People who depend on certificates of deposit and living on fixed incomes were hurt by the central bank's zero-interest-rate policy. The alternative would have been far more painful.

Share story

Last week a reader wrote to complain about the lack of coverage about one of the unintended consequences of the Federal Reserve’s long regime of interest rates at zero: the pain inflicted on savers, especially seniors on fixed incomes.

He wrote, “My wife and I “did the right thing” (such fools) living frugally and saving enough so that by supplementing our Social Security with modest interest from safe CD’s we would have adequate income.”

This left what he listed as the following choices: “1) Try to live strictly off our Social Security and try to hold onto our savings until interest rates rise (pretty bare existence); 2) Supplement our SS by spending down our savings (put ourselves in financial jeopardy down the road); 3)  Supplement our SS by moving our savings into the unpredictable ‘market’ (a cesspool of manipulation).

“None of these are very attractive options for a person’s ‘golden years’ but those involved in setting monetary policy seem to care only about ‘the market.’ “

Most Read Stories

Unlimited Digital Access. $1 for 4 weeks.

He makes an undeniable point about the situation facing many seniors, one made only slightly better by the central bank raising rates late last year.

Before the financial crisis, in June 2006, the federal funds rate was 5.25 percent. By late 2008, it stood at virtual zero. In addition to making returns nearly impossible for people holding certificates of deposit, it also hurt annuities. Pensions and insurers dependent on rate sensitive investments also suffered.

The problem: What was the alternative, given the economy standing on the edge of the abyss?

Had the Fed not cut rates and kept them low, the severe contraction in 2008 would have turned into a severe depression and seniors would not have been spared. The central bank took a different course after the market crash of 1929 and the result was the Great Depression, as shown by the seminal work of Nobel laureate Milton Friedman and Anna Schwartz.

These are no ordinary times. While the United States avoided the worst and is doing better than almost every other large advanced economy, growth is very slow. Jobs have returned but wages have not grown much if at all. Deflation, rather than inflation, is a danger. And the situation has not been helped by the failure of Congress to provide fiscal stimulus through investments in infrastructure (as opposed to, say, the disastrous F-35 fighter).

It is little comfort that CD savers are at least not losing money, as opposed to the cubicle proles stuck in their stock-heavy 401(k)s, riding the roller coaster.

So millions of savers are among the many victims of the Great Recession — along with many millions more forced out of their homes or underwater on mortgages; stuck in such low-paying jobs that they must depend on food stamps, and people carrying heavy student debt but failing to find jobs paying a decent wage.

And none of the banksters whose rackets brought on the crisis went to prison.

No wonder this is such a volatile political season.


Today’s Econ Haiku:

Bank stocks are bargains

Chock full of Oil Patch lending

Chickens meet your roost