CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Bernanke Helps the Economy and the Masses with Low Interest Rates

Bernanke Helps the Economy and the Masses with Low Interest Rates

Sunday, 30 December 2012 15:14

William D. Cohan had a bizarre opinion piece in the Sunday Post claiming that the Fed's low interest rate policy was hurting savers and helping hedge funds. The gist of the story is that low interest rates hurt small savers with bank deposits while they make it easier for hedge funds to borrow money to speculate. Both sides seem more than a bit off the mark.

On the small savers story, it's not clear how much anyone could be hurt. It's not clear what interest rate Cohan would expect the Fed to run in a badly depressed economy (he complains about an "artificially" low rate, which seems to imply that there is a natural rate out there somewhere), but let's assume that 2 percent would be Cohan's preferred rate. If a saver has $40,000 in the bank (this would put them way above the bulk of the population in terms of their holdings of financial assets), Bernanke's zero interest policy is costing them $800 a year. That's not trivial, but hardly a disaster either.

Even this loss assumes that all of their savings are in short term deposits. If they hold long-term bonds they have seen their price soar, at least in part because of Bernanke's policy. Also the low interest rate policy has almost certainly given a boost to the stock market as well.

On the hedge fund side, investors have benefited from lower interest rates, but this is hardly necessary for them to profit. Hedge funds made plenty of money in the higher interest rate environment of 2006-2007 as well as the late 90s. The zero interest rate policy is certainly not necessary for them to earn hefty profits.

The biggest gainers from the low interest rate policy are probably the millions of homeowners who have been able to refinance at interest rates that are 1-2 percentage points lower than their previous mortgage. A 1.5 percentage point drop in interest rates on a $200,000 mortgage would save a homeowner $3,000 a year in interest payments. For this reason it is very difficult to see Bernanke's low interest rate policy as one designed to primarily benefit the wealthy.


Comments (12)Add Comment
written by PJR, December 30, 2012 11:00
Cohen did raise one issue that concerns me. Economists of all political persuasions seem to smugly dismiss the consequences for poor young people, and poor old people, and poor people generally, of negative real interest rates on small savings accounts. If a poor person struggled mightily to save-up a few dollars last year, and nevertheless saw his or her meager savings account decline in real value, well, I guess that's just too bad--it's for the greater good, according to liberal and progressive economists. In fact, many of them say that we need more inflation while interest rates remain close to zero. Although I mostly agree with these economists, they ought to own up to the negative consequences of their policy preferences, if not also go further to propose ways to offset them.
written by Jc, December 31, 2012 1:27
There has been roughly 5 trn of mortgage origination via refi of which 3/5 was serviced with rates around 5 with the balance closeR to 4.5 for a roughly 320 bn savings to consumers. 4 trn of deposits under 250k according to FDIC website you are looking at the survey of consumer finances which I assume excludes small business but regardless the loss of income is greater on the asset than that saved from liability. You just made the same argument
written by Chris, December 31, 2012 3:41
What Cohen said is actually mostly true and not too far off the mark, in my opinion.

Obviously low rates kill bank-deposit savers (and don't tell me some working class guy with barely any savings is invested in the stock market or bond markets -- only those with 401(k)/403(b)'s and pensions are). Most of these lower-middle class people have a savings vehicle at a bank that specifically avoids volatile asset markets (bond/stock/commodity) to preserve value.

And hedge funds are scoring ridiculously low financing to speculate thanks to ZIRP, that's something that you seem to acknowledge, but say that, well, hedge funds ALWAYS make crazy amounts of money in ANY environment. That's true, but that doesn't take away from the fact that those hedge funds who survived the market volatility in 2008-09 are benefiting from rock-bottom wholesale funding in the current economic environment.

But you make a good point. Bernanke has no option to reward bank-deposit savers in the depressed economy. That's the system, and we have to deal with it. The system is designed to stimulate growth from the top down, by controlling cost of capital and fund flows to banks from the central bank. And the top are hoarding, not investing in active riskier projects that will generate job growth.

Regarding your final point that refinancing activity has benefited the not-super-wealthy, I'm skeptical about this...extremely skeptical.

While mortgage rates are declining, refinancing activity is also declining in recent years, he's a good graph plotting data points for comparison:


The real question is, do the benefits from ZIRP to the wealthy outweigh the benefits that lower-class get from higher demand, debt refinance, etc. And I'm going to have to go with it benefiting the wealthy a lot more.
No account
written by David, December 31, 2012 5:10

The percentage of people without bank accounts is rising.

Also, the liquidity trap argument says rates are too high, if we want a recovery. Encouraging the labor share of growth to increase is needed.
written by skeptonomist, December 31, 2012 8:41
As Chris says, the Fed's supposed stimulus is mostly top-down or supply-side. Job creators are supposed to be taking advantage of the low rates to invest - if low rates aren't advantageous to hedge fund operators, why should they be advantageous to job creators? In fact regardless of the low rates banks have huge reserves which are not being lent out.

