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February 15, 2012 at 09:58 AM
Criticism of the Federal Reserve has become a mainstay among the financial commentariat, politicians and gold bugs who believe the U.S. central bank is bringing economic ruin–and among regular folk complaining about low rates on savings and checking accounts. Far rarer does one find analysis that comes to defend the status quo, but that is what the American Enterprise Institute’s John Makin has done in a policy paper that argues the Fed’s near-zero rate policy is necessary to prevent a far worse outcome, despite the toll it takes on savers.
Titled “The Pain of Zero Interest Rates,” Makin’s analysis essentially argues that both the Fed and U.S. savers today must choose among unpleasant alternatives.
As regards monetary policy, higher rates would have several negative outcomes. They would add hundreds of billions of dollars annually to U.S. debt-service costs, on top of a $14 trillion debt burden already weighing down the economy; they would put added pressure on the stock market and real estate, still struggling at pre-crisis valuations; and by strengthening the dollar, higher rates would suppress exports. So withdrawal of easy money would “kill the economy or make it a lot sicker,” while the maintenance of an accommodative monetary policy has the effect of stabilizing the U.S. economy, Makin says.
Parallel to the beleaguered central bank is the plight of U.S. savers, especially those at or near retirement, who face low rates on safe assets, though their retirement income projections were likely based on the higher rates of return available in the years before the crisis. Makin says that Fed Chairman Ben Bernanke has made clear he is aware of savers’ pain, mentioning it in nearly every speech or testimony. But in order to avoid another Great Depression, his hands are tied.
For that reason, savers must choose among spending less; working more; dipping into their past savings (for those with the luxury of doing so) even if that reduces funds for future spending; or to do what the Fed policy is meant to encourage: put money into risky assets.
