The True Bank Bailout is Ongoing

From The Inoculated Investor blog:

I had a light bulb go off over my head the other day. Well, maybe it was less of an “aha” realization than an “oh yeah” recognition of the relevant facts. When we think about the bank bailouts that have occurred over the last two years we think of a number of measures. First, there were the direct interventions like the one the Fed engaged in by facilitating JP Morgan’s purchase of Bear Stearns. Another one that is still under the radar to most non-professional investors was the bailout of Fannie and Freddie. While the preferred share of those companies that had found their way onto banks’ balance sheets did get hurt by the fact that F&F were forced into conservatorship, the fact that the agency paper was not made worthless prevented the banks from suffering further losses. Then of course we have TARP, a bank slush fund created after Hank Paulson put a gun to the head of Congress. As Elizabeth Warren continues to attest, we have no idea what happened within these banks to the money they received. I understand that money is fungible (making it irrelevant what the precise funds coming from TARP were used for) but the goal of the TARP-enabling legislation was not have banks use the extra funds to engage in risky activities or hoard the money by refusing to lend it out. Based on just about any data you look at, this is exactly what the TARP money was used for.

Then of course was the FDIC’s backing of bank debt, a subsidy that allowed banks to issue debt at fractions of what it would have cost without the FDIC guarantee. Furthermore, allowing Goldman and Morgan Stanley to become bank holdings companies basically overnight was a bailout that allowed them access to additional cheap funding from the Fed and FDIC. We also must not forget (how could we—this is the story that unfortunately never dies) the bailout of AIG’s counterparties on all of AIGFP’s terribly ill-conceived derivative bets. Each detail that emerges in this ongoing saga suggests that the banks were paid 100 cents on the dollar for assets that were worth quite a bit less, without any regard for the consequences for taxpayers.

Next, the how can we forget that the FASB grudgingly relaxed mark to market accounting rules, a decision that may more than anything else have allowed the banks to postpone the day of reckoning when it comes to the worst assets on their balance sheets. I don’t think it is a coincidence that along with the confidence built after the so-called successful stress tests that the banks stocks have rallied massively since then. This fortuitous reversal has allowed banks to raise additional equity at prices that were not unreasonably dilutive and the increase in stock prices has inexplicably calmed creditors’ nerves and led to narrower CDS spreads despite many risks not having been eliminated.  Finally, it appears that all of the new Treasury issuance and Fed activity through primary dealers has provided a windfall of trading revenue for the big banks. I haven’t really dug into the data on the profitability of government desks but you know the banks are making basically risk free profits from all of the government’s interaction with the markets.

Wow. I had never really enumerated the number of different full scale and quasi-bailouts before. It really is unbelievable and from what have I read regarding US history, also unprecedented, at least in terms of scale. No doubt I have also forgotten some events and details but the message that the government sent to the banks was clear: not only are you too big to fail, but we are also going to do whatever we can to help you get back to profitability and stabilize your balance sheets. Unfortunately, the message of US taxpayers has been commensurately blunt: despite the fact that the banks had a hand in this crisis, their health is pivotal to US economic prosperity and it is your job(my dear taxpayer) to backstop them and suffer the associated economic hardship as we nurse the banks back to health. It was within this context that I realized which bailout/subsidy was the most unappreciated and maybe even most harmful to people on Main Street.

What I am referring to is the zero interest rate policy (ZIRP) of the Fed. While the taxpayer losses that will eventually come out of TARP, FDIC debt guarantees, and the explicit extend and pretend policy are tough to quantify, the impact of miniscule rates on US savers is pretty easy to determine. According to this data from ICI, at the end of December 2009 there was close to $3.3 trillion in US money market funds. I don’t even have to include checking and savings accounts that are paying virtually no interest to illustrate the impact of low rates on savers. Specifically, according to Bankrate.com, the current average money market rate is 1.03%. So, if there were no outflows and the rate remained the same for the rest of the year (clearly this will not be the case but I want to illustrate a point here), that $3.3 trillion would earn total interest for a full year of about $33 billion or $110 for every one of the 300 million people in the US.

