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Disability Insurance Observer: Fed goals

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The green ghost hovering over the seventh annual Disability Insurance Awareness Month is low interest rates.

Nonprofit industry groups and insurers are sending me various reports indicating how common disability is and how important insuring against that risk is, when the real question is, “Do the insurance companies actually want to write this stuff right now? If they could, would they actually prefer just to take applications, put them in a big file cabinet, and wait to process them after interest rates go up?”

If the companies’ chief financial officers were being blunt, I think they’d say they’d prefer to wait to process the applications, and that disability insurance has turned out to be a product to be sold on an “opportunistic basis,” when rates rise above ankle-level.

I have, honestly, a pretty sorry bachelor’s degree in economics. I had great professors, but I slid into economics from English. One of my econ professors, Laurence Meyer, ended up serving on the Federal Reserve Board. He was very nice.

I don’t believe that he was in a conspiracy with the Trilateral Commission to do something terrible about gold or to conceal a hidden high-speed tunnel connecting Washington, D.C., with secret hiding locations for space aliens. That’s about all I know about the Fed.

I have a vague understanding that how much influence the Fed really has over interest rates is unclear. People at the Fed itself have argued that the low rates are the result of low demand for loans from qualified borrowers, not really with Fed efforts to keep low.

Maybe that’s true. Sounds possible.

But, anyhow, two thoughts.

One is that one reason effective loan demand is low is that bankers are scared to death of being fined, jailed or hauled before congressional committees if they make bad loans.

In the real world, plenty of responsible, employed people — even people with decent credit scores — have trouble getting mortgage loans, or even credit cards, because they have quirks in their credit histories that conflict with the banks’ horror of making anything other than pure plain vanilla loans.

Maybe the Fed could deal with the reality that the true interest rate for many pretty good borrowers is actually infinite — because they can’t get loans at all — by figuring out a way to rehabilitate folks who have never gone bankrupt, have never gone through a foreclosure, and have paid all of their bills but, for some mysterious reason, have strawberry swirl credit histories as opposed to plain vanilla histories. If those people could borrow again, maybe natural demand for loans would rise, and interest rates would rise on their own.

Another idea is this: Ask Congress to make considering the well-being of long-term savers part of the Fed’s statutory mandate.

Today, the Fed notes in every press release about the body that shapes its interest rate strategy, the Federal Open Market Committee (FOMC), that the committee has a mandate to “foster maximum employment and price stability.”

The FOMC has no mandate to consider the effects of its policies on insurance companies, retirement savers, or other savers or investors with a long-term outlook, and, at least in the Fed’s FOMC press releases, there’s no indication that it pays much attention to those sorts of effects.

My impression, from looking at Fed documents, is that, even though there are people there who must know everything there is to know about life insurance and retirement savings, the Fed is a bank-oriented place. People there pay a lot of attention to employment and housing, but not to the insurance policies that protect the workers’ ability to pay for their houses and continue to live in the houses after retirement.

If Congress told the FOMC to add promoting prudent, economically productive long-term saving and investment to its mandate, maybe it would do so in a thoughtful way, and maybe that would reduce the FOMC’s inclination to try to pump up employment levels today at the expense of reducing employed workers’ ability to insure themselves against the risk of long-term disability.

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