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A Modest Proposal: Gold Plate Banks with Cash from Retirees

Now we know how the banksters can afford gold-plated pens. (photo: architekt2 on Flickr)

Here’s the idea: steal from retirees to gold plate the banksters. That is the direct result of the Federal Reserve Board’s quantitative easing, the policy of buying up corporate and treasury bonds in an effort to drive down medium-term interest rates. Who is dependent on interest rate income? Why, it’s your grandmother and your retired uncle.

How did this happen? The Democratic Majority we elected to Congress flailed around, caved into the conservatives in both parties, and produced an inadequate fiscal stimulus in 2009, so the economy is not growing and deflation is a threat. Raising taxes on the hyper-wealthy, the 2% who have all the wealth and income, and using the money to rebuild our infrastructure is now a non-starter. The even bigger group of idiots taking over in the House never met a Corporate Person they didn’t have a thing-crush on, or a rich person of whatever thingicity they wouldn’t suck up to for a few dollars. They want to slash government spending and produce a searing Depression instead of the current sluggish mess.

The only other tool we have is fiscal policy, weak as that is. Here is Fed Chair Bernanke’s explanation for QE II, the second round of quantitative easing:

For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

Why will stock prices go up? Because people can’t live with the astonishingly low interest rates engineered by the Fed to get the financial system going. How does that affect Grandmother and Uncle? The effect of this policy is to keep interest on savings at an absolute minimum, under .25% in most cases. That’s not a typo, ¼% on checking accounts, and 1% or so on certificates of deposit. Look at this chart from a report by the Employee Retirement Benefit Institute:

Figure 15 from March, 2010 Employee Benefit Research Institute Issue Brief

We can use this chart from the 2002 census to estimate the number of households. There were 22.5 million households where the householder is 65 or older, and 6.6 million between 60 and 64. Some of those over 65 are not retired, and so are some even younger than 60. It’s reasonable to call that a wash, and say there were 29 million retired households in 2002. I estimate a total of 34.1 million today, which seems plausible based on the respective populations over 60 (2009: 55.4 million; 2002: 47.1 million).

The two lowest groups, approximately 14.3 million households, have less than $10,000 in financial assets. They don’t have any significant interest income.

The next group is about 4.8 million households with $10-25,000 dollars. Let’s estimate an average of $20,000 for this group, and an average interest rate (assuming that some of them have CDs), of .6%. They average $120 per year in interest. If medium-term interest rates were a more normal 4%, they would get an additional $680 per year, not an insubstantial amount at this level of income, maybe an extra ½ of a Social Security check.

The next two groups total about 5.8 million households with between $25-100,000 in financial assets. If we estimate the average at $65,000, we get an estimated $376.8 billion in total. For this group, QE II is a real disaster. If they are able to get a 1% return by investing the entire amount in CDs, they have a measly $650 dollars, an amount that is surely much less than they anticipated when they retired. At a more normal 4%, they would get about $2,600, a significant improvement on the average Social Security check of $1,164 for last year.

10.6 million households are severely damaged by the Fed. It’s worse than a tax, because they have no way to protect themselves. There is no one to complain to about this disastrous loss, because the Fed doesn’t answer to anyone. I suppose Chairman Bernanke wants them to invest in the stock market, a foolish idea when retail investors are taking money out of mutual funds.

Absolutely no one is looking out for these people. They will be forced to consume some or all of their savings, and hope they can come out even after the funeral expenses. They will die knowing that they weren’t able to help their kids.

No one in power in this country is willing to lift a finger to help these people.

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