“This is the legacy of the Federal Reserve. This is the legacy of Ben Bernanke, who was rewarded by President Obama with a second term at the Fed despite the fact he testified before Congress in September 2005, assuring the American people there was no housing bubble, but later the bubble burst…

…It was Mr. Bernanke who established the false wealth effect of a rising stock market which would cure everything.”, Paul Schoenbaum, Williamsburg, Va., Letters to the Editor, Wall Street Journal

“Despite all these questions about the effectiveness of their policies, the Fed continues its six-year crusade that penalizes savers, as are central banks in Europe and Japan, which are following similar policies. These seemingly perpetual easy-money policies are a poor substitute for and a dangerous distraction from what really needs to be done—the implementation of pro-growth structural reforms in tax and regulatory policies.”, Em. Professor Robert F. Stauffer, Roanoke College, Letters to the Editor, Wall Street Journal

Letters

The High Costs of the Fed’s War on Seniors and Savers

Is it fair that seniors subsidize cheaper credit for others?”Not only is it unfair but it has been an ineffective policy in stimulating the economy.

In “Raise Interest Rates, Make Grandma Smile” (op-ed, Nov. 20), Charles Schwab asks: “But is it fair that seniors subsidize cheaper credit for others?” Not only is it unfair; to add insult to injury, it has been an ineffective policy in stimulating the economy. How can an easy-money policy be stimulative when the same amount of income is taken from savers and given to borrowers via lower interest rates? This is a zero-sum shell game, unless lower rates encourage credit spending or have positive wealth effects on consumption. But growth in private-sector credit demand has been stagnant from 2009-13. Household credit spending fell, while business demand increased at modest rates after 2010. Growth in the federal deficit, which is unresponsive to interest-rate declines, accounted for 86% of the increase in total credit spending in this period.

The remaining justification for the Federal Reserve policy is the wealth-effect argument. Near-zero interest rates have pushed up housing and stock prices, thereby encouraging consumption as household net worth increases. This is suspect, since wealth effects are hard to measure. Other forces have been pushing up stock prices, and the real net worth of households’ monetary balances has been reduced by a combination of inflation and near-zero interest rates.

Despite all these questions about the effectiveness of their policies, the Fed continues its six-year crusade that penalizes savers, as are central banks in Europe and Japan, which are following similar policies. These seemingly perpetual easy-money policies are a poor substitute for and a dangerous distraction from what really needs to be done—the implementation of pro-growth structural reforms in tax and regulatory policies.

Em. Prof. Robert F. Stauffer

Roanoke College

Salem, Va.

It is too late to make grandma smile. Grandpa retired in December 2008, counting on being able to supplement his income in retirement with money-market instruments. As Mr. Schwab writes: “Retirees depend on income from their savings for basic living expenses.” Grandpa and grandma have, for the past six years, been forced to deplete their savings to make ends meet. So even if the Fed were to raise rates, who knows when, grandma won’t be smiling because her depleted savings won’t generate enough income to help anymore.

This is the legacy of the Federal Reserve. This is the legacy of Ben Bernanke, who was rewarded by President Obama with a second term at the Fed despite the fact he testified before Congress in September 2005, assuring the American people there was no housing bubble, but later the bubble burst. It was Mr. Bernanke who established the false wealth effect of a rising stock market which would cure everything.

The zero-rate policy which was necessary the first year or two of the recession recovery should have been phased out years ago. It wasn’t done because the Fed has one major goal—pumping the stock and bond markets.

What has the Fed accomplished? Rising assets for the top 5%, an unemployment rate under 6%, fueled by millions of part-time workers, stagnant middle-class income and devastated retirees who have seen their savings disappear. Grandma isn’t smiling. It is heartburn.

Paul Schoenbaum

Williamsburg, Va.

Posted on December 4, 2014, in Postings. Bookmark the permalink. Leave a comment.

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