Why Bureaucrats Shouldn't Set Interest Rates

Those with the power to shift hundreds of billions of dollars out of the pockets of savers should have to stand for election.

When I was collecting my annual tax forms to send to my accountant earlier this month, I couldn't find one—the one called the Form 1099-INT.

That's the form I've gotten in past years from banks or mutual fund companies to report interest I've received on bank accounts or money market funds.

The form didn't seem to be downloadable from the bank or mutual fund Web sites, either, so I finally called up and asked a call center representative where my form 1099-INT was.

Wearily, she explained that the bank doesn't have to issue the form if an account generates less than $10 in annual interest. Lots of other callers, she said, had been asking the same question, and getting the same response.

It's not that I have less money in the bank than I used to. Okay, maybe a little less. The point, though, is that the Federal Reserve's zero interest rate policy—"zirp," for short—means that whatever I do have in the bank isn't generating much interest. And that's part of the reason I've got less money in those bank accounts.

The cost of this, nationwide, isn't merely a few moments of confusion, even multiplied by many taxpayers, when it comes time to get those tax forms together. In a March 1 letter to clients, economist David Malpass of Encima Global, who served in the Reagan administration Treasury Department, wrote, "interest income is one of the key contributors to the weakness of personal income and real personal income."

The Commerce Department's Bureau of Economic Analysis, which keeps track of this sort of thing, reports that personal interest income received by Americans in 2011 was $997.5 billion. That's down 28% from the $1.382 trillion in interest Americans earned in 2008. Part of the story may be that Americans who lost jobs have spent down their savings accounts and so have less in the bank to earn interest on, but part of the story, too, is that the low interest rates mean whatever money is left in the bank is generating less interest — to be precise about it, $384.5 billion less interest in 2011 than 2008.

Now, if President Obama or Congress announced that they were going to raise taxes in a way that would take $384.5 billion a year out of American pockets, there would be a huge uproar about it. It would be the lead story on the evening news and there would be 30-second political commercials about it. With zirp, on the other hand, you might see some complaints from Ron Paul, from the Wall Street Journal editorial page, or from a few congenitally cantankerous hedge fund managers, but otherwise, the silence has been deafening.

Mr. Obama has even tried to make a virtue of it. At his press conference last week, he said, "Congress should pass my proposal to give every responsible homeowner a chance to save an average of $3,000 a year by refinancing their mortgage at historically low rates….That would make a huge difference for millions of American families."

Mr. Obama is correct that the low interest rates help Americans with mortgages who want to refinance and who are able to do so. But what about those Americans who sold their homes in 2006 or 2007 and have been renting since then? What about Americans who own their homes free and clear of any mortgage?

It's not only savers with interest-bearing accounts who are affected by the zirp. The formulas for businesses to fund their pension funds are based on interest rates, so businesses are reportedly being hit with significant additional pension funding obligations because the rates are so low. The banks are affected, too—if consumers don't want to deposit money there, the banks have to turn to other ways of funding their operations, such as borrowing or issuing equity.

Higher interest rates would have costs, too. They might be good for savers, but not as good for those who need to borrow money. They might slow economic growth, or further depress housing prices.

The person who sets the zirp, the chairman of the Federal Reserve, Ben Bernanke, is appointed by the president and testifies regularly before Congress. But that's an awfully indirect method of democratic accountability. In the rest of the government, those with the power to shift hundreds of billions of dollars out of the pockets of savers and into the pockets of others through government decisions at least have to stand for election themselves every once in a while.

Ira Stoll is editor of FutureOfCapitalism.com and author of Samuel Adams: A Life.