Unfortunately I had some trouble finding data on historical money market rates. But, on the Fed’s website there is data going back to 1964 on the average 6 month CD rates.  Right now the average rate on standard six month CDs is about 1.03%, almost exactly what the money market rate is offering. Let’s just assume that rates on these short duration CDs are a reasonable proxy for money market rates. The 1964-2009 average is about 6.42%. If you exclude the high interest rate environment that was pervasive in the mid-1970’s and 1980s, the average rate from 1990 to 2009 was about 4.37%. So it is not hard to see the impact of the Fed’s low interest rate policy has had on people who depend on interest on their cash. Using the 1964-2009 average rate implies $211.89 billion or $706 of interest per year per person. Even the 1990-2009 average rate yields $480.70 of interest per year per person. I would say that when you have so many people struggling to meet end meat these differences are not trivial. In fact, I would even go as far to say that this is a form of stealing from the poor to give to the rich. Not exactly the kind of behavior that leads to a stable society.

I can already hear the Fed apologists and proponents of low interest rates as a cure for all our ills saying that higher interest rates would surely destroy an economic recovery and thus ZIRP is justified. This may be true to some degree. I do understand the need keep interest rates low to encourage borrowing in hopes that people will start to invest again and the economy will rebound. Unfortunately, the Fed’s position that interest rates should stay low for an extended period of time in order to help revive the economy is kind of like an arsonist leaving the fire house on indefinitely after he puts out the fire he created. Yes, maybe it is necessary but what further damage is being done? My answer to that is the savers are being punished  by the low interest rate environment while the banks use low short term rates, just about interest free funds from the Fed and a steep yield curve to literally print money. Yes, this helps banks earn their way through the cycle. Yes, we do want a functioning banking system in the US. But none of that takes away from the fact that in order to achieve those goals people on Main Street have taken another hit to their incomes. After the banks help precipitate a global financial crisis that caused many asset classes to plunge in value and severely damaged the retirement plans of millions of people, somehow that just doesn’t seem fair, does it?

I would be remiss not to mention that low interest rates cause people who are searching for yield to go further out onto the risk curve whether they can afford to or not. While there is little data out there that suggests that Main Street has jumped back into stocks, there is no question in my mind that banks, traders, and hedge funds have once again embraced risk. The problem is that the structural problems and risks inherent in our financial system have not disappeared. If anything, the risks are even more concentrated than before and with Congress locked in irrelevance we are unlikely to see meaningful reforms anytime soon that would address this problem. So when you have fewer players making bigger and more flammable bets with cheap money provided by the Fed, it creates a dangerous cocktail. What happens if it all blows up again? Well, even if Washington decided not to bail out the culprits (highly unlikely as that is) the impact on asset markets would surely only harm savers and retail investors even more.

So, as we employ all these means in an attempt to determine what went wrong and how to stop it from happening again, we can’t forget that not everything is solely visible through the rear view mirror. In fact, we can see the pain caused by ZIRP as we look out through the front windshield. Let’s just hope the people in charge of reforms and future policies remember that it is Main Street that loses the most when the Fed and the banks create huge booms and busts. For the US to create a sustainably prosperous economy and high quality of life society, I have no doubt this dynamic must change. And soon; before we have hit the point of no return.

Comments

[tom a taxpayer]

Innoculatedinvestor - Wow! Thanks for covering the waterfront with this great article. 

Starting at your first bailout example, Bear Stearns, this initial bailout shocked Volcker, who on April 8,2008 said:

"Former Federal Reserve Chairman Paul Volcker questioned the central bank's decision to rescue Bear Stearns Cos. with a $29 billion loan, saying it was at ``the very edge'' of its legal authority."

"``The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices,'' Volcker said in a speech to the Economic Club of New York."

http://www.bloomberg.com/apps/news?pid=20601087&sid=aPDZWKWhz21c

 Mr. Volcker was being as polite and circumspect as he could, but his message was clear. Volcker's alarm was sufficient cause for Congress and federal prosecutors to investigate Ben and the Fed for possibly breaking the law, that is, criminal violations. But nothing was done.

 So, the Fed and Treasury became bolder and bolder with one Ponzi bailout scheme after another. Similar to the financial engineering and fraud committed by Wall Street and the mortgage industry that created the crisis. No wonder the Fed and Treasury hired Wall Street's "best and brightest"...who better to design and do the dirty bailout work.