In theory, housing is one area in which monetary policy can be influential on the demand side, and when the Fed was given the job of stimulating the economy in the recession of 2001, it tried to boost housing in every way it could. But in reality this meant encouraging all kinds of trick mortgages and bundling which improved the profits of mortgage providers. Thanks to low short-term rates the very low teaser mortgages rates could still be profitable. The rate for a long-term mortgage ceased to be the critical factor for approving a mortgage - in practice almost anybody was approved regardless of whether they could make the payments. Despite what turned out to be an unsustainable rate of house sales the recovery from the 2001 recession was unusually slow. Housing stimulus by the Fed after the 2001 recession was a complete flop for several reasons, not just because Fed chairmen failed to recognize the bubble and completely reverse policy on a dime.

At some point economists need to face the realities of Fed intervention; in the real world it just doesn't work the way their theory says it should. Conservatives constantly make wrong predictions about the effect of Fed actions, based apparently on their own unsound monetary theories, but the predictions and expectations of "liberals" who think that monetary policy - and the Fed - can be relied upon have also been falsified repeatedly.

The Fed was really designed to be a kind of super-J.P. Morgan which would use government money to bail out the financial system when it overextended itself, and it actually performed this function well in 2008-9. The idea that it could and would keep unemployment low and wages high and avert recessions - not to mention control inflation - has always been unrealistic.
Baker is correst.
written by Peter K., December 31, 2012 9:25
I don't understand the objections to Fed policies aimed at helping the economy. Seems like a case of making the perfect the enemy of the good.

"William D. Cohan, a columnist for Bloomberg View, is the author of “Money and Power: How Goldman Sachs Came to Rule the World” and “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.”"

Yes Wall Street should be regulated more.
written by JSeydl, December 31, 2012 9:43
Chris & skeptonomist, you haven't acknowledged Dean's point about the natural rate. Do you think there is one out there? And is it negative?

It's funny that you think low rates after the 2001 recession was a bad move. Economic theory suggests that low short-term rates should weaken the value of the currency. If you wanted higher rates back then, the implication is that you wanted a stronger dollar and a wider trade deficit -- which is quite remarkable, considering that the nearly $800 billion trade deficit in the previous cycle was a key factor driving the housing bubble.
written by Chris, December 31, 2012 1:03

To clarify, I was not advocating against Bernanke's policies (low interest rates in theory do fuel more demand which is needed in the economy). I do not believe in a "natural rate of interest". I was just analyzing the practical consequences of the fact that there is low rates for what every day Americans see and for what incentives there are for other actors in the economy (like hedge funds). I provided a graph of refinancing activity and mortgage rates and i don't see that it's benefiting American homeowners THAT much, so to weigh it against how much banks are profiting and stuff...it's hard to tell who's really winning.

That being said, the Fed as an institution works top-down, which doesn't help much when the top is currently hoarding, skittish, uncertain, inactive...

Either the Fed should engage in radical changes where fresh base expansion or M1/2 ends up in the hands of workers and lower classes instead of just fueling strange bank finance games that aren't helping fuel economic growth and fight inequality.

Or, we should change that way we introduce base currency into the economy outside of the Fed.

But that's crazy talk, so in reality adequate fiscal intervention is sufficient to help let the Fed's ponzi run without so many issues (and proper regulation to limit financial crisis risk going forward).
written by Chris, December 31, 2012 1:07
Oh and what I do disagree with Bernanke about is that i'm more dovish on inflation rates, and i think there should be a 3-4% inflation target and an unemployment rate target (ngdp targetting is also appealing, but maybe not as much for long-term growth). That way we wouldn't just be serving the investor class with low annual inflation rates, we could balance it out more by addressing the needs of workers too.
They told us to save our money for retirement . . .
written by Carolyn Kay, December 31, 2012 5:39
. . . and those who did are getting no return on the money they foolishly saved.

Even if you saved a million dollars, at today's CD rates you'd be lucky to make $10,000 a year. And they want us to get even less Social Security. When will they trot out the ice floes?

Carolyn Kay
written by jay, January 01, 2013 8:29
The problem is the average person wants to avoid risk, and they prefer to keep cash or if they are adventurous buy treasury bonds. The alternative of investing in the stock market makes people particularly nervous given the past 13-14 years. It was hard enough to get people to buy stocks in the first place given the risk, lack of comfort making investment decisions, and skepticism of financial advisors. The risk isn't an unreasonable fear given the necessity of remaining liquid with a lack of wage growth, increased health care costs, a lack of job security, and the increased importance of good timing to get good returns in funds. People want to get 5-6% without messing around with the stock market.
written by Martha M, January 04, 2013 8:12
Forget the "small savers." How do you think most retirees with any amount of money were funding their retirement? Largely with CDs. Everyone knows old people aren't supposed to take risks with their money. That money most likely can't be replaced. The ZIRP actually causes me to hoard money. How can so many not see this?

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.