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Lincoln Institute


Low Interest Rates: Winners and Losers

by Frank Ryan
 

"Anytime you have a really great deal, remember for every winner there must be a loser."

The expression means that when you have a "lopsided" transaction; one person's good deal is likely done at another's expense.

With the artificially low interest rates promoted by the Federal Reserve with Quantitative Easing and Operation Twist, there are winners and losers as well. By the Fed's own admission, the purpose of the current monetary policy is to significantly reduce long term rates of interest to stimulate the economy.

The Federal Reserve's monetary easing is designed to stimulate the economy while at the same time keeping inflation in check.

The fallacy of the policy, however, becomes apparent when one considers who loses financially as a result of monetary easing. Federal Reserve policy papers typically only consider the effects on those who benefit from the policies.

Those who are negatively affected by the Federal Reserve monetary easing hold the key to the rationale as to why the economy is not responding to the Fed's historic loose monetary policies.

Two years ago in November 2010, Dr. Bernanke wrote a paper entitled: "Emerging from the Crisis: Where do we stand?" The losing parties to the policies help understand why the paper he delivered was premature.

Who are the losers?

First, anyone living on a fixed retirement income from an annuity contract or investments in bonds has had the effective yields and interest rates plummet since the quantitative easing was put in place. Interest rates on certificates of deposit and bank loans are incredibly low and have had the effect of reducing the incomes of seniors and other retirees.

Second, the current beneficiaries of low-interest rates for home refinancing fail to amplify the problems of all those mortgage holders who are currently under water and not able to refinance. So while interest rates are extremely low, those who have below market mortgages are unable to refinance. As such those who are most in need of help are getting little, if any help, from very low interest rates.

Third, any pension funds which follow the "prudent man rule" under ERISA are being harmed by the current quantitative easing because earnings on fixed income investments are lower than historic rates which, in turn, make unfunded liabilities of funds higher.

Fourth, State and local governments are being harmed by quantitative easing as well. The very low interest-rate is causing a reduction in the expected earnings rate of pension funds which increases the amount of annual contributions taxpayers must pay to make up for the lower earnings caused by quantitative easing.

Fifth, bank investment portfolios are beginning to chase yields to keep net interest margins higher which will subject these same financial institutions to grave "mark to market" risk when normal interest rates return. When normal interest rates return, the fair value of longer term, lower interest rate investments plummets further adversely affecting banks and consumers.

Finally Social Security investment funds held by the federal government on behalf of the Social Security recipients is equally being harmed because those funds are invested almost exclusively in federal government bonds and notes. The result is that the interest on the assets held by Social Security are declining significantly which means the fund will go bankrupt sooner.

The result is that while the Federal Reserve thinks it is helping the federal government and our economy by reducing interest, and while the Fed gives the perception that lower interest rates are helping to stimulate investment, all the Federal Reserve has done is to have picked who will win and who will lose.

For every winner there is a loser. Perhaps the biggest loser of all though will be the American people because of a horrific unintended consequence of the Quantitative Easing program.

The unintended consequence is that the extremely low interest rates on the deficit financing of the government permits the Executive Branch to continue reckless spending with little regard to costs of funding the debt. Only future generations will have to deal with this consequence.

Irrational federal spending, unrestrained growth in the federal government, state government, and local government are not helping the economy. Such behaviors would not be possible without the invisible hand of the Federal Reserve.

Instead of quantitative easing from the Federal Reserve, the Federal Reserve should use its power to force government to live within its means. The uncertainty of when the Federal Reserve will establish financial discipline is harming our recovery, our citizens, and our future.

"No doc loans", teaser rates, negative amortizing mortgages in the most recent housing crisis have apparently enabled the Fed to employ irresponsible housing bubble tools to fuel an irresponsible Federal Government spending binge.

Col. Frank Ryan, CPA, USMCR (Ret) and served in Iraq and briefly in Afghanistan and specializes in corporate restructuring and lectures on ethics for the state CPA societies. He has served on numerous boards of publicly traded and non-profit organizations. He can be reached at FRYAN1951@aol.com and twitter at @fryan1951.


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