Now, the litany of Ponzi schemes created by the Fed and Treasury (with Wall Street pulling the puppet strings) is a bloated carcass about to explode.

[JR]

Thanks for putting all this together, innoculatedinvestor. This is truly a story of reward the guilty and punish the innocent.  Let the record show that here for history to read is the record of the true bailouts, the true injustices, and the unspoken American stories of tragedy brought by the financial steamroller piloted by a handful of private Federal Reserve owners intent on a scale of grand larceny never before attempted in this land of the free.

The hard facts, such as  “it appears that all of the new Treasury issuance and Fed activity through primary dealers has provided a windfall of trading revenue for the big banks…making basically risk free profits from all of the government’s interaction with the markets,” when taken together, make a powerful statement. The full impact of these policies on Main Street has generally been ignored by the MSM, yet it is THE story of these economic times. An impoverished Main Street, when finally given a chance to vote its opinion on the “associated economic hardship” it has suffered, spoke loudly and clearly on January 20, in Massachusetts.

As you say, the number of different full scale and quasi-bailouts  “really is unbelievable and from what have I read regarding US history, also unprecedented, at least in terms of scale.” And I agree with your conclusion of “which bailout/subsidy was the most unappreciated and maybe even most harmful to people on Main Street…the zero interest rate policy (ZIRP) of the Fed. While the taxpayer losses that will eventually come out of TARP, FDIC debt guarantees, and the explicit extend and pretend policy are tough to quantify, the impact of miniscule rates on US savers is pretty easy to determine. According to this data from ICI, at the end of December 2009 there was close to $3.3 trillion in US money market funds. I don’t even have to include checking and savings accounts that are paying virtually no interest to illustrate the impact of low rates on savers.”

And, as you say, “Unfortunately, the Fed’s position that interest rates should stay low for an extended period of time in order to help revive the economy is kind of like an arsonist leaving the fire hose on indefinitely after he puts out the fire he created. Yes, maybe it is necessary but what further damage is being done? My answer to that is the savers are being punished  by the low interest rate environment while the banks use low short term rates, just about interest free funds from the Fed and a steep yield curve to literally print money.”

I salute you!

[Anonymous]

Someone needs to do something before we get to the point that the IMF needs to step in (and we have to sacrifice a certian degree of our sovereignty in the process.)

There was an article called [url=http://www.theatlantic.com/doc/200905/imf-advice]The Quiet Coup[/url], published in May 2009 edition of The Atlantic Weekly written by Simon Johnson, a former chief economist at the IMF that made a pretty accurate diagnosis of problems in our current banking system, as well as the problems with the way the government was trying to fix the problem (and still is), as well as recommendations for how to “right the boat”...

Now I have to admit, while I’m not a big fan of the IMF, what he proposed at the time still makes quite a bit of sense (i.e., flush out the oligarchs and their henchmen, force banks to open up their books and mark assets to market, dissolve/break up the insolvent institutions, etc.) I just don’t think that the political will is out there do to such a thing – we’re not up against the proverbial wall yet.

Some of the suggestions sound similar to the ones that Tyler reported on earlier this week [url=http://www.zerohedge.com/article/volcker-revolution-providing-some-much-...]here[/url] (in a watered down form), but they're much clearer in the Atlantic article.

[rawsienna]

Yes.  It is a wealth transfer from savers to banks - that is what it is meant to be, along with pulling demand forward.  The policy is needed for banks to get re-capitialized. THe "crime" here is that the bank executives that put us in this mess are the ones getting huge bonuses thanks to the steep yield curve.  Somehow we need to figure out a way on increasing the tax rates on financial sector bonuses during steep yield curve environments or whenever the FED needs to bring rates below long term gdp potential. 

Rates do need to be low but they do not need to be zero nor should the FED be explicit in the time frame of the policy. It distorts risk taking and creates a information feedback loop from the market that can be misleading. The FED needs to be more transparent on what they own on their balance sheet and less transparent on their plans on rates. Let the market price in the correct risk premium and you would have less one way bets in the short end.  Fed did not learn the lesson from the Greenspan years. If you tell the market what you are going to do and give em a time frame, you will get a biased allocation of risk and the risk premium that does get priced into the market is meaningless  - ONE WAY BETS ENCOURAGED BY THE FED HELPS CREATE BUBBLES.  WHEN WILL THEY LEARN?

