When Federal Reserve Chairman Ben Bernanke announced two weeks ago that the Fed expected to maintain its near-zero interest rate policy at least as long as the end of 2014, it was the latest salvo in our loose monetary regime’s increasing repression of savers.
Like the Syrian army unleashing heavily armored vehicles and massacring civilians, American savers are feeling the financial equivalent of fighting a desperate and so far losing battle against the might of the U.S. central bank. Indeed, until two weeks ago, U.S. savers were being massacred by a zero-rate policy intended to last until the middle of 2013, so the most recent Fed announcement must have seemed like a body blow to this beleaguered group.
As in all other cases of repression, the violence is aimed at protecting the interests of some favored group–the Assad regime and its ethnic Alawite supporters in Syria or in the case of the U.S., the borrowing class.
Why should the U.S. favor borrowers? Economists and bankers offer all sorts of reasons, and usually focus on the need to revive the battered financial and housing sectors, which triggered our economic crisis. With zero rate returns, the thinking goes, those with capital will be forced to enter risk markets, thereby spurring investment and creating a wealth effect while consumers will flock to homeownership since the cost of financing a purchase is so low.
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Cynics will argue that the real reason for low rates is that the government itself has assumed the interests of borrowers because, like Assad’s Alawites, they come from the same group. The U.S. after all is the world’s biggest borrower and is running trillion-dollar annual deficits. U.S. debt-service costs would balloon if interest rates were at normal levels. According to this thinking, the Fed is playing for time with the hope that the economy will be growing again and debt trending downward when it once again imposes costs on credit.
In what must seem to some savers as a coordinated attack, the Securities and Exchange Commission this week revealed proposed regulatory changes on money market funds that would have the effect of lowering rates. For those not hip to money funds these days, the current average seven-day yield on a taxable money market fund is 0.02%, which may not sound like much, but is double the 0.01% rate on a comparable tax-free fund.