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Low interest rates hurt some, help others
A financial professional looks over his screen on the floor of the New York Stock Exchange as the U.S. Federal Reserve makes an announcement on interest rates August 10, 2010 in New York City.
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BOB MOON: Did you notice, this is the first real quiet week in August. Well, relatively speaking. Most people are thinking about vacation. But others -- especially anyone who handles money -- they're thinking interest rates. The Fed is expected to keep those rates near zero for nearly two more years. But is that a good thing for the economy? Who's really benefiting?
Our New York bureau chief Heidi Moore reports.
HEIDI MOORE: When the going gets tough in the economy, the Federal Reserve gets going on keeping interest rates low.
Mark Zandi, the chief economist at Moody's, told me why.
MARK ZANDI: The Fed is working really hard to make it very attractive to go out and take a chance, take a risk, borrow money, go out and hire somebody, go out and invest, start a business, go spend some money, buy a car, buy a home -- that's what this is all about.
But we all know that hasn't worked exactly according to plan. For instance, take that part about buying a home. It's harder now because banks don't lend so easily. And how about refinancing?
A lot of people got excited about that, says Guy Cecala. He's the publisher of Inside Mortgage Finance.
GUY CECALA: In the past two weeks, we saw a mini refi boom. Significant. The phones were ringing off the hook at most lenders.
And you got to lock in those low rates -- if you had pristine credit, a lot of equity in your home, and the agility of a ninja. Otherwise, some lenders let those calls go straight to voicemail while waiting for rates to rise again.
CECALA: You not only have to have really quick reflexes, you have to get a lender who will answer your phone and take a loan application very, very quickly.
One bright spot is those notorious adjustable-rate mortgages. Homeowners who got those a few years ago have seen their monthly payments fall along with interest rates. But generally, who's really benefiting from low interest rates? The paradox is that it's the ones who are doing well anyway: corporations, banks. But retirees on fixed incomes? People who are struggling with their mortgages? Not at all.
In New York, I'm Heidi Moore for Marketplace.
It is a difficult one—a paradox, as you say: Allowing rates to rise will increase adjustable interest rates, along with costs to holders of credit card debt and future potential borrowers (and with consumers supposedly accounting for 70% of the recovery, that isn’t good); keep them low and banks will only capitalize on the interest rate spread between their borrowing rate and the going treasury-rate yield, rather than lend—at taxpayer’s expense, ultimately, as debt escalates via QE. Kansas Fed President Thomas Hoenig’s arguments are compelling on this, not because rising interest rates are going to encourage savings or lending, but because another round of QE can only lead to inflation and exacerbate an a failed banking system that has become addicted to Fed injections. Ultimately, there is no way to navigate through this system with monetary policy tools that have gone far beyond their original mandate. Commercial banking has to be separate from investment banking, and stay there; “too big to fail†has to end. That’s it. Farting around with interest rates in a three to four percent range isn’t going to accomplish much in the way of putting people back to work, getting them to save or consume, or rationalizing a $600 trillion global derivatives market.
I think the Fed should raise interest rates modestly to encourage banks to let some of the money go. It interest rates are raised, they'll have to pay depositors more, so they will need to make more. This seems like the only way to do it and it would in fact begin to benefit everyone.
"But generally, who's really benefiting from low interest rates? The paradox is that it's the ones who are doing well anyway: corporations, banks. But retirees on fixed incomes? People who are struggling with their mortgages? Not at all." That's not a paradox, that's the way the world works.
