# A rant on Fed policies and what can be done

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Gold Member
Donald Kohn is stepping down as the #2 on the Fed and there are currently two other vacancies on the board. Obama must nominate and the Senate gets to confirm or deny the appointments. Recently, we had an opportunity to rid the Fed of Bernanake, and lost the chance, to the detriment of all of us older people who have saved all our lives.

Under Bernanke, and Greenspan before him, the Fed has continually suppressed interest rates, claiming that this would stimulate the economy. It did not. It made money so cheap that investment banks and speculators could borrow all they wanted. They didn't re-loan that money out so that business could borrow at favorable rates. Instead they used the money to gamble on "investments" with a high potential for large pay-backs, and often defrauded (and then bet against) their own customers by selling them worthless bundled loans and investing in derivatives that would pay off nicely when the customers lost their shirts.

In the meantime, the cheap Fed money means that banks pay me and others like me almost nothing on our savings. Banks adjust their interest rates to follow Fed rates, and when the Fed keeps money cheap for Wall Street, private individuals with liquidity take it in the neck. Why should the bank pay me more for the use of my money than they pay the Fed? I'm getting very sick of the Fed's policy of welfare-for-Wall Street, while making the common people pay the bill. Obama should nominate some people who are less concerned with preventing inflation and more concerned with keeping the US treasury and US citizens solvent. So far his monetary policies seem in-line with that of the neo-cons. Neo-cons didn't elect him and won't vote for him next time, so if he wants to be a two-term President he would do well to remember that.

MotoH
I say we go back to using coinage that is worth what it is. . . worth.

I dont want a quarter that costs 12c to make, I want my quarter to be worth 1/4th of a dollar!

Homework Helper
Not sure how giving all you dollars to Canada for gold/nickel as well as for oil is going to help - but hey, knock yourselves out.

At the moment nickels are worth more than their face value and copper (pre 1980?) pennies are worth a lot more.

Homework Helper
I say we go back to using coinage that is worth what it is. . . worth.

I dont want a quarter that costs 12c to make, I want my quarter to be worth 1/4th of a dollar!

What?

Hopefully, quarters don't cost 12c to make. Unless there's some particularly difficult aspect to making quarters, that probably means the cost of making dimes, nickels, and pennies are more than the coin is worth.

And when you say you want your quarter to be worth 1/4 of a dollar, you mean you want the silver diluted with more alloy?

The problem with coins is that the metal they were originally made of has increased in value. So, you'd get more by melting down silver quarters and selling the silver than you would by spending the quarters. The alloy mix is to keep the value of the metal near the value of the coin.

Homework Helper
In the meantime, the cheap Fed money means that banks pay me and others like me almost nothing on our savings.

...and that you lose almost none of it to inflation. On the whole, I would expect savers to benefit from such a policy, relative to spenders.

Homework Helper
MotoH
12c must have been the Sacagawea dollar.

It was on how its made a while ago

edit:

My now that coin is worth less than what they said on the tv a long while ago.

I will now be bartering in sea shells.

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Gold Member
...and that you lose almost none of it to inflation. On the whole, I would expect savers to benefit from such a policy, relative to spenders.
I am well-diversified and am willing to risk a bit of inflation in exchange for a fair return on my savings. My IRA and my wife's 401K will dampen the risk.

