We depart from our usual topics of eminent domain and land use law to take a look at another subject that is worthy of your attention, namely, what has been happening, or more accurately, not happening to interest rates. For the umpteenth time, the Fed announced last week that it is leaving interest rates alone and leaving them at nearly 0 percent as far as the banks are concerned. What a deal if you are a banker! You get the Fed’s money at the rate of .001 percent and then you loan it to your prime borrowing customers at 3.25 percent. Do the math sometime and see what rate of interest you get. Our calculator says it’s over 3000 percent. Not a bad profit margin, if you are a banker, particularly when loaning other people’s money.
But what if you aren’t?
Then, if you put money in a bank, you have to pay income tax on the pittance your bank has the nerve to call “interest” (Our bank pays us the munificent rate of .02 percent on our account). Of course, inflation has been doing its thing relentlessly, and has been hovering around 2 percent per annum. So without dwelling on the depressing arithmetic, you lose over 2 percent by saving money and putting it in the bank. Does that sound right to you? Not to us. To us, since this situation prevails by government decree, it’s a form of institutionalized theft, mostly from the middle class.
So who benefits from that? (Or cui bono? as the Romans used to ask.) First and foremost, Uncle Sam. The feds are borrowing trillions but don’t have to pay anything remotely resembling reasonable interest on their borrowings. Any increase in prevailing interest rates would thus hit Uncle Sam harder than anyone else because no one else can run up a multi-trillion dollar debt. Second, the big banks, the ones that get their money from the Fed at an effective rate of zero percent, and get to loan them out at real interest rates. And when it comes to that double-digit interest they charge on credit card debt, don’t ask! Third, extremely low interest rates prop up the stock market that goes into a swoon whenever it perceives an imminent increase in interest rates.
But since there is no free lunch, who gets screwed? Primarily, savers, which is to say the middle class – the folks who are hard put to put some money aside, and who got burned in 2008. They have been driven out of the stock market because they are unable to risk its collapse that many believe to be imminent and that has been foreshadowed by the recent multi-hundred point up-and-down swings. Extremely low interest rates also inflate a housing bubble because, as we surely need not tell you, extremely low interest rates drive the housing market by encouraging people to buy homes at prices they cannot otherwise afford, because the prevailing low rates keep the monthly mortgage payments low. But just you wait until interest rates rise to more reasonable levels, the all-cash buyers realize that they can’t get their money back, and those poor suckers who took on large loans try to sell their high-priced houses when interest rates return to normal.
The Fed has been stalling, as they just did this week, for years. This process has now assumed the proportions of parody; sort of like the annual shtick of the “Peanuts” cartoon strip where every year Lucy faithfully promises Charlie Brown that this time, this time for sure, she will hold the football for him so he can kick it, but at the last moment snatches it away. So, year after year, poor ol’ Charlie Brown winds up on his little keester. Same with the Fed. Chair Janet Yellen keeps promising an increase in interest rates in a month or two, when the financial moon is in the recovery house, but when the time comes, she and her merry men keep things exactly as they have been for years, thus benefiting Uncle Sam, the big banks, and the stock market, and of course screwing the middle class savers.
Folks, this isn’t good. That sort of policy that tries to fool and stall the Great Unwashed may put money in big-time stock market players’ pockets, and make for an entertaining cartoon, but at bottom it is a bait and switch scheme.
Like him or not, Donald Trump’s abrasive but successful campaigning has demonstrated that if politicians keep lying to the people long enough, and feeding them their conventional-wisdom bullshit about how they will make things great if you only elect them — whereupon they do nothing or even do the opposite — there comes a point where the people lose not only their faith but their cool as well, and widespread anger replaces thinking and judgment. Which is a prescription for ultimate destruction of civic values and what is left of good governance. And, as we have seen in this year’s presidential politicking, one day you look up and see the establishment types standing there babbling away as usual, with people increasingly not listening to them, while smart political outsiders make a virtue out of inexperience but make political hay nonetheless. Is that better? That remains to be seen.
Gideon Kanner is professor of law emeritus at the Loyola Law School. This article appeared in modified form in the Los Angeles Daily Journal on September 22, 2015.