasts forever. The question we are interested in is timing.
And I am quite familiar with history, and historians do not agree over the causes of the failure of empires for the very simple reason that the issue is complex and a lot things influence the causality.