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Disability Insurance Observer: Yellin' at Yellen

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Janet Yellen, the new Federal Reserve Board chair, seems to be inclined to keep interest rates low because, she says, inflation still seems to be low, and because she thinks keeping rates low will help employment.

Seriously, Federal Reserve Board people, let me say, as a moderate-income worker and a would-be home buyer: Do not try to do me any favors by trying to keep rates at an unrealistically low level.

We all know that the low rates are destroying disability insurance businesses and other businesses that depend on investments in high-rated bonds by depressing rates.

But I think you can make a case that the low rates, combined with a punitive atmosphere that scares lenders away from taking on risk, are also hurting disability insurers by hurting employment.

If a worker has a serious disease, or could fake having one, why the heck would that worker try to keep working in such a scary environment?

Employers face tough regulations, erratic customer demand — and the knowledge that, when it comes time to meet payroll, small and midsize employers have no practical way whatsoever to borrow money to smooth over fluctuations in cash flow.

Some economists question how much influence the Fed really has over rates in the real world. Maybe rates are low because of what the Fed is doing, but maybe rates are low because the banks and other borrowers have a hard time “selling” money.

Or, maybe, in the actual real world, rates have to be low because, otherwise, the big banks would implode. Maybe Yellen’s “We’re keeping the rates low for the job hunters,” is a euphemism for, “Do you know how quickly Big Bank X will go splat if we raise rates half a percentage point?”

But, just in case rates really are low because of jobs and home buyers, not because of rickety big banks: The more I personally have to do with credit, the more I wonder whether the real cause of ongoing economic problems in Japan, and the current stagnation in the United States, might not be alleged efforts to help the economy with low rates.

The truth is that no one in the United States who faces financial constraints can get new loans right now.

Owners of plenty of salt-of-the-earth Main Street businesses that have been buying insurance from National Underwriter advertisers since 1897 are trembling in their beds at night because they know there is no such thing as conventional working capital available for businesses that actually need working capital.

One such owner recently told me, “I know I couldn’t increase my credit card limits, or get a loan from the bank where I’ve been banking since the 1950s, so I just kept calling wealthy members of my church till one helped me out.”

The attractive midsize businesses that have managed to get financing in the past few years have gotten it from lenders that are charging very high rates and imposing very high performance goals.

Yellen may read the business press and think the companies are doing fine, because that’s what the articles say, but the businesses are just trying to create the illusion of prosperity, to keep the high-interest-rate lenders from turning the screws as long as possible.

The executives of the businesses trying to make financing stick as long as possible know that, once they fall off the horse, they probably won’t be able to get money to get back on the horse, because, once they fall off the horse, they will be high-risk borrowers themselves.

Consumers who do somehow have steady incomes can’t actually get loans to buy homes, because the lending criteria are too strict — even for borrowers with good scores who have paid all of their bills.

Most home owners can’t use the low rates to save money by refinancing, because, before banks let the owners refinance, the owners need to have a substantial amount of equity in the home. At this point, many mortgages are still under water. So, the stable, employed, attractive owners of those homes can’t even use the low-rate environment to get cash to start or expand a business.

So, again: How exactly do these low rates help consumers when the consumers can’t use the low rates, and few of the employers that employ the consumers can use the low rates?

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