[THE DORK OF CORK]

Increase the capital requirements for the banks and you will not need to worry about bonuses - this micro management of banks is a diversion from the real cause of banks rewarding themselves for doing nothing  - the state is taking the risk for these bogus institutions

Banks only make money from risk management and when the risk is transferred to the state it will make more money until the state collapses

[JR]

Using John Williams' Shadow Government Statistics (SGS) Inflation Calculator, $100 in 1970 by Bureau of Labor Statistics, CPI-U (Urban Workers, All Items), was worth $542.59 in 2009, or $1677.36 in Shadow Government Statistics (SGS) Alternative CPI.

The SGS CPI chart on Williams’ home page “reflects the estimate of inflation for today as if it were calculated the same way it was in 1990. The CPI on the Alternate Data Series tab reflects the CPI as if it were calculated using the methodologies in place in 1980. In general terms, methodological shifts in government reporting have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.”

I agree with you, Dork. Was it a conspiracy theorist I heard say on National Public Radio (NPR) Friday that the big money on Wall Street is being racked in by a handful of financial “oligarchs”?  Nope, it was a large stockholder in investment banks such as Goldman Sachs.  He highlighted the increasing complaints of investors who say their investment bank shares or not benefiting from the windfalls reflected in executive bonuses that are hitting the stratosphere, often paid to the people most responsible for risk failure. (Goldman, last trade: 154.12 (52wk Range 65.53-193.60)

[THE DORK OF CORK]

If the Oligarchs are not taken out soon by a Republican elite we will come to know that the  Dark Ages were called the Dark Ages for a reason.

[Astute Investor]

If you exclude the high interest rate environment that was pervasive in the mid-1970’s and 1980s, the average rate from 1990 to 2009 was about 4.37%. So it is not hard to see the impact of the Fed’s low interest rate policy has had on people who depend on interest on their cash.

In many ways, ZIRP is as harmful as the ravages of inflation in the mid-70s to early 80s when it comes to conservative investors / retirees who rely on interest income.

[Anonymous]

A zero interest rate policy also puts a huge amount of pressure on defined benefit pension plans and insurance companies. In each case the pension plan and insurance company needs long lived earning assets to match the long live claims. In the past these could be matched using a good quality long term bond. Pushing down interest rates across the board has made matching these assets and liabilities much more difficult. In the case of private and public pension funds the shortfall needs to be made up from corporate profits or higher taxes in the public sector.

Things get worse if the plan has a lump sum feature, as by law, the lump sum will be keyed to the most favorable (read lowest) interest rate for the participant, thus equaling a larger lump sum. The plans will be stripped of ever larger amounts of assets thus losing their future earnings potential.

In the case of insurance companies, they have entered into annuities in the past with guaranteed earnings rates some at 6% or above. Where will they find assets to out-earn these guarantees.

The other long lived traditional matching asset for pensions and insurance companies are real estate projects like shopping centers and office buildings. Often this would be in the form of outright ownership. I would suggest with the ongoing commercial real estate crash that would not be a good place to invest assets.

Leo Kovalikis, the resident pension expert has not commented on this disconnect in the pension area. I would be curious how he factors this unintended consequence of a zero interest rate policy into his bullish analysis of equities.

[Anonymous]

ZIRP was also used to encourage safe money to pile back into risk assets. In this sense I think ZIRP has been quite successful.

[Astute Investor]

Nice article.  I have argued that ZIRP is simply a wealth transfer from savers to borrowers.  According to David Stockman's op-ed in the NYT, it cost savers approximately $250 billion in 2009.  It's certainly one of the major costs of the bailouts, but the citizenry doesn't seem to recognize it.  Maybe it's because there are more borrowers than savers.  All the focus is on the repayment of TARP by the banks.  Unfortunately, the TARP dollars are a tiny pimple on the gargantuan bailout butt in comparison to the costs of ZIRP.

