Posted on 11/28/2009 7:40:40 PM PST by sickoflibs
The zero-interest-rate policy of the Fed is sold to the public as a benign economic rescue in the public interest. The stark reality is that this policy is a disguised tax implemented by the Fed. It takes income from savers and hands it as a subsidy to borrowers. It also facilitates and funds the fiscal deficit policies of central government. Such a well disguised tax is a boon for governments. The cruelest tax of all is this 100 percent tax on interest income, disguised and rationalized as "good" policy.
The zero-interest-rate policy deserves closer scrutiny. Would a saver willingly agree to an economic environment of zero interest rates? Certainly not. Would a debtor prefer a zero interest rate? Absolutely. The saver and the debtor would, under normal, willing-economic-participant conditions, negotiate a "price" for the use of money saved. That price for the use of funds is interest.
The central bank enters the negotiation between saver and borrower, and by counterfeiting money it destroys the negotiating base of the saver. Counterfeiting money through policies of unlimited liquidity provision is a "price control" over interest rates, instituted to force interest rates down and eventually spiral them downwards out of control to zero. The interest income of the saver is eventually taxed to extinction at zero interest rates.
It is basic economic theory that price control actually reduces the availability of the item subject to the control. It should therefore come as no surprise that available credit is falling despite unrestrained liquidity provision at zero interest rates. Banks have no direct cost implication when they hold funds at zero (apart from opportunity cost). Thus there is no direct cost penalty for doing nothing.
Not exploiting a lending opportunity in a high default-risk environment, where the margin between a zero-interest cost of funds and the lending rate is insufficient to protect bankers against default risk, is an entirely rational choice for bankers. While the intended consequence is to increase the availability of credit, the ultimate "zero-rate" intervention actually reduces credit availability. One wonders how significant this unintended consequence would be in the absence of Cash for Clunkers, the now-expanded subsidy policy for housing purchases, and the constant Fed, Treasury and Federal Housing Finance Agency support for Freddie Mac and Fannie Mae. We shall find out when fiscal deficits can no longer fund such excesses.
Savings will migrate to term assets for meager interest income but that income has more to do with a term premium than with interest, the cost for the use of funds. The stated policy is to start the yield curve at zero and to use all the influence and tools of the Fed to apply downward force on the slope of the yield curve. No one has any moral standing to defend any policy that dispossesses the interest of the saver; however, the indiscriminate redistribution of this interest tax is exceptionally unjust.
"The central bank enters the negotiation between saver and borrower, and by counterfeiting money it destroys the negotiating base of the saver."The normal standards for a tax are that it must be fair and it must be evenly distributed. The "for the public good" argument is that tax may be levied disproportionately usually with reference to some wealth measure. In simple terms, the rich must pay more and the poor must pay less.
The tax of a zero-interest-rate policy fails dismally when it is tested against this framework. There is no discrimination in taxing savers' interest. All savers are taxed by a zero interest rate. Some savers, usually the wealthier and more sophisticated savers, can institute countertax measures and are able to avoid or escape the zero-interest-rate tax to some extent. Most savers can't, and they fund the redistribution and subsidies to the borrowers.
Indiscriminate principles are applied in allocating the interest subsidy. Its distribution is not monitored fairly and equitably in the interest of society. The recipients are random borrowers, selected with no reference to the wealth, income, or other discerning standards that would normally apply. It is appropriate to ask by what standards society decides that a homeowner who bought a property priced beyond his means must be subsidized by a pensioner who had saved to survive the income drought of old age? Why must a big bank have access to zero or near-zero cost of funds to carry all those losses making loans while an ordinary saver can no longer afford his child's tuition?
The zero-interest-rate tax strips the interest income from savers and hands it to government, and morally justifies this as stimulating the economy through deficit funding. The justification is that it is of no use to run up huge deficits if it involves paying a high interest rate. Strip the interest and hand it indiscriminately to over-extended borrowers, many of whom used the borrowings to speculate on asset inflations. Strip the interest and hand it to the banks to "repair" their balance sheets and to "carry" the bad debts. Strip the interest and hand it to the developers who overinvested in property, capacity, or trading. Strip the saver of interest to fund the carrying of compounding, unliquidated losses.
How totally one-sided! Rip off the savers and give to the borrowers. Not even the socialist dictate that everybody should contribute according to ability and receive according to need can contain the injustice of a zero-interest-rate-policy tax. Surely nobody can have a zero need and a 100 percent obligation to contribute. Neither can anyone claim 100 percent contribution from savers against a zero contribution from borrowers (the bank margin excluded).
