NYTimes lets Walker Todd denounce Fed for coddling big banks


0.2% Interest? You Bet We'll Complain

By Gretchen Morgenson
The New York Times
Saturday, March 3, 2012


Stop your bellyaching.

That was the message delivered last Thursday to Americans who today make almost nothing on the savings in their bank accounts.

It came from Sarah Bloom Raskin, an insider at the Federal Reserve. Ms. Raskin, one of the governors on the Fed board, made the usual disclaimer that her comments reflected her own thinking. But Fed watchers said her remarks probably mirrored views inside the central bank.

The issue -- as anyone looking for income-producing investments knows -- is that the Fed drove down interest rates to almost zero to shore up big banks and an economy that those banks helped drive off a cliff. Now savers, who did nothing to create the financial crisis, are being punished.

This is one of the more troubling paradoxes of the Fed's rescue of the financial system. And, according to Ms. Raskin, it is likely to continue for some time.

So suck it up, America: If it's good for the financial system, it's good for you.

... Dispatch continues below ...


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Yes, Ms. Raskin, who delivered her message during a speech in Westport, Conn., nodded at how low rates put pressure on savers. But she quickly extolled the advantages that rock-bottom rates offer to ordinary Americans.

"Many households are benefiting from the low level of interest rates, and some critics of the Federal Reserve's accommodative monetary policy seem to minimize this point," Ms. Raskin said, according to prepared remarks posted on the Fed's Web site. "Purchases of motor vehicles and other household durables can be financed more cheaply, and in many cases, households have been able to refinance their mortgages into lower-rate loans, freeing up income for other uses."

Apparently Ms. Raskin hasn't tried to refinance a home mortgage lately. I have, and the process was labyrinthine, glacial, and exasperating. Putting potential borrowers through the wringer is a bank's prerogative, and I have no interest in returning to the days of E-Z Loans "R" Us.

But the idea that legions of people have been able to refinance their mortgages recently is a bit optimistic. The credit scores associated with the mortgage I refinanced were around 800, the loan was for only about 30 percent of the property's value, and no equity was taken out of the property. Given this experience, it seems clear that troubled borrowers -- including those who are underwater on mortgages and who most need assistance -- are least likely to receive it.

Walker F. Todd, a research fellow at the American Institute for Economic Research and a former assistant general counsel and research officer at the Federal Reserve Bank of Cleveland, said Ms. Raskin should know better about the toll Fed policy is taking on savers.

"She blithely assumes that everyone who could refinance their mortgages at current interest rates has done so," Mr. Todd said. "She ignores effects of credit scoring and outrageous fees banks are charging for those refinancings. I invite anyone who will accompany me to visit the local branch of any bank in Cleveland and to inquire about what is required exactly to be able to refinance at the currently advertised rates."

Ms. Raskin is a former commissioner for financial regulation in Maryland and has spent time as a managing director at the Promontory Financial Group, a regulatory consulting firm in Washington. On Friday, when I asked for an on-the-record interview with her, a spokeswoman said she was not available.

In her remarks in Westport, however, Ms. Raskin played down the effects of low rates on investors. She said that less than 7 percent of household assets were held directly in certificates of deposit, savings bonds, and the like. "Instead, the bulk of household wealth is held in stocks, retirement accounts, business equity, and real estate," she said. "For these other types of assets, rates of return depend primarily on the strength of the economy and how fast the economy is growing. Thus, these returns should be supported, over time, by the accommodative monetary policy that we have in place."

But the 7 percent figure cited by Ms. Raskin comes from data collected between 1998 and 2007, before the crisis hit. With housing prices still declining, consumers' home equity holdings have collapsed. Meanwhile, it's a good guess that the percentage of household assets in safe-haven accounts has risen.

Considering the Fed's plans to keep interest rates near zero through late 2014, it looks as if this policy will wind up being in place for six years. That's a mighty long drought for savers. But in Ms. Raskin's view, it's a small price to pay for a sound economy.

The Fed has been following this plan for more than three years now. Yes, we are seeing some improvements here and there. But the transfer of wealth from savers' pockets has been immense. And with the price of gasoline and other goods going up, the vise is tightening.

"We are rapidly approaching a situation," Mr. Todd said, "where Congress and the administration are unwilling to confront bankers on the need of thoroughgoing reform of everything involving household finance and credit reporting/credit scoring because it would cost the bankers money to do so." The big banks, meanwhile, complain bitterly about regulation but don't mention how regulation might have helped mute the crisis.

"Our policy makers do need to think about what we are transferring to the banks," Mr. Todd said. "Why is the public obligated to provide them with all those subsidies? Nobody will ask these questions."

And that's a crying shame.

* * *

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