Why has the pendulum swung so sharply where savers are held in such low esteem?  Not too many years ago, savers where admired (paying off mortgage, eschewing debt, etc.).

People complain about the government, Fed picking the winners and losers during the financail meltdown.  In a similar light, TPTB should stop favoring debtors over creditors.

[mikla]

+1

It's certainly one of the major costs of the bailouts, but the citizenry doesn't seem to recognize it.

...and of course, that's why they are doing it.

This is similar to why the Fed is *paying* banks on their reserves ... they are paying banks to not lend.  Since the banks borrow the money from the Fed for free, and leave it on deposit at the Fed to collect interest on the paid reserves, this is direct cash-to-the-banks for no societal benefit.  Similarly, the citizenry does not seem to recognize it.

[THE DORK OF CORK]

The banks will have to recapitalise one way or another before they can even think of lending again , if they start lending now they will only cause consumer inflation and their investments will turn sower but with the risk capital structure of banks not paying for its mistakes it is punishing depositors and rewarding risk capital that is apparently not risky - if bond holders are wiped out more interest income will flow to prudent savers. Once the banks have become recapitalised then new bond holders are free to move in a take a risk premium.

America has a great advantage in its reserve currency status and is free to print money to cover the deficit - this is causing huge problems outside the states since non US citizens have to drastically reduce their consumption and living standards to square the circle

This is causing huge geopolitical tensions and strife which the US will have to deal with - China currency is pegged to the dollar so most of the heat is being felt in the Euro zone bloc and Japan where countries  will have no choice but to reduce their deficits through massive tax increases since the powers in charge will not reduce the debt levels and destroy favoured politicalized capital

These are interesting times.......

[Thoreau]

Dead On. +10

[Madcow]

Newsflash - 

We are ALREADY well past the "point of no return."  Public obligations can no longer be serviced without raising taxes to levels that would destroy the economy.  Money can't be 'borrowed' to make up the difference - at any rate - because it DOESN'T EXIST IN SUFFICIENT QUANTITIES. 

Its called a deflation trap - and there are but 2 escapes - both of which are not going to happen - 

escape #1 - hyperinflation (50% decrease in purchasing power of USD)

escape #2 - voluntary dismantling of the state (75% reduction in size and scope of government)

[mikla]

Its called a deflation trap - and there are but 2 escapes - both of which are not going to happen - <snip, hyperinflation or reduction in size of the state>

GM's bankruptcy was "not going to happen" also.  ;-))  All over the world people are talking about things that are "not going to happen", like bankruptcy of California, or sovereign default by Greece.  ;-))

The math isn't there to service the debt.  Deflationary collapse, followed by hyperinflation, followed by sovereign default.

Will happen.

[Anonymous]

'...stealing from the poor to give to the rich'? Please. The only individuals who could make a lot of money at 6% are already rich.

[Mr Lennon Hendrix]

Damn it Ms. Warren get to work, please!

Now Volker chases the DRAG on?

Gold snitches!!!!!!

[deadhead]

Fantastic piece.  Excellent!  A great summary!!

[Anonymous]

What did the Supreme Court just do to our democracy?

http://freespeechforpeople.org/

[damage]

Why are so many idiots upset as this wonderful decision that should have been 9-0?

[Anonymous]

You are right it should have been 9-0. 5-4 is good enough. The unions and trial lawyers have been doing it underground for the Dems for decades. The Libtards are pissed because they don't want the competition.

[Anonymous]

“Fascism should more appropriately be called Corporatism because it is a merger of state and corporate power” - Benito Mussolini

[Charles Mackay]

I agree with everything except the end - we are well past the point of no return.  I am not sure how the Fed can ever remove itself from the QE/ZIR/bailout policy it has undertaken on its own without destabilizing the whole financial system.  Most likely, events we can not yet clearly see will force the Fed to raise interest rates and cutback on QE.  The reason that is vague is that we do not know if the Fed will first risk hyperinflation - or some high rate of inflation - to keep the banks earning what amounts to a direct subsidy of the banks - by devaluaing the Fed dollar by making its backing (Fed assets) worth less over time (thorugh bailouts and investing in for example mortgage related assets).   

