Fed Chair Ben Bernanke gave a speech recently in which he explained why long-term interest rates are so low. He started by saying that certainly central banks play a role in determining long-term rates, which seems right because the Fed is buying up long term securities Treasuries and mortgage backed securities issued by Fannie, Freddie and Ginnie Mae at a current rate of about $85 billion a month, for a total of about $2.8 trillion. First, he explains basic economic theory on setting rates, then moves to a recap.
Long-term interest rates are the sum of expected inflation, expected real short-term interest rates, and a term premium. Expected inflation has been low and stable, reflecting central bank mandates and credibility as well as considerable resource slack in the major industrial economies. Real interest rates are expected to remain low, reflecting the weakness of the recovery in advanced economies (and possibly some downgrading of longer-term growth prospects as well). This weakness, all else being equal, dictates that monetary policy must remain accommodative if it is to support the recovery and reduce disinflationary risks. Put another way, at the present time the major industrial economies apparently cannot sustain significantly higher real rates of return; in that respect, central banks–so long as they are meeting their price stability mandates–have little choice but to take actions that keep nominal long-term rates relatively low, as suggested by the similarity in the levels of the rates shown in chart 1. Finally, term premiums are low or negative, reflecting a host of factors, including central bank actions in support of economic recovery.
So that’s the reason savers are getting screwed: our fabulous economic system can’t pay decent interest, just like it can’t pay decent wages. The giant corporations that dominate our system, that are sitting on trillions of dollars, that don’t pay taxes, that hide money overseas, that cheat us at every step, that cut the pay of the average worker, that own the media and control public discourse, the poor babies just can’t afford to pay a decent interest rate to the dummies who scrimped and saved for a lifetime so they would be able to retire comfortably.
And there is nothing that the Fed, or any central bank, can do to help. They just sat there and watched the financial sector destroy the real economy. Housing Bubble? No such thing. Stock market froth? No, the market allocates capital wisely and generously. In the wake of the financial crisis, Bernanke has a simple suggestion: Screw you if you don’t want to put your money into the Wall Street casino; no returns for you. And @FixTheDebt adds to that: let’s cut Social Security, Medicare and Medicaid.
Now it’s only fair to point out that this means that those rancid corporations don’t get much in the way of a real return on their Treasuries. In fact, after inflation, they may be losing money. Maybe the point of low interest is to encourage them to invest. But that’s pushing on a string: with widespread underutilization of existing capital stock, why buy more capacity? And with the ability to screw workers, why pay more? It isn’t like the shareholders need the money; most of the stock is owned by the rich. It’s no different from blind support of banks in the hope they will increase lending.
Savers are toast in this brutal version of capitalism, but savers, like the unemployed, the foreclosed upon, people with underwater homes, government employees, corporate workers and just about everyone, except the feral rich, aren’t ever going to be helped by the captured Obama Administration, the vicious Republicans or the spineless Democrats. We’re all on our own. Read the rest of this entry →