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.

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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.

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  1. A better title for this article would “Why ignorants shouldn’t comment on economic topics they don’t understand”.

    1. “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.”

      With one sentence, Mr. Stoll has adequately explained why the rest of his article is spectacularly and frightening ignorant and wrong.

      1. Its anti-Fed porn. It sells well here.

        1. Beats the bullshit you Keynesians sell, shrike. That’s more like a snuff film than porn.

      2. With one sentence, Mr. Stoll has adequately explained why the rest of his article is spectacularly and frightening ignorant and wrong.

        With one sentence, CJ has adequately explained… nothing.

      3. If interest rates are too high, you have problems. You also have problems with interest rates that are too low – like the boom-bust in the first place. That’s what CAUSED the housing bubble.

        The solution, of course, is to have the rates set by the market – then they will be neither too high nor too low for very long at all.

        Also, that’s three sentences and they don’t prove anything. It’s like you claiming that someone saying high prices would lower demand for a good as proof that the price should be zero.

        1. The markets do set interest rates – not the Fed. The Fed only has a “policy” and the Fed funds target rate.

          1. The Fed has the power to directly affect rates via direct funds rate to large banking institutions, and also uses it’s influence through the open market committee to affect rates in the market as well. Either way, the market is not by any means a true market – the Fed’s fingerprints are all over it.

            1. “affect” vs “set” = big difference.

            2. A fund may affect the price of a stock by buying/selling but cannot set that price.

        2. Markets can be wrong for long periods of time as well. See for example stock prices in the late 90’s.

          1. With the housing bubble, there is a clear case that much of it originated from and was sustained by gov’t policy.

            Are there things like this for the several stock market bubbles that seem to have all occurred in the short time I have been investing? Did the S&L bailouts and Chrysler bailout in the 80’s affect what people invested in? Were there gov’t policies and investments and tax code that supported the tech bubble? These are the kinds of questions one needs to ask before assuming it was all the “free” market.

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  2. That head would look much better on a pike.

    1. pikes are expensive.

      1. Sharp sticks are free

        1. well, except for the carbon credit deduction you have to take for chopping down the tree.

          1. Reduce Reuse Recycle

            1. really, I should just gambol a bit and forage up a pointy stick.

              1. Make the pikes out of carbon-fiber. They’d last forever, and would result in zero bitching from the Climate Griefers.

  3. Zirp means the government can borrow forty cents of every dollar they spend; nothing else matters. Because fuck you, that’s why.

    Anybody who thinks otherwise is crazy.

  4. “Financial repression.” Google it. Learn it. Live it. Love it.

    1. at all related to Hydraulic Despotism?

  5. Why, is that Helicopter Ben’s fuck you finger? I believe it is.

    So classy.

    1. Why, is that Helicopter Ben’s fuck you finger?

      It’s widely known that all of Ben’s fingers are fuck you fingers. In fact, he is entirely composed of fuck you body parts.

      1. You’ll make shrike cry* with talk like that.

        *Or horny.

  6. They might be good for savers, but not as good for those who need to borrow money.

    Fucking price signals- how do they work?

    1. They don’t – at least not with price controls run by the Fed. Having Bernanke control interest rates makes just as much sense as having Jimmy Carter set the price of gasoline – absolutely none.

  7. Ben’s in charge of the money supply. He knows what a dollar is truly worth.

    1. I had to empty out the kitteh box today, so I know what a dollar is worth, as well.

  8. 1. We don’t live in a democracy, we live in a republic.

    2. Do you REALLY believe that putting a bunch of elected politicians would be better??? They would make the money printing from Bernake look like child’s play,

    1. “1. We don’t live in a democracy, we live in a republic.”
      Cite difference in out come.

    2. 1. We don’t live in a democracy, we live in a republic.

      That’s not Red, it’s Crimson!

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

    The democratic process is such an improvement in this area!

  10. I ain’t so good at these markets, but I am gonna comment any way cause I’m better that you sheep fucking rubes who couldn’t tell an auto shop depot from Williamsburg. And if you did, fuckers probably think I mean some place in Virginia.

  11. “Those with the power to shift hundreds of billions of dollars out of the pockets of savers should have to stand for election.”
    How the fuck is that an improvement???
    Dumb fucks, electing more dumbfucks.

  12. The only thing less likely to result in a reasonable Fed than what we have now would be to make it an elected position.

  13. It all has to do with incentives, the bureaucratic need to think somebody is in control, the human psychological need to think everything has a readily understood reason. Just tweak a few things and everything will be perfect.

    http://www.forbes.com/sites/wa…..gislation/

    1. You speak the truth, jerryskids. But you need a lobotomy first, to grasp the True Word.

      1. I always thought maybe heavy doses of Thorazine would help me cope.

  14. I can’t help it. Every time I see Bernanke’s face I think of the picture that says, “F*ck B*tches, print money!”

  15. Printing is theft. The bank is stealing the pensions, wages, and savings of citizens.

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  17. Great article. Thanks for the info, you made it easy to understand. BTW, if anyone needs to fill out a form 1099-INT, I found a blank form here http://goo.gl/Xvfmzj. This site PDFfiller also has some tutorials on how to fill it out and a few related tax forms that you might find useful.

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