August 13, 2012
Johnston: The Victims of Low-Interest Locusts
Another financial crisis looms for U.S. taxpayers, a disaster likely to create even worse human misery than the mortgage fiasco that some of us warned about years before the Wall Street meltdown in 2008.
The crisis next time: collapsing investment incomes for older Americans as artificially reduced interest rates force them to use up their savings and drive more pension plans into failure. ... As in the mortgage crisis, you can see this disaster building by examining the official data.
At the broadest level, 53% of taxpayers earned interest in 2000. But by 2010 just 39% did, my analysis of IRS data shows, while high-interest debt has become ubiquitous. From 2000 to 2010 total interest earned by savers fell 53% in real terms, a decline of $134 billion. Average interest earned per taxpayer, measured in 2010 dollars, plummeted from $1,950 to $825. ...
Americans overall received just 1.5% of their income from interest payments in 2010. But among those with tiny incomes – the 37 million taxpayers making less than $15,000 – interest accounted for 9.3% of their money. ...
The low interest rates paid on savings and bonds are not the result of market forces, but official policy. As readers here know, I favor competitive markets to set most prices, including interest rates. The Fed has been suppressing interest rates for more than a decade. ...
Cheap interest also benefits credit-worthy individuals and companies, who can use cheap loans to scoop up assets that collapsed in value after the 2008 Wall Street meltdown. This is a subtle mechanism for concentrating wealth among the best off.
For savers, the reverse alchemy of low interest rates turns gold into dross.
As interest income falls, older savers start cutting into their nest eggs. Millions of older Americans relying on interest income will, thanks to the Fed, run out of savings before they run out of time, a prescription for another taxpayer bailout, though this time one with a stronger moral case than rescuing the fortunes of profligate bankers and those who foolishly invested in the companies they run.
Expect more pension plans to fail, too, because their once robust interest income has shriveled thanks to the Fed’s low-interest policy, a subject I’ll examine in my next column. ...
Holding down interest rates to prop up banks and the economy and help the already rich buy assets on the cheap, amounts to an official policy to take from the ants who saved for their old age and give to the Wall Street grasshoppers. Given the economic devastation this causes, it is more accurate to say to give to the financial locusts.
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