BACON: Fleeced by the Fed

Fed’s zero interest rate bails out Wall Street and Treasury, sinks middle class

The Federal Reserve Board announced plans last Tuesday to keep short-term interest rates at near zero for another three years and said it might embark upon another bond-buying program to drive down long-term interest rates. The stock market rallied and President Obama’s supporters hailed the rising stock market as a sign of his brilliance as a manager of the economy.

Call me a party pooper, but I see nothing good coming from this. Let’s set aside fears that the Fed’s jam-down-the-pedal monetary policy might drive down the dollar or ignite a monster credit bubble and focus on the topic that seems to preoccupy Washington’s political class these days: the distribution of wealth.

There will be winners and losers from the Fed’s monetary policy. The winners will be the nation’s debtors. The losers will be the nation’s creditors and savers. Debtors will continue to pay rock-bottom interest rates. Creditors and savers will earn rock-bottom returns on their investments. Indeed, with the Fed’s stated objective of maintaining a 2 percent inflation rate, many small savers will see the real value of their savings erode.

The largest debtor and biggest beneficiary of the Fed policy, of course, is the federal government, which owes more than $15 trillion and is on track to owe $16 trillion before the year is out. When compiling the fiscal 2012 budget, the Office of Management and Budget assumed that the interest on 10-year Treasury notes would average 3.6 percent this year while 91-day Treasury bills would average 1.0. percent. Compare that to actual interest rates today under the Fed’s easy-money policy: 2.1 percent for 10-year notes and 0.4 percent for T-bills. That averages out to roughly a full percentage point less than forecast - cutting Uncle Sam’s anticipated interest payments by about $150 billion.

That’s not the end to the Fed’s largesse. As the Fed purchases more long-term bonds, it collects more interest on the bonds, which it kicks over to the Treasury. In 2010, the interest amounted to $79.3 billion. As the Fed pushes bond purchases well past the $2 trillion mark, that number is likely to rise. Thus, Chairman Ben S. Bernanke’s contribution to deficit reduction could approach $250 billion this year - and yet more in 2013 and 2014.

So, how has this economic stimulus worked out? American consumers are huge debtors, too, but they haven’t seen remotely the same benefit. Total consumer credit outstanding in the third quarter of 2011 stood at $2.47 trillion - the same level as in 2009. But interest rates are lower, right? Yes, but only marginally:

c The average interest rate on a four-year auto loan declined from 6.7 percent to 5.9 percent over the same period.

c The average interest rate on personal loans slid from 11.1 percent to 10.8 percent.

c The average interest rate on credit cards eased from 13.4 percent to 12.3 percent.

If consumer spending has boosted gross-domestic-product growth over the past year, it’s not because marginally lower interest rates have made it so much cheaper for consumers to borrow. It’s because lower interest rates have devastated the incentive to save. What’s the point of setting aside money to earn a half-percent interest in a bank certificate of deposit or money-market fund when inflation trotted along at 3.0 percent in 2011 and, if the Fed is right, will continue at 2.0 percent this year? Your savings are losing value. Why not spend the money instead?

Mr. Obama bemoans the difficulties of America’s middle class. His answer: Raise taxes on rich people. Meanwhile, he says nothing as Fed policy eviscerates the savings of middle-class families who don’t have $1 million or more to invest in exclusive hedge funds or private-equity accounts that generate higher returns.

Mr. Obama bashes the greed-meisters on Wall Street yet says nothing about Fed policy that props up bank profits with hundreds of billions of dollars of low-interest lending.

The American people understand what they have to lose from higher tax rates, but they have no concept of how the Fed is fleecing them. Monetary policy is opaque even to those who follow it for a living, and it’s simply beyond the comprehension of most Americans - including a brain-dead press corps that is all too happy to peddle Mr. Obama’s narrative of a growing income gap and the injustice of the tax rate paid by Warren Buffett’s secretary.

But give Mr. Obama credit for this: While his handmaiden Bernanke plunders the middle class in order to prop up Wall Street and the U.S. Treasury, the president has exploited the resulting uncertainty and unease by posing as a champion of Middle America. That’s more than you can say for Newt Gingrich, who is attacking Mitt Romney for the sin of being a successful, wealth-creating capitalist, or for Mr. Romney, who seems incapable of defending himself. Like Sherlock Holmes and Professor Moriarty at Reichenbach Falls, they are locked in a death grip that will plunge them to their political demise.

I’ve never been much of a fan of Rep. Ron Paul, but the man is making more and more sense when he says it’s time to abolish the Fed.

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