As it stands now, excepting theft and fire, someone who saves money would be as well off stuffing it under the mattress instead of putting it in the bank. No interest to speak of, and hefty fees if you want to transfer money around. We had been with a local savings bank for many years and when I went in to withdraw money to transfer to another bank's money-market account, they charged me $20 for the check AND the bank manager came out and harangued me for 15 minutes or so, trying to convince me to leave the money in their bank. Then when an IRA CD matured, and I asked for a cashier's check to roll the money into another IRA (at another bank) they charged me$20 for that. My wife and I then moved all of our locally-deposited money and checking account to a credit union. The savings bank never informed us that they were instituting these hefty fees for a couple of minutes worth of work - suddenly the fees just "were". I gave them the choice - Waive the fee for the IRA roll-over check or lose all our business. They chose to take the free $20. Good riddance. Last edited: Science Advisor Homework Helper I am well-diversified and am willing to risk a bit of inflation in exchange for a fair return on my savings. My IRA and my wife's 401K will dampen the risk. If current return is 0% and inflation is 3%, and you'd be willing to risk 8% inflation to get a 5% return... how have you gained anything? Put another way: Why do you think that the low inflation has led to low *real* and not just *nominal* interest rates? Science Advisor Homework Helper This site tracks the current metals value of your coinage. http://www.coinflation.com/ So that 1909 S vdb penny in my drawer has increased in value to only 2.25 cents in over a 100 years? Crud! Ben Franklin be damned, I'm spending it! Gold Member If current return is 0% and inflation is 3%, and you'd be willing to risk 8% inflation to get a 5% return... how have you gained anything? Put another way: Why do you think that the low inflation has led to low *real* and not just *nominal* interest rates? If you are properly diversified, only the liquid portion of your assets will be at much risk from inflation. The other assets will rise or fall in value to adjust for inflation. Inflation is not as big a problem as currency devaluation, anyway. Institutional debt and government debt are eroding the value of the dollar vs foreign currencies, causing a loss of buying power on the part of the consumers. The government has claimed that no cost-of-living increase is necessary for SS beneficiaries because inflation is low. Tell that to a person living on a fixed income who is watching their income being strained by rising costs. Last edited: Brian_C I still don't know what the Federal Reserve actually does, or why any of this stuff matters in the real world. From what I understand, they're a bunch of guys who sit in front of computer screens and control interest rates. They also have a big pile of gold in New York City. I think there are more important things to worry about. Gold Member Inflation is not as big a problem as currency devaluation, anyway. turbo-1, if you mean inflation, low as it is at the moment, is not currently devaluing the currency in any large way, fine. If you mean inflation in general is unrelated to currency devaluation, you're mistaken. Science Advisor Homework Helper I still don't know what the Federal Reserve actually does, or why any of this stuff matters in the real world. From what I understand, they're a bunch of guys who sit in front of computer screens and control interest rates. They also have a big pile of gold in New York City. I think there are more important things to worry about. You know credit card agreements? They pretty much universally set their interest rates at "(whatever) plus the prime rate".* Yeah, the Fed effectively sets that. So if you have a credit card, a floating-rate mortgage, etc. then you care about the Fed. * Actually, usually it's "___ plus the prime rate, or ____, whichever is higher". Gold Member turbo-1, if you mean inflation, low as it is at the moment, is not currently devaluing the currency in any large way, fine. If you mean inflation in general is unrelated to currency devaluation, you're mistaken. I mean exactly what I said. Our currency is being devalued WRT foreign currencies because of out-of-hand governmental and institutional debt. Those holding long-term debt are OK with this because they will repay the debt with devalued currency. Who pays the bill? Ordinary people whose buying-power is being reduced. It would not be as much of a problem if the US had lots of domestic production of clothing, electronics, durable goods, etc. Unfortunately, that is not the case, and the Chinese are not going to tolerate being paid in increasingly devalued dollars forever. Gold Member I mean exactly what I said. Our currency is being devalued WRT foreign currencies because of out-of-hand governmental and institutional debt. Those holding long-term debt are OK with this because they will repay the debt with devalued currency. Who pays the bill? Ordinary people whose buying-power is being reduced. Yes, and reduction of buying power is also known as inflation. Gold Member Yes, and reduction of buying power is also known as inflation. Not by the Federal government, which denied all SS recipients a COLA increase this year. They have different standards for measuring inflation, as does the Fed. Science Advisor Homework Helper Who pays the bill? Ordinary people whose buying-power is being reduced. Not so much. It's those who hold cash -- people without debt or savings will be essentially unaffected. Their wages/salaries rise with inflation (naturally -- otherwise it wouldn't be inflation). Of course in practice some salaries rise faster than inflation and some fall faster. Last year my pay rose faster than inflation; this year it will not rise as quickly. Also, inflation expectations must be taken into account. If I took out a 30-year fixed loan at a time when long-term inflation was expected to be around 8%, I'll pay an interest rate of something like 8% + bank expected costs + bank expected profit. If inflation over that period is actually 6%, then I'm paying back the loan with more expensive money; bad for me. If inflation is 10% then I pay back the loan with inflated money; good for me. Obviously, the reverse holds with buying bonds and the like. But if (because Volker and Greenspan and Bernanke all tried to keep inflation low, and were known for doing that) inflation was expected to be low, then low inflation does not increase or decrease your expected long-term gains from savings. It's what was expected. Now if you're saying that you invested your money in a way that assumed that inflation would be high, and low inflation means that you didn't make as much as you hoped -- tough luck. You bet on something and it didn't happen. But on the other hand, if you had money in savings and short-/mid-term bonds that paid low interest because inflation was low, you're not making or losing more real* money than if inflation was high and interest rates high. * "Real" to an economist means after adjusting for inflation; that's the sense in which I use this word. Is this commonly known? I wasn't sure enough to leave this note out. Gold Member [...]It would not be as much of a problem if the US had lots of domestic production of clothing, electronics, durable goods, etc. Unfortunately, that is not the case, and the Chinese are not going to tolerate being paid in increasingly devalued dollars forever. Even though much US manufacturing has gone away, keep in mind the US still has by far the largest domestic manufacturing base in the world. http://investing.curiouscatblog.net/2008/09/23/top-manufacturing-countries-in-2007/ Last edited: Gold Member Not by the Federal government, which denied all SS recipients a COLA increase this year. They have different standards for measuring inflation, as does the Fed. Different standards than who? Anyway doesn't matter, if someone's buying power was reduced as measured by whatever standard, then it is also accurate to say they were impacted by inflation. Gold Member Now if you're saying that you invested your money in a way that assumed that inflation would be high, and low inflation means that you didn't make as much as you hoped -- tough luck. You bet on something and it didn't happen. But on the other hand, if you had money in savings and short-/mid-term bonds that paid low interest because inflation was low, you're not making or losing more real* money than if inflation was high and interest rates high. No. I invested with the near-certainty that the Fed would keep money cheap for Wall Street, and then watched my interest on my liquid assets fall as the prime rate went hopelessly low as Wall Street demanded lower and lower rates. The Fed chairmen reacted like scalded cats every time Wall Street biggies urged no increase in interest - even as small as 1/4 of 1%. I could see a recession and housing crash coming years ago, and positioned myself with more liquid assets than I would normally have wanted, in case attractive properties came up for sale at great prices. Essentially, now all that money is merely "parked" and doing nothing for me unless some nice timber-land or potential house-lot parcels shake loose. I will jump on such opportunities. Science Advisor Homework Helper Not by the Federal government, which denied all SS recipients a COLA increase this year. Massively Wrong! Here's the rule for SS. If the CPI-U goes up in a given year, the SS checks increase by the same amount -- a COLA, as you say. This gives them the same buying power as the year before.* If the CPI-U stays the same, the check stays the same, and so does their buying power. If the CPI-U goes down, the SS checks stay the same (rather than falling to match the CPI-U). This increases their buying power! To add fiscal imprudence to injury, they were also given a$250 payment (tat was in the final bill, right?).