It is not fair, moral, or just for central banks in their quest for self-preservation to strip savers of their income. The phrase, "interest rates will remain at zero for longer" simply means the imposition of hardship on the saver for longer. Placing the weight of the interest-tax burden on a small and responsible portion of society is self-serving behavior by central bankers who have the encouragement, support, and consent of central government.
Robbing the saver is immoral. The indiscriminate redistribution of income rights from the responsible and the cautious to overburdened borrowers, speculators, government, and risk-seeking banks serves not the short- or long-term interests of economic society. Rationalizing this mean policy and indiscriminately cruel tax into a benign and caring action by central banks is certainly folly.
If you realize both parties in Washington think our money is theirs and you trust them to do the wrong thing, this list is for you.
If you think there is a Santa Claus who is going to get elected in Washington and cut a few taxes and spend a few trillion and jump start the economy, and get our lost money back, this list is not for you.
You can read past posts by clicking on : schifflist , I try to tag all relevant threads with the keyword : schifflist.
Ping list pinged by sickoflibs.
To join the ping list: FReepmail sickoflibs with the subject line add Schifflist.
(Stop getting pings by sending the subject line drop Schifflist.)
Interesting take, but it’s actually worse than that.
Because the Feds are lending money at (near) zero interest rates, and the financial institutions are risk-averse to extending credit at this point, instead they’re using the money for carry trades.
So, the hundreds of billions of bailout money are simply being used to line the pockets on Wall Street, weakening the dollar, while the “little people” get to endure Great Depression II.
Nice.
as much as I read seemed good. but then I got distracted by the Rock n Roll Hall of Fame special on PBS...
I agree with your analysis. Why risk loaning money to a small business in USA when you can make instant money betting against the dollar? So banks get money at near zero and get it out of the dollar to make money.
This sure sounds like an accurate analysis to me.
It seems there’s little hope for actual reform from this path and that we are simply destine to ride it out to its bitter end. We have far too many in this society that want something for nothing and will milk it to the end no matter what.
YOu are correct. The carry trade and all the added liquidity is lifting the stock market but is not doing a damn thing for employment/business growth.
It is much worse than that. We have reached a point where most people: dems and republicans, liberals and conservatives, taxpayers and tax recipients have decided the federal government owns them.
Great stuff the MI as usual. This path is not just unsustainable. It has reached a point where any choices (except those which take power from the elite) will bring cascades of pain to the common folk. The Gov’t/Fed has boxed itself into a corner, and like the rat that it is, it will likely have to use explicit force, rather than implied force. It will be interesting to see the consequences of that...
I meant ‘owes them’, but ‘owns them’ is a funny typo.
Right on target article.
It's cost me thousands over the past five or more years. Money market accounts pay next to nothing on uninvested balances and CDs are little better. It's been actually punishing for people who save money and always invest conservatively in savings accounts and CDs. Many older workers and retirees used to earn decent income supplements from CDs paying around 5%, but no more.
Savers who invest conservatively have been royally screwed for the benefit of higher risk investors and the gov't's stupid fiscal policies and the role they played to screw up the mortgage industry and the nation's financial system in general.
It’s an economy shrink and stay.
This is a silly article. No-one is being forced to lend to the Govt at the shortest maturities.
Longer term govt bills and bonds have positive interest rates. Private borrowers are all paying rates higher than zero.
Inflation is actually down year over year, so a lender even at zero interest rates gets a tax free increase in purchasing power.
You are absolutely right. The zero rate policy means that no one is paid for passive savings anymore. The original purpose of a bank was to be an intermediary between savers and borrowers. Not many banks making money that way anymore. And all these retirement plans are accruing nothing more than the return of capital—and that capital will be devalued when you get it back. There is no incentive to save, and every incentive to put your assets at risk. Which is what I am doing, but I know I am gambling(I got clobbered last year). Buy gold.
Great post...
Are you sure you’re posting that on the right forum?
It’s actually worse than worse than that.
The dems are proposing a "trading tax" to curb speculation and raise money. The real problem is zero interest rates promote wild speculation destroying the market with price swings from unlimited capital borrowed at zero interest.
It you actually paid interest on the money you borrowed, the speculation and market dislocations would lessen.
Bravo Mises Institute!!
Excellent take. Gubmint profligate spending and Wall St. gamblers who are shielded from taking their losses punish savers. It’s especially hard on boomers nearing retirement who are looking for a safe harbor for their nest egg that yields something of value.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.