Ralph Nader Is Right: The Fed’s Stimulus Hurts Ordinary People

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Ralph Nader Is Right: The Fed’s Stimulus Hurts Ordinary People

November 25, 2015

Defenders of the Fed have long been at a loss to explain how anyone could ever oppose the Fed and its “stimulus” programs. After all, in their minds it is unassailable gospel that the Fed makes everybody better off when it creates new money, forces down interest rates, or buys up government debt. Only Neanderthals oppose such things. 

Don't Like the Fed? You Must Hate the Poor 

In fact, a small cottage industry has sprung up around trying to explain why anyone would oppose the fed. Here's one example: back in April, Matt O'Brien in the Washington Post theorized that the reason Republicans now oppose the Fed's stimulus is because they've embraced the ideology of Guilded Age Robber Barrons. O'Brien decided that only rich people like income from interest, so the only reason they would oppose the Fed, is because they want higher interest rates and they oppose inflation. Why do they oppose inflation? According to O'Brien, “The rich have gotten so much richer the past 30 years that they have more to lose from inflation…Second, people are risk averse too. If they can make money without really having to risk it, well, that's what they want to do. The Fed's low interest rate policy has made that harder, though, which is why so many conservatives have attacked the Fed for things worse for well-off people … who were counting on having more interest income.”

O'Brien is totally incoherent on the first point. The rich don't suddenly become anti-inflation because they got richer. A billionaire doesn't have more to lose from inflation than does a millionaire. In fact, the opposite is true. The billionaires have access to overseas accounts, hedge funds, currency traders, and a myriad of strategies that can act as inflation hedges. 

Its the non-rich who have to worry about inflation and a lack of access to  interest income. 

So, we see that he fails on his second point too. The rich aren't the ones who stand to lose the most from a lack of low-risk interest income. The rich can take advantage of many different types of investments at different risk levels to generate income. They even get higher interest rates for savings accounts. Everyone knows that banks offer conservative investment tools (such as CDs) that offer higher interest rates for people who can put in $100,000, than for people who can only buy a $5,000 CD. 

It's the poor and ordinary people who are pretty much stuck with savings accounts and other run-of-the-mill investments that pay next to nothing. Or nothing at all.  Putting money is a savings account is now a money-losing proposition. Moreover, its the poor who stand to lose everything if they put their money in a risky investment tool. It's much easier for the rich to diversify. 

Maybe O'Brien is right and Republicans hate the poor. If that's the case, then the Republicans make a mistake by opposing Fed stimulus, because Fed stimulus does great damage to the poor, and has been doing so for decades. 

Ralph Nader's Letter to Yellen 

Leftist Ralph Nader recently threw a monkey wrench into this narrative this week, when, recognizing that the Fed's zero-interest-rate-policy has made it nearly impossible for low-income households to benefit from savings and to make any income off low-risk investments, Nader wrote a letter to Yellen stating

We want to know why the Federal Reserve, funded and heavily run by the banks, is keeping interest rates so low that we receive virtually no income for our hard-earned savings while the Fed lets the big banks borrow money for virtually no interest. It doesn't seem fair to put the burden of your Federal Reserve's monetary policies on the backs of those Americans who are the least positioned to demand fair play.

It's a fair question. 

Nader went on to note that the Fed appears primarily concerned with the expectations of large institutional investors, but…

What about the expectations of millions of American savers? It is unfortunately true that we are not organized; if we were, we would give you and the Congress the proper signals!

And he even points out the implausibility of Fed claims that it is not political: 

Please, don't lecture us about the Fed not being “political.” When you are the captives of the financial industry, led by the too-big-to-fail banks, you are generically “political.” So political in fact that you have brazenly interpreted your legal authority as to become the de facto regulator of our economy, the de facto printer of money on a huge scale (“quantitative easing” is the euphemism for artificially boosting the stock market)…

Nader points out that small-time savers and investors have been backed into a corner:

So what do you advise us to do? Shop around? Forget it. The difference between banks, credit unions and mutual funds may be one-twentieth or one-tenth of one percent! That is, unless you want to tie up money, that you need regularly, in a longer term CD or Treasury. Even then interest rates are far less than they were ten years ago.

