What Happened to my Interest Income (see your IRS Form 1099)?

Two days ago, the minutes from the January 2010 meeting of the Federal Open Market Committee, which sets short term rates in the United States, were released. They included the following statement, “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” You can access the entire press release about their actions at: http://www.federalreserve.gov/newsevents/press/monetary/20100316a.htm  

The public press interprets this action as a measure of the Feds thinking that low interest rates will promote a borrowing environment that will promote economic growth, a not entirely incorrect analysis but most certainly not a complete analysis. So, the stock market continues to hold to a tenuous rebound while most every indicator of real economic activity and growth either set or maintain new lows. The thinking is, “Rates are low, good times they are a comin’. Them Washington folk sure must know what they be doin’.”

Tax receipts at all levels of government go down. Spending either holds or rises. More deficits. More debt.

For the regular folk, there is a significant and maybe not so “unintended consequence” of the actions of Bernanke and eight of the other nine FOMC members voting to keep rates low. We don’t get paid for our bank balances. Any of us who have recently prepared our 2009 tax filings know that there is almost no such thing as a 1099 IRS Form for Interest Income of any dollar consequence. If you have a recently issued Certificate of Deposit or a Money Market Account at a bank or an investment firm you know of what we speak. Hundreds of billions of dollars are being placed with banks and investments firms and they are paying nothing for the deposits. Yet, if you go to borrow at the bank (for those of you who have forgotten of what we speak, borrowing at a bank is something that people do for worthwhile purposes unless you happen to have a lower Manhattan, New York City mailing address) you will find that the interest rates are not measured in basis points (a basis point is one, one hundredth of one percent or .001) as are the quoted rates for deposits but are measured in multiples of percents such as 5% or 8% or, if you borrow via the device of choice for many Americans, a credit card, the rate may be 15% or, heaven forbid, 21%.

Have any of you noticed a decline in the quoted rates for credit card borrowing to match the substantial reductions in deposit rates?

Why would the Fed permit this imbalance to occur? Banks pay almost nothing for deposits and receive substantial rates for loans or credit card borrowings? This can’t be good for economic growth can it?

Why don’t they just set the rates for loans much lower and then more people will borrow at the lower rates?

Why don’t they just tell the banks running the big credit card lending programs to lower their rates from 15 or 18 or 21% to 8% or 6%? That would surely lower borrowing costs for many people; lower their monthly payments; free up money to be spent on necessities and other expenditures?

Here’s why. You and I are the designated capital providers to Wall Street lenders, banks, investment firms and credit card programs. We are the ones who get to give them our deposits for nothing while they lend it out for rates as high as 21%! Their capital balances were devastated by the losses they incurred financing the bubble in real estate prices and other bad lending activities. They lost hundreds of billions of dollars by not being good stewards of their banking licenses. They lost billions of dollars by paying themselves exorbitant wages and bonuses based on the temporal, gossamer paper profits that disappeared as their self created house of cards collapsed. You think we got screwed when the fancy dudes at Treasury and the Fed bailed out Wall Street’s financial fools? Think again. Look at your Form 1099’s for 2009. You are paying much more right now for the ongoing bailout compliments of the geniuses at the Fed. Those low rates dictated by the Fed are your government’s ongoing subsidy of rebuilding the financial systems capital accounts. You are investing in rebuilding the capital account of your bank and your investment firm. Only it is done in such a manner that you get nothing to show for it. No stock certificate. No Senior Security such as a Debenture or a Preferred Stock. Not even a toaster. No nothing. Each dollar in a low earning bank deposit, CD or Money Market Account is a gift from you to the Federal Reserve Bank for their failure to do their job; or a gift to a fat cat banker who took risks for which there is no penalty or fine; or a Wall Street entity that Messer’s Bernanke, Paulson and Geithner and a ton of Wall Street lawyers deemed too big to fail. Washington DC bailouts are not just money borrowed from China. It’s money taken from you by not paying you for your money. If you or I took money from someone and gave them nothing in return we’d either go to jail or be called crooks or Ponzi schemers. In Washington DC they give these bad actors the Presidential Medal of Freedom and a government pension check.