Record-low interest rates steal from savers, especially seniors, and give to Wall Street
I just read a Reuters column on the evils of low interest rates that made me think, “Wow, couldn’t have said it better myself.”
Maybe that’s because it’s by David Cay Johnston, a Pulitzer Prize-winning investigative reporter who specializes in economics and tax issues.
"Holding down interest rates to prop up banks and the economy and help the already rich buy assets on the cheap amounts to an official policy to take from the ants who saved for their old age and give to the Wall Street grasshoppers," Johnston writes.
His column on the damage that low rates cause, especially for older Americans, is insightful and articulate.
As Johnston notes, because of low rates, the next financial crisis will be the collapse of investment incomes for older Americans.
And the Fed is the main culprit.
The Federal Reserve has kept the federal funds rate between zero and 0.25% since December 2008, and it recently announced that it won't budge on the plan to keep rates low until at least late 2014.
That's killing interest income that Americans rely on, and it's only getting worse.
According to Johnston, 53% of taxpayers were still earning interest in 2000.
By 2010, that number had dropped by 14 percentage points to 39%.
And the average interest earned per taxpayer fell by $1,125 from 2000 to 2010, which is quite a drop if you need that money to keep a roof over your head and food on the table.
Americans only received 1.5% of income from interest payments in 2010. However, interest accounted for 9.3% of income for the 37 million taxpayers making less than $15,000 per year.
Three-fourths of low-income Americans reported no interest income, which means the rest relied heavily on interest returns from their savings, notes Johnston.
And according to IRS and government data, that minority is mostly older Americans.
Whenever the Fed finally allows rates to rise, those savers would get a significant boost in their income.
As Johnston points out, while Fed policy is crushing the little guy, it's propping up Too Big to Fail Banks.
Banks pay squat to borrow from the Fed, which they then use to make a profit by purchasing federal debt paying 3% or more — not a bad deal, if you're a bank.
But low interest rates also help the wealthy.
Creditworthy individuals and companies can use cheap interest to take out loans and snap up assets that collapsed during the Wall Street meltdown, notes Johnston.
The longer this drags on, the more older Americans are forced to dip into their principal to make ends meet — and risk of running out of savings before their time is up.
"In the next few years, expect news reports, like those I read as a boy a half century ago about old ladies buying cat food not for a pet, but to get a little protein for dinner," Johnston writes.
You can read his column here: