Showing posts with label ZIRP. Show all posts
Showing posts with label ZIRP. Show all posts

Friday, April 13, 2012

Sheila Bair's Humorous & Sadly Ironic Rant

Usually this is something I would just post on Facebook or retweet on Twitter but this from Sheila Bair (formerly from the FDIC) I just had to post for those that may only follow my blog. Funny and sadly ironic -- definitely check out the whole thing here "Fix income inequality with $10 million loans for everyone!" .

Here is a piece from the Washington Post....
"For several years now, the Fed has been making money available to the financial sector at near-zero interest rates. Big banks and hedge funds, among others, have taken this cheap money and invested it in securities with high yields. This type of profit-making, called the “carry trade,” has been enormously profitable for them.
So why not let everyone participate?
Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.)"
and some more.....
"Some may worry about inflation and long-term stability under my proposal. I say they lack faith in our country. So what if it cost 50 billion marks to mail a letter when the German central bank tried printing money to pay idle workers in 1923? 
That couldn’t happen here. This is America. Why should hedge funds and big financial institutions get all the goodies?  
Anyway, check out the whole thing .

Sorry, only the Fed and their friends at the banks get free money. Can't let that money get out to the general public -- That's inflationary! Gotta bailout only a select group of people so not too much of that money gets out into the general economy....that way inflation stays where they want it.....in asset prices.....

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?