Monday, February 6, 2012

Some Commentators Still Clueless That Fed's Zero Interest Rate Policy (ZIRP) Is A Backdoor Bank Bailout

I have seen some pretty off-base commentary about the Federal Reserve's Zero Interest Rate Policy (ZIRP) over the past week. The first was from Matthew Philips and Dakin Campbell over at Bloomberg BusinessWeek in an article titled "The Hidden Burden of Ultra-Low Interest Rates". Now you might assume that an article with that title is going to dig into some details about how ZIRP is robbing retirees and savers and funneling easy money to the banks so they can cover up their losses. However, you would be mistaken.While that is what ZIRP does, unfortunately it's not what the article is about. (bold added by me)
"The Federal Reserve, which cut its target for the federal funds rate to a zero-to-0.25 percent range on Dec. 16, 2008, said last month that rates would remain “exceptionally low” at least through late 2014. While the unprecedented period of near-zero rates is meant to aid an ailing economy, it poses challenges for banks, insurers, pension funds, and savers.
The hope is that by making mortgages and other loans cheaper, ultra-low rates eventually may revive economic growth. For now they’re squeezing profits at banks and disrupting investment strategies at insurance companies and pension funds. 
Yes you are reading that right. Free money from the Fed is "squeezing profits at banks"! The whole article focuses little on savers except one quote from Barry Ritholtz which is on point.
"“For most people, there’s been more downside to these low rates than upside,” says Barry Ritholtz, CEO of Fusion IQ, an independent research firm. “They’ve punished savers and people living on fixed income, and made insurance more expensive.”"
You will notice he mentioned nothing about banks being punished. However, this doesn't stop the writers from going on with the bogus narrative which they conclude as follows:
"The bottom line: Near-zero interest rates have hurt bank and insurance company profits and contributed to a $236.4 billion increase in pension underfunding."
While correct about hurting pension funds, the article is missing one "tiny" detail about banks........ZIRP is the only reason banks have profits!! (well ZIRP and every other bailout thrown their way). ZIRP is sold to the public by saying that "by making mortgages and other loans cheaper, ultra-low rates eventually may revive economic growth". Great idea, since too much debt got us into the problem, we will revive the economy by encouraging more debt and stopping any money from flowing into the economy through interest on savings. Should anybody be surprised it has not worked?

The real beneficiaries are the Banks. How can getting money for free be "squeezing profits" at the banks as they said? It's not. The banks didn't even fully pass on the savings from ZIRP to consumers in the form of lower rates. Bank's borrowing costs went from 5.25% to 0.1% (or a 98% reduction). The chart below shows how much consumers "benefited" from lower rates by comparison.

Ya, not so much. Or another way to look at it.

The highlighted area is where the Fed lowered rates from 5.25% to essentially 0. Not only did spreads increase in banks favor but it encouraged banks to take the easy money and just buy Treasuries rather than lend it out to consumers. Get money from the Fed at 0%, lend it to the Government for 2%...repeat. And that is exactly what they did.

The primary purpose of ZIRP was (and is) a backdoor bailout for banks......not to help consumers with lower interest rates as advertised. Anyone still under the illusion that it had to do with encouraging lending might want to find out why the Emergency Economic Stabilization Act of 2008 included a provision for the Fed to pay interest to banks on reserves (which they never did before). Obviously paying banks NOT to lend money isn't going to encourage lending. It shouldn't come as a surprise that excess reserves shot up after this was enacted.

Despite it being undeniably clear that the Fed's ZIRP is robbing the saver to benefit the Banks, we get this article from Joe Weisenthal at Business Insider "DEAR SAVERS AND RETIREES: Stop Whining About Those Lousy Rates You're Getting From The Bank". It includes this gem:
"But why can't Bernanke just, you now, raise rates or something!? 
Well think about what that means: Essentially people are asking the central bank to create a special carve-out in the economy, where despite all that's happening, one class of people—savers—gets to have above-average returns on their money."
So Joe realizes that it's not fair to create a special carve-out in the economy for one class of people but remains utterly ignorant to the fact that is EXACTLY what the Fed is doing....For the banks! The Federal Reserve Bank of St. Louis makes it quite clear
"By keeping short-term interest rates low, the Fed helps recapitalize the banking system by helping to raise the industry’s net interest margin (NIM), which boosts its retained earnings and, thus, its capital."
Is that not a special carve-out?

9 comments:

  1. Why stop there? I would rather argue that ZIRP is a bailout for the American government. It looks bad if the central bank has to buy the sovereign bonds so why not lend money at 0% to banks in a hypothetical free market and let them do the dirty work of buying up treasuries?

    You think Japan is in a malaise cause it can't get out or do you think Japan is in a malaise because it wants to be?

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    1. Agreed, ZIRP has made it too easy for the government to run a massive deficit. If banks were not getting money for free and recycling back to the government (and earning a nice chuck of change in the process) then people would be paying a lot more attention to the unsustainable nature of the debt. ZIRP has silenced the free market signals.....

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  2. ZIRP is wealth transfer from savers to the zombie banks. It really is that simple. We live in an era of financial repression. Wages grow at less than the rate of inflation, folks are out of work or underemployed, and even those who invest cannot beat inflation. Last year the S&P500 got you 2.5% with dividends, below inflation. We are watching a drain slowly sucking inflation-adjusted wealth or income down and away from all the classes to a select few organizations. Supposedly the elites are doing this to save the system from far worse. Let's hope that is the reason, only temporary, and works. But, what we got is pretty bad.

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  3. @Randel "Supposedly the elites are doing this to save the system from far worse. Let's hope that is the reason, only temporary, and works"

    But of course....as Lloyd Blankfein would say, their all just "doing God's work"! ;)

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