Every now and then we permit ourselves to say something on subjects that seem of interest, even though not related directly to eminent domain or land use. Here is one.
Los Angeles Daily Journal
Jan. 07, 2010
The ‘Intergenerational Conflict’ Cuts Both Ways
By Gideon Kanner
Conventional wisdom has it that the ongoing explosion in public deficit spending amounts to an intergenerational wealth transfer from young people who will have to pay off the growing public debt, to the old folks who are enjoying costly public services like Social Security, Medicare, and assorted private breaks and government subsidies. Even as grandpa enjoys life on the dole, goes the argument, his kids and grandkids will have to pay higher taxes, and suffer an inflation in the long run in order to foot the bill. But it is not quite that simple. As a local bank commercial used to put it during a credit crunch of some years ago, there is lots of money around, but if you want to borrow some you must do two things: first, you have to ask for it, and second, you have to pay it back. But that was then – this is now. Today, you can ask all you want, but the banks are not eager to make loans because they can do right well elsewhere. Also, the dubious prospects of borrowers paying back in these recessionary times motivate the banks’ reluctance to lend. This causes the people in need to go elsewhere and take out loans with a higher risk than reward in some instances, one such type of loan is a logbook loan, this type of credit can be dangerous it should definitely only be considered as a last resort. Saying this though, if you have come to the conclusion that taking out a loan or applying for credit cards is something that you feel is necessary, as long as you have done research into potential solutions like Complete bank ASA (or Komplett Bank ASA as you’d say in German) and various credit cards, then you should be confident in what you are getting yourself in to. Struggling with your finances is not something you should be embarrassed about. Plus asking for help shows that you are thinking of ways to make it better. Even if you take it upon yourself to check out sites similar to PromoCodeWatch.com, to find discounts before shopping online, this can make all the difference and at least shows that you are making an effort to manage your money better than before.
Of late, we have been experiencing low interest rates, the likes of which the country has not seen since the Great Depression, when safety trumped income. I remember how, in the 1940s, when things had already improved, a local bank in the small town where I lived at the time, proudly displayed a big, red neon sign that read “We pay 2 percent.” Today, you will be lucky if your friendly bank pops for 1.5 percent on a promotional money market account. A major bank recently informed me that the interest it pays these days on what it laughably calls interest-bearing checking accounts, is 0.05 percent.
If I were a suspicious sort, I might speculate that the Federal Reserve Barons are taking care of their big-buck buddies at the expense of the rest of us. First, the federal Reserve low-interest policies are a boon to the federal government, which can borrow with abandon at extremely low rates of interest it then gets to tax. Second, the big-buck boys who have invested in the stock market recently are making oodles of money (at least on paper, for the time being). They are in the stock market because they think they can handle the risk, and because the market is being driven up by desperate people trying to get any kind of decent return on their money. As the New York Times put it in a recent front-page story, “Many think the Federal Reserve is fueling a stock market bubble by keeping [interest] rates so low that investors decide to bet on stocks instead.” (Stephanie Strom, At Tiny Rates, Saving Money Costs Investors, N.Y. Times, Dec. 26, 2009). But if you are grandpa, and your nest egg is all you have, betting on anything, much less the market, is not a good idea. On the other hand, as the Los Angeles Times business columnist Tom Petruno observed, staying out of today’s market is “a fine idea – if you can survive earning 2 [percent] or less on your money.” And there’s the rub.
If you buy safe, short-term federal paper you axiomatically lose money – after adjusting the paltry 1 percent or so return for inflation and taxes, the net return is probably negative. Buying long-term federal paper might enable you to do better, but then you run the risk of inflation eroding your principal. True, you can buy a sturdy safe and invest in gold, which has done right well lately, but having to store significant quantities of gold where it is both safe and accessible, can be a bit of a problem. Burying your gold on the south forty of a remote desert cottage, and guarding it with your gun locked and loaded, is not a very appealing option either. There is no fun in that.
But what does all that have to do with that intergenerational conflict? Plenty. Even as the public debt skyrockets and threatens to put new financial burdens on future generations, today’s ordinary old folks who may have problems living on Social Security, and whose trashed 401(k)s, if any, have yet to recover from the recent debacle, are dependent on safe but income-producing investments, and are thus compelled to subsidize those low interest rates with their nest eggs. Those among them who lack lawful access to a printing press like the feds, or to the substantial resources (and risk-tolerance) of the aforementioned big-buck folks, have no choice but to invest their nest eggs in CDs and short-term government bonds whose income prospects at current rates of return evoke visions of grandma dining graciously on cat food a la mode in her golden years.
In other words, the younger folks may be facing future financial burdens, but for now, those of them who still have jobs (which means the great majority of them) enjoy bargains being offered by anxious merchants. They get to finance cars for peanuts (0 percent is not unheard of), and can get under-5-percent home mortgages with the ever-helpful Uncle Sam chipping in a few grand on the down payment. Not to mention Uncle Sam’s recent generous cash-for-clunkers program. What a deal! They get to do all that at the expense of the old folks who already have homes and cars, and are increasingly faced with having to invest their nest eggs at a paltry 1.5 percent or so. And to add insult to injury, as all that is going on, bankers get virtually interest-free money from the Fed, which they can then put into long term Treasury bonds that pay 3.5 percent to 4 percent, without investing any of their own funds. How $weet it is. They do it because they can, and it’s a lot better for them than lending to borrowers who in the current economic climate may have problems repaying their loans.
This strategy does not work for grandpa. Unlike the banks that have an indefinite life and employ those “masters of the universe” bond traders who can respond instantly to market fluctuations, grandpa can only watch and hope for the best. And of course, grandpa can’t get his hands on essentially interest-free seed money generously supplied by the Fed, while the banks can.
Oh, and did I mention that concerns over the banks’ large cash accumulations have grown to such an extent, that the Fed has proposed allowing banks to park their reserves at the central bank, to wean the economy “off extraordinary infusions of cash and curbing inflation” when the economy starts improving? (Javier C. Hernandez, To Inhibit Inflation, Fed Offers to Set Up Interest-Bearing Deposits, Wall Street Journal, Dec. 29 2009). The banks argue that they are accumulating cash in anticipation of the next wave of foreclosures. The New York Times anticipates several hundred bank failures in the next few years. (Graham Bowley and Eric Dash, Doubts on Regulation and Renewal Hang over Wall St., N.Y. Times, Jan. 1). So at the moment, the big boys are making money, and those of them who are in banking are again enjoying obscene, unearned, multi-million dollar bonuses, while grandpa is involuntarily subsidizing much of that via those puny returns on his shrunken nest egg.
So it isn’t just a case of an intergenerational wealth transfer from the young to the old; there is also an element of vice versa involved here. Maybe the country’s economy is kept afloat by federal borrowing that the next generation or two will have to repay, but the younger generation enjoys present financial benefits at the expense of grandpa’s retirement income. Does it all balance out? I doubt that – I leave that judgment to the number crunchers. But it seems clear that the intergenerational wealth transfer we hear so much about is not a one-way street.
Gideon Kanner is professor of law emeritus at the Loyola Law School, and of counsel to Manatt, Phelps & Phillips.
© 2010 Daily Journal Corporation. All rights reserved.
Follow-up. It’s nice to note that the New York Times is singing our song. See the editorial of January 18, 2010. Click here: http://www.nytimes.com/2010/01/18/opinion/18mon3.html?ref=opinion