So we can basically expect going forward that Fed controlled rates will likely always remain lower than the rate of inflation.

[THE DORK OF CORK]

Well if you are right and we are well past the point of no return , why not gamble with the system with some shock therapy

Volcker raised interest rates to 21% and punished anybody selling consumer stuff - why not punish the very guys that got us in this mess

In my belief it is our only hope and will push money into productive investments.

[THE DORK OF CORK]

The authorities are farming us and that is indisputable

Insolvent banks get free money from a central bank  to recapitalize and use this to buy 30 year at let say 4% - citizen slaves then pay tax and this revenue is used to pay the interest on this debt.

This is basic banking at on one level I have no problem with this mechanism

My problem is with how the capital structure of the banks have been abused. The "risk" capital of bond holders are still getting 100cent on the dollar+ a premium interest and the equity is still in the game and in some cases is shockingly still getting a dividend

This implicit subsidy of favoured capital creates huge distortions within the economic system and favours the wasteful use of "risk" capital in commercial banks.

The continued propping up of a failed form of "capitalism" is doomed as the taxpayer is no longer able to consume the products that the bank relies on for revenue.

This vortex of monumentally corrupt governance is shocking in its scale and brazenness.

[Anonymous]

great article

[Anonymous]

As a nation, aren't we net borrowers? Is the impact of ZIRP on savers worse than the freebie given to those with loans tied to 3M Libor? I'm not saying that's fair either, but there's two angles here.

[Anonymous]

you are exactly right
now please buy a larger typeface

[Anonymous]

Great points, but this JUST occurred to you? Bernanke has been stealing my potential interest income for two years now with ZIRP - tens of thousands in my case. And he has given it to the banksters. also, he has diluted the purchasing power of the dollar through printing - another way he has "paid" for bankster bailouts - and an insidious one, since your bank account still has the same amount of dollars in it - they are just worth less.

[Anonymous]

I don't disagree with you on ZIRP, but as we are in a deflationary environment, you need to look at real rates, rather than nominal rates. Given the interplay with taxation based on nominal interest earnings, 0% interest in a 0% CPI environment has a higher after tax yield (0%) than than 3% in a 3% CPI environment. (-1% for the 33% bracket). Not great, but not as bad as it has been in other eras. In fact, the big loser under ZIRP is the government sector, which loses the "inflation" tax on nominal yields.

[Anonymous]

The issue is that consumers are not able to benefit from ZIRP. Banks borrow at 0% with a 0% CPI, but consumers pay credit card interest rates that have risen up to 20 - 30%. Even mortgage rates haven't fallen as much as the short term rates that the Fed controls. Ultimately, the economy rests on interest rates available to individuals (consumers) whether they use it to consume for themselves, or to borrow to fund a small business venture.

Don't forget the counter-productive nature of ZIRP also. For anyone with savings, who doesn't want to borrow, they have less money to spend. If you have $100,000 at 5%, you can spend $5,000 per year and maintain your "emergency" savings fund. At bank interest rates of 1%, you receive $1,000. That means you squeeze money out of more potential consumers. It isn't just debt-laden consumers who can't spend, it is also those flush with cash, unless they suddenly become willing to spend their savings. The decreased spending means lower GDP, but more importantly, more layoffs.

Finally, forced "price" inflation won't help the jobs picture, especially since the rise in prices is due to higher commodity costs. If a store sells $1 Mill worth of merchandise, what is truly important, in terms of labor force, is number of real items sold. If each item is $1, you need enough staff to sell 1 Mill items. If each item is $1,000, you only need enough staff to sell 1,000 items. You need far fewer jobs to sell the 1,000 items, even though the Fed successfully "reflated" prices. The reflation sets a price floor, but with declining incomes, it just means fewer total sales.

[Orly]

Yet it is government that is creating the most jobs currently.  That means that there is another, more stealthy black hole that few consider:

If government tax receipts are shrinking and government is doing all the hiring, then the government has created yet another off-balance-sheet debt sieve.  As the government hires, tax revenue sinks further and the apparatus of bureaucracy becomes a looming weight around our necks.

That is altogether unpleasant.

[Rainman]

Public sector employment has indeed become an absolute conundrum.

