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Irwin Kellner
Feb. 9, 2010, 12:01 a.m. EST · Recommend (8) · Post:
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By Irwin Kellner, MarketWatch
PORT WASHINGTON, N.Y. (MarketWatch) -- Beware of the law of unintended consequences.
Judging by the testimony that Federal Reserve Chairman Ben Bernanke is expected to give later this week to the House Financial Services Committee, it won't be long before the central bank starts to drain some of the excess liquidity now sloshing around in the financial system, thus raising interest rates. (See WSJ story on outline of Fed's 'exit strategy.')
It can't come a moment too soon for the silent majority -- the nation's savers.
In its efforts to shore up the banking system, the Fed has neglected the needs of those who save. And in case you did not know it, savers make up the bulk of the population.
Business and governments are net borrowers; consumers are net savers. Foremost among those who save are those who are trying to build a nest egg for their retirement -- not to mention those who are actually retired.
Lately, these folks and others who live on a fixed income have fallen behind the eight-ball. Besides losing some $13 trillion in wealth because of the drop in prices of homes and stocks several years ago, they have to deal with below-radar inflation, which is eroding the purchasing power of their savings. ( See March 24, 2009 column.)
To make matters even worse, many retirees are finding that their monthly Social Security payment has shrunk, compared with the amount they received last year, while those who are veterans on disability did not receive their annual cost-of-living increase in their pensions this year.
Since the end of 2008, those who keep their savings in a regular savings account at their neighborhood bank have earned virtually nothing on their savings because of the Fed's ultra-low interest rate policy.
The key overnight federal funds rate on which these interest rates are based has hovered in a range of 0%-0.25% for over 15 months.
In order for savers to earn a decent rate of return on their funds, their banks require them to lock up their money in a certificate of deposit for a number of years. Beyond that, savers have to turn to longer-dated Treasurys or take a chance with junk bonds or the stock market.
Borrowers, naturally, like low interest rates, especially the biggest borrower of them all -- the federal government. The same goes for the banks.
Speaking of which, besides receiving less than a penny per dollar in their savings accounts, savers many times have to pay their banks a fee for maintaining these accounts as well as their checking accounts.
To add insult to injury, the banks have drastically reduced their lending to individuals and to most businesses. Instead, they prefer to take advantage of the big difference between their cost of funds and yields available on longer-dated securities and buy Treasurys.
Playing the yield curve, as this is called, has enabled the banks to earn hefty profits, thus hastening their return to a pink-cheeked state of health.
Since the banks are apparently in good financial shape, it's time for the Fed to consider the needs of the silent majority -- the nation's savers -- and raise rates so that they can become healthy, too.
Irwin Kellner is MarketWatch's chief economist.
- TTolstoy | 9:08 a.m. Today9:08 a.m. Feb. 9, 2010
Staying at home was a boon for retailers -- at least this week.
11:43 a.m. Today11:43 a.m. Feb. 9, 2010 | Comments: 5
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