Nothin’ from nothin’ leaves nothin’
You gotta have somethin’
If you wanna be with me…
I’m not tryin’ to be your hero
‘Cause that zero is too cold for me
Nothing from Nothing – Billy Preston
Zero interest rates have a clear and pernicious effect upon the elderly. See Is The Administration Determined to Make the Elderly Poor? Worse, this policy has broader implications for all savers and our national competitiveness. A robust household saving rate is integral to investment and long term American prosperity. America’s two major competitors have healthy household savings rates, Germany (10.9 % in 2008) and China (30% in 2009) vs. 1.8% in the US in 2008. Not surprisingly, the export led economies of China and Germany have fared better than the US during the financial crisis. And while the mainstream media has not focused on the zero interest rate strangle hold, more voices on the subject are appearing.
Genesis of the Problem
Our low savings rate has been US economic policy for the past decade. An “emergency” interest rate cut to near zero has followed every financial crisis from the dot.com bubble burst to the housing market crash. Unfortunately, these “emergency rates” have robbed savers, pension funds and insurance companies. In a recent Wall Street Journal op-ed Charles Schwab laid out the problem of seniors in particular:
Today’s historically low interest rates may be feeding banks’ profitability, but they are financially starving our seniors.
In February 2006, when Ben Bernanke was first sworn in as chairman of the Federal Reserve, the federal-funds target rate stood at 4.5%. That same year, the average yield on a one-year certificate of deposit was 5.4%. A retiree who diligently saved for a lifetime and had amassed a nest egg of $100,000 could count on an added $5,400 in retirement income per year. That may not sound like much to the average Wall Street Journal subscriber, but for a senior on fixed incomes that extra money improved the quality of his life.
Today’s average rate for an identical one-year CD is roughly 1.3%. On the same nest egg, that retiree will now get annual payout of just $1,300—a 76% decline in four years. See Low Rates are Squeezing Seniors
The Administration is Tone Deaf
Mr. Schwab is way too well mannered in his criticism: banks are now profitable at the expense of the entire economy, and the government endorses this policy. Tim Geithner on the Today Show almost offhandedly asserted that:
It’s “deeply unfair” that some financial institutions that got taxpayer-paid bailouts are emerging in better shape from the recession than millions of ordinary Americans.
Geithner also argued that President Barack Obama had no choice when confronted with a financial crisis. See Pickpocketing Trillions from the People to Give to the Oligarchy was Deeply Unfair
What Secretary Geithner did not mention is that the banks can now virtually mint money by way of this zero interest rate policy. The Secretary portrays himself as a powerless actor when in reality he is an architect of this policy and could encourage the end of this detrimental policy.
For Every Action There is an Equal and Opposite Reaction
From 1959-1994 the historic savings rate averaged 8.45%. Given the damage done to net worth in the recession we need to return to that savings level or higher. However, the government focused on restoring consumption with the “cash for clunkers” program and new home buyer tax credits. Provisions of the new health care legislation (which imposes a 2.9% Medicare tax on “unearned income;” that is, interest, dividends, etc.) further discourage savings.
Finally, a graphic rendering from Michael Panzner of how low interest rates undercut savings attempts:
Panzner Savings Chart
The savings problem falls heavily to baby boomers heading into retirement. In the recently released Employee Benefit Research Institute 2010 Retirement Confidence Survey 27% of participants had less than $1000 in savings and 54% had less than $25,000 of savings. (Primary residence value is excluded in this analysis, but we know how variable and ephemeral that asset can be.) With a zero interest rate policy we are encouraging those who should not be speculating to invest in an overvalued stock market or take inflation risk with longer dated fixed income products. Worse, people are dipping into savings for living expenses.
Charles Schwab concludes with a plea for the government to keep the plight of the seniors in mind. We need an outcry from pension funds, insurance companies, AARP, Congress and others who rely on safe fixed income investments to stop the insanity. We need to stop artificially depressing interest rates. Messrs. Geithner and Bernanke: ’cause that zero is too cold for me (and for the country).
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