 Maintaining current levels = fiscally unsustainable.

 Reduce from current levels = unemployment spike.

 Current solution = furloughs and attrition.

 Necessary solution = defined deficit reduction plan ( fed, state, munis ) 

[Dirtt]

Unpleasant?  In a Xanax-induced state I might use unpleasant.  In reality it is revolting.

And that is where events like this lead.  To revolution.

[Anonymous]

I don't disagree with you on ZIRP, but as we are in a deflationary environment, you need to look at real rates, rather than nominal rates. Given the interplay with taxation based on nominal interest earnings, 0% interest in a 0% CPI environment has a higher after tax yield (0%) than than 3% in a 3% CPI environment. (-1% for the 33% bracket). Not great, but not as bad as it has been in other eras. In fact, the big loser under ZIRP is the government sector, which loses the "inflation" tax on nominal yields.

[JR]

The ancient virtue of thrift is under attack to support the ancient vice of reckless oligarch larceny and  “Keynesian” spending.  The lie of oligarch inflation is meant to take the people’s money.  That’s the reason for engineered inflation.

There’s nothing lower than to lend support to the debauching of the currency.  What deflation there will be, if any (in 2008 the U.S. was wrestling with the worst food inflation in 17 years*), is just a momentary pause in inflation. Inflation is the lifeblood of America’s tryants.  And what do they want?  They want the product of your labor, so they can put it in their pocket.  And they will use any CPI lie to achieve it.

It’s savings that creates jobs.  Dissavings is a job killer

As to retaining the value of your labor in a Keynesian environment, I needed to renew a CD this week; I was offered 1%.  After taxes, that’s about a .006% return.  Most baby boomers in their peak saving years (ages 46-64), says Dean Baker, have little savings--the Median 45-54 - @$50,000 Median 55-64 -@ $60,000--as reported in a recent Zero Hedge post, Observations On The Aftermath Of The Artificial Recovery From Dean Baker.  At .006% interest the annual return on $50,000 is $300. Also, the COLA increase in Social Security to combat inflation in 2010 stands at 0%. 

And all the while the oligarchs, spouting Keynesianism and producing nothing, stint themselves nothing—spending their billions in bonuses and Wall Sreet earnings lavishly on the number of cars they own, on travel, diamond bracelets for the wives and mistresses, fur coats, yachts, island estates, jets, servants, chauffeurs, derivatives gambling…  And the media touts the Keynesian mantra that they’re giving employment and spreading the money.  Now, they’re broke, writing their bank manager, Ben, and demanding your tax money, your savings, to boost their bonuses to billions again, to continue God’s work--spending your money to "revive their economy" and retain global power.  

“Savings,” of course, is a form of spending, but it is an investment form, even if in a commercial or savings bank, that grows capital wealth and income to spend on the nation’s productive capacity.

And if you think there is no savers’ plight, try to save a down payment for a home at .006 percent in the current CPI environment.  Try prudently saving money on your stablized income while you wait for house prices to return to sane levels. Try combating Fed banker policy  “in the name of home-ownership” that refuses to allow house prices to return to “sensible” levels… to let the market find its bottom, to correct its excesses.”

_____________________________

*USDA Food CPI and Expenditures: CPI for Food Forecasts (Updated December 24, 2009)

Changes in food price indexes, 2006 through 2010 (Percentage Change):

All food: 2006, 2.4; 2007, 4.0; 2008, 5.5; Forecast 2009, 1.5 to 2.5; forecast 2010, 3.0 to 4.0 (Food away from home 2010—3.5 to 4.5).

 http://www.ers.usda.gov/briefing/CPIfoodAndExpenditures/Data/cpiforecasts.htm

[Anonymous]

Good Point you are making there,and once agin those who play by the rules get screwed..You pay your bills,dont leverage your personal balance sheet and try and earn some interest on your savings,and they give you 50bp-100bp !! Also the poor local s/l who sees their FDIC premiums jump 300-400 pct to bail out the big banks--a true travesty

[masterinchancery]

And then you pay income taxes on it.  Wholesale robbery by your friendly government.

[Seal]

"before we have hit the point of no return" HA HA HA