Collateral damage

OPINION:

Federal Reserve low interest rate policies helped to create the housing bubble that burst upon us like a thunderstorm. Now the Fed is busy sweeping up the fallout and trying to tweak the economy by lowering interest rates again, among other innovative initiatives.

That’s fine. It probably will help, as long as the Fed stops in time, like about now, and doesn’t create new incentives down the road for financial markets to start waving their bubble wands again. Mr. Regulator, will you be there next time so there won’t be a next time?

If low interest rates are good for what ails the economy, they’re not good for everyone. Some people are getting hurt. At the top of the list are elderly retirees — not all, but many.

When you’re young and working, low interest rates are a boon. You can borrow cheaply and buy all sorts of good things. If you take risks and lose, you have years of earnings before you to more than compensate. If you win, so much the better.

But if you’re old and retired, you’re more risk averse. Maybe you remember the Great Depression or hearing your parents talk about it. You don’t know how many years you have left, except it’s a lot fewer than it once was. You’re less secure now, and the stock market scares you. If you gamble and lose, you may not be able to survive the loss or be around long enough to make it up.

You put your savings in government-insured short-term certificates of deposit or in a savings bank. You need a decent interest income to live on. You may have Social Security or a small pension, but they’re not enough. When the interest you earn begins to evaporate and you ask the banker why, you’re told the Federal Reserve lowered the federal funds interest rate. The economy is weak and needs a few low interest shots in the arm for nourishment. If you’re hurt in the process, that’s collateral damage.

So you cut back on your spending. If there’s no more room for that, then you can always dip into your principal. That will carry you for a while. But then what?

With the cost of necessities rising, the lower interest income you’re getting is no longer enough. You have a daughter up north. But you value your independence and dread the idea of becoming a dependent.

Why is it, you wonder, that the prices of things you can’t do without, like food and fuel, are rising faster than average? Surely it’s not a conspiracy against the aged, though it sometimes seems that way. The papers say the Federal Reserve can control inflation, but it doesn’t seem to be working.

If worst comes to worst, a retiree could always go back to work. But you hear people are losing their jobs — employment is falling. For someone who hasn’t worked in years, whose skills have eroded and could be obsolete by now, finding a job could be a pipe dream.

Remember the 1970s, when unemployment and the cost of living both went up together? Today, from what you read and the prices you see at the supermarket, it seems to be happening again, though maybe not as badly. How can you not feel worried and vulnerable?

A few days ago the paper said that, with interest rates so low, the county government is earning less interest on its accounts too. With real estate values also lower, the county is facing a budget shortfall and so will be increasing the property tax rate to raise additional revenue. That will mean an additional burden for homeowners and higher rental costs for renters. The paper says the state government is also in financial straits. Will that mean an increase in state taxes too?

For retirees lucky enough to own homes and who need to draw equity out to pay bills, at least their interest rate will be low. But pity those who have to sell their house or condo in so depressed a housing market.

When you’re old and retired, and with the economy the way it is, it’s hard to plan ahead. When the powers that be in Washington lower interest rates for the general good, do they know about all the people they’re hurting? These folks aren’t big bankers or careless borrowers, so there won’t be any bailouts for them.

When is enough enough? Some people are saying sufficient adrenaline has already been pumped into the economy so interest rates won’t have to be lowered again. Let’s hope so.

Alfred Tella is former Georgetown University research professor of economics.