The previous few posts have been a bit heavy, so let’s change topics. Today I read an open letter from Charles Schwab asking the Fed to raise rates ASAP. His opinion is that retirees have been fleeced by the low rates, and are hurting to the detriment of the economy overall. Statistics are offered aplenty, as Chuck applauds the return of normal monetary policy.
Sigh. I’ve written about this a bit before. A summary:
- The unconventional monetary policy wasn’t intended to redistribute from savers to borrowers, nor was it designed to hurt retirees. The policy helped avoid catastrophic economic collapse, which would have hurt everyone.
- Savers (including yours truly) are disappointed with low interest rates. Borrowers (including all those people now buying houses, so that house prices are back to pre-crisis levels) are very happy. Though Chuck wants to focus on retirees’ marginal propensity to consume (i.e. they spend more than they earn), I would argue we’re about as well off with borrowers (who, by definition, spend more than they earn) having lower interest rates.
- Following the housing point: though it’s more common in the UK, there are probably a lot of US retirees relying on ‘trading down’ their housing to help fund retirement. Thank the Fed’s low rates for high mortgage – and thus housing – affordability among younger homebuyers. In this sense, the Fed saved retirees – not hurt them.
- Beware partial equilibrium analysis. Higher interest rates better for the economy? Really? Yes, higher rates mean more interest received, but also means more interest paid. In an environment where we want to encourage business investment and employment, higher interest rates are a bad thing.
In sum: this is the second letter written by Chuck that I have a serious issue with (the other one is this, which shows an absolute lack of information and analysis about high-frequency trading). Why does the man insist on putting his name to such insanity?? I guess he’s getting some free press, even if it’s discouraging.
Happy weekend, everyone.