Maybe you're saying that we should try the stock market to get higher returns. Some of us have been impelled to do that, but too many have lost their peace of mind and much money in the market.

The Fed's near-zero interest rate policy isn't helping younger people with student loans (now over 1.3 trillion dollars), whose interest rate ranges from six to nine percent. It doesn't help millions of pay-day loan borrowers or victims of installment loan rackets – mostly the poor – whose interest rates, rolled over, can reach over 400 percent!

Yellen responded to Nader with the usual Bromides:

She claimed that “by making consumer purchases more affordable and encouraging businesses to invest, low interest rates supported the economic recovery and the creation of millions of jobs.” 

She then asserted: 

Would savers have been better off if the Federal Reserve had not acted as forcefully as it did and had maintained a higher level of short-term interest rates, including rates paid to savers? I don’t believe so. Unemployment would have risen to even higher levels, home prices would have collapsed further, even more businesses and individuals would have faced bankruptcy and foreclosure, and the stock market would not have recovered. 

Note that while Nader has noted many observable facts, Yellen relies primarily on conjecture and imaginings of what might have been. The assumption is always that without Fed intervention, we'd today still be mired in depression-like conditions. No actual evidence can be provided to back up this point, of course. They simply make assertions. And let's not forget that this ride isn't over yet. It took more than five years just for employment to get back to where it had been before the crisis. And the real median household income is down 7 percent from 2007.  This is the Fed's “success” story. 

And some of these claims boggle the mind. Millions of jobs were created by the Fed? Which jobs? Correlation does not prove causation, Ms. Yellen. How do we know those jobs would not have existed without the Fed? And consumer purchases are more affordable?  Which purchases are those? 

If Yellen is asserting that things are more affordable because it's easier to borrow cheap money, then she's just ignoring the trade-offs involved. Low interest rates and inflation mean that people must borrow more because it's far more difficult to save under those conditions. Yes, debt is cheaper, but people must also take on more debt because it's so difficult to save or make money off investments unless you're not already rich. 

And, of course, this just applies to people who are at a stage of their life where it makes sense to take on more debt. If you're old or on a fixed income, all you're getting from the Fed is a huge “screw you.” 

Moreover, when it comes to affordability of everyday, things, who is Yellen kidding? Home price growth and rent growth are at historic highs. Are we to believe that immense growth in rents and mortgage payments (the largest single expense for families) are a good thing for families? For people who already own homes, rising home prices are often a hurdle that can be overcome. But for people who don't already own real estate, there's little hope of buying one under these conditions. Surely, the Fed has played no small part in driving the homeownership rate in America down to a 30-year low. And again, if you're retired: good luck. You're gonna need it. 

Yellen no doubt believes that wages are higher because of Fed intervention. But in a world of sky-high rents, real wages are in fact lower. 

The Media Reaction

As the mainstream media is so full of Fed defenders, the media narrative has been that Yellen “smacked down” Nader and that Yellen gave Nader a “fantastic short lesson in monetary policy.” 

Even worse, the media decided that since Nader suggested Yellen talk to her Nobel-Prize-Winning economist husband, the letter was “sexist” while, of course, ignoring the economics discussed in the letter.  

This is the level of discourse, apparently, we can now expect from the financial media. 

For more on how the Fed impoverishes the middle class while helping the rich, see:

How Money Production Can Worsen Income Inequality” by Guido Hulsmann

?”The Cultural and Political Consequences of Fiat Money” by Guido Hulsmann 

How Inflation Keeps the Rich Up and the Poor Down” by Guido Hulsmann 

The State Causes the Poverty It Later Claims to Solve” by Andreas Marquart ?

How Fractional Reserves and Inflation Cause Economic Inequality” by Andreas Marquart

?”Ten Reasons to Condemn Inflation” by Andreas Marquart 

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