By David Cay Johnston
Aug 10 Another financial crisis looms for U.S.
taxpayers, a disaster likely to create even worse human misery
than the mortgage fiasco that some of us warned about years
before the Wall Street meltdown in 2008.
The crisis next time: collapsing investment incomes for
older Americans as artificially reduced interest rates force
them to use up their savings and drive more pension plans into
Eviscerating the interest income of savers is the undeniable
result of a long-running Federal Reserve policy to reduce
interest rates, especially since December 2008. The Fed
reiterated on Aug. 1 that it plans to keep interest rates low
through late 2014. It says this helps to promote stronger
economic growth and bring down the jobless rate.
As in the mortgage crisis, you can see this disaster
building by examining the official data.
At the broadest level, 53 percent of taxpayers earned
interest in 2000. But by 2010 just 39 percent did, my analysis
of Internal Revenue Service data shows, while high-interest debt
has become ubiquitous.
From 2000 to 2010 total interest earned by savers fell 53
percent in real terms, a decline of $134 billion. Average
interest earned per taxpayer, measured in 2010 dollars,
plummeted from $1,950 to $825.
A drop of $1,125 per taxpayer may not seem like much,
especially since the average income reported on 2010 tax returns
was more than $56,000. But look at who relies on interest to
make ends meet and the problem comes into focus.
RELIANCE ON INTEREST
Americans overall received just 1.5 percent of their income
from interest payments in 2010. But among those with tiny
incomes - the 37 million taxpayers making less than $15,000 -
interest accounted for 9.3 percent of their money.
More than three-fourths of these low-income Americans
reported no interest income. This means that the minority who
saved relied heavily on the interest their savings earned. IRS
and other government data show that minority consists mostly of
older Americans who saved during their working years, prudently
spending less than they earned so they could avoid poverty in
their golden years.
The low interest rates paid on savings and bonds are not the
result of market forces, but official policy. As readers here
know, I favor competitive markets to set most prices, including
The Fed has been suppressing interest rates for more than a
decade - a major factor in the housing bubble that began in the
mid-1990s. The bubble was obvious in official data by 2002 as
housing prices grew much faster than incomes, a trend that could
not be sustained. But those of us who pointed this out were
ignored. Alan Greenspan famously claims no one saw it coming,
which is true if you suffer willful blindness.
Since December 2008, just three months after the Wall Street
meltdown, the Fed has kept the federal funds rate at zero to
0.25 percent. The other interest rate the Fed controls, for
money it loans directly to banks, is being maintained at three
quarters of one percent. These, in turn, tend to lower other
This Fed policy props up the Too Big to Fail Banks, which
pay next to nothing to borrow from the Fed and then use that
borrowed money to buy federal debt paying 3 percent or so. Any
bank with a 3 percent spread should report healthy profits. The
built-in mismatch between taxes and spending in Washington
guarantees plenty more federal debt, no matter who gets elected
to the White House and Congress, for years to come.
Cheap interest also benefits credit-worthy individuals and
companies, who can use cheap loans to scoop up assets that
collapsed in value after the 2008 Wall Street meltdown. This is
a subtle mechanism for concentrating wealth among the best off.
For savers, the reverse alchemy of low interest rates turns
gold into dross.
As interest income falls, older savers start cutting into
their nest eggs. Millions of older Americans relying on interest
income will, thanks to the Fed, run out of savings before they
run out of time, a prescription for another taxpayer bailout,
though this time one with a stronger moral case than rescuing
the fortunes of profligate bankers and those who foolishly
invested in the companies they run.
Expect more pension plans to fail, too, because their once
robust interest income has shriveled thanks to the Fed's
low-interest policy, a subject I'll examine in my next column.
About 44 million Americans have earned a pension, 1.5 million of
them in plans that already have failed, acco rding to the U.S.
government's Pension Benefit Guaranty Corp (http: //www.pbgc.gov).
One effect of the Fed's low-interest policies can be seen in
all those mid-day television ads encouraging older Americans to
take out reverse mortgages on their homes, as people desperate
for enough money to put food on the table consume the equity in
their homes. I say desperate because only someone desperate to
survive would accept the stiff interest charges and fees in
these reverse mortgage deals.
In the next few years expect news reports, like those I read
as a boy a half century ago, about old ladies buying cat food
not for a pet, but to get a little protein for dinner.
Holding down interest rates to prop up banks and the economy
and help the already rich buy assets on the cheap, amounts to an
official policy to take from the ants who saved for their old
age and give to the Wall Street grasshoppers. Given the economic
devastation this causes, it is more accurate to say to give to
the financial locusts.