Disability Insurance Observer: Fed goals

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.

See also:

• Disability Insurance Observer: Failure
• Disability Insurance Observer: Z
• Disability Insurance Observer: Interest rates