Low Interest Rates – Who Wins? Who Loses?

In The Wall Street Journal this week, an op-ed piece deals with the Federal Reserve’s policy of near-zero interest rates, presumably to help our very anemic and faltering economic recovery.  Are we really in an economic recovery?  Or, are we on the edge of a double-dip recession?  Or worse yet, are we entering a depression as some seem to worry?  With interest rates near zero, who wins and who loses?  Let’s talk about it now.

According to the article, the Federal Reserve policy is primarily helping big government finance its huge deficits and helping big banks pad their balance sheets.  With interest rates this low, big government can borrow at low rates.  Similarly, big banks can profit from the spread between their borrowing costs and their lending revenues.  So, near-zero interest rates favor big government and big banks.

If the “bigs” are winners, who are the losers?  Unfortunately, main street savers and investors.  People living on savings and investments such as retired people can’t make much money on their savings and investments.  In some cases, the managers of pension funds are taking larger than normal risks with their investments, hoping to make up for the ground lost with near-zero interest investments.  Also, States that depend on taxing wealthy individuals are running into budgetary problems because the wealthy can’t earn as much – and hence, don’t pay as much taxes.  Some States appear to be teetering on bankruptcy.

Near-zero interest rates favor big government and big banks.  Too bad main street savers and investors are not treated as well.

It still appears that a double-dip recession is likely at a minimum.  Some asset deflation also appears to be a reasonable expectation.  As to the possibility of a depression, I think it is too early to tell.  If fiscal (spending and tax) policies and monetary (money supply and interest rate) policies move from Keynesian to pro-growth, I think we can see a rapid recovery.  However, I currently have not seen indications of such policy changes.

Citizen Economics Blog – News, Analysis, Insight, Practical Knowledge by Gerard Francis Lameiro, Ph.D.