Here are some examples of how SS works.
Year 1, CPI = 100: payment 1.000 (value = 1.000)
Year 2, CPI = 105: payment 1.050 (value = 1.000)
Year 3, CPI = 110: payment 1.100 (value = 1.000)
Year 4, CPI = 115: payment 1.150 (value = 1.000)
Year 5, CPI = 120: payment 1.200 (value = 1.000)

Year 1, CPI = 100: payment 1.000 (value = 1.000)
Year 2, CPI = 110: payment 1.100 (value = 1.000)
Year 3, CPI = 105: payment 1.100 (value = 1.048)
Year 4, CPI = 125: payment 1.310 (value = 1.048)
Year 5, CPI = 120: payment 1.310 (value = 1.091)

So the government, under existing law, was already giving SS recipients a raise. The \$250 payment was just icing on the cake.

* Assuming that the CPI-U measures the true inflation rate for SS recipients, of course. This differs from person to person, of course. Some issues:
• On average the CPI-U actually overstates inflation. A "new" (5-year-old?) index, the C-CPI-U, is designed to measure substitution more carefully and thus give a better figure for inflation. This tends to be slightly lower, but can be higher or lower.
• Seniors tend to spend a higher percentage of their income on medical care, which has risen faster than any other expenditure category (as I recall).
Overall, I suspect that the two largely cancel out. The first is a major flaw, but medical care is so disproportionately important to that group that it may be able to match the size of the first. (If anyone has information on this second point, I'd love to hear about it.)

Homework Helper
No. I invested with the near-certainty that the Fed would keep money cheap for Wall Street, and then watched my interest on my liquid assets fall as the prime rate went hopelessly low as Wall Street demanded lower and lower rates. The Fed chairmen reacted like scalded cats every time Wall Street biggies urged no increase in interest - even as small as 1/4 of 1%. I could see a recession and housing crash coming years ago, and positioned myself with more liquid assets than I would normally have wanted, in case attractive properties came up for sale at great prices. Essentially, now all that money is merely "parked" and doing nothing for me unless some nice timber-land or potential house-lot parcels shake loose. I will jump on such opportunities.

You say you predicted all of this and invested with it in mind. So you're living in exactly the world you want to live in (as opposed to where your predictions were wrong, the stock market took off making your cash worthless, and there was no cheap property to buy). So... under what theory are you complaining? I'm just confused now.

That is, you're saying that you expected interest rates to be low but intentionally kept your money liquid. Things worked out just as you wanted --what's the problem?

Homework Helper
Gold Member
You say you predicted all of this and invested with it in mind. So you're living in exactly the world you want to live in (as opposed to where your predictions were wrong, the stock market took off making your cash worthless, and there was no cheap property to buy). So... under what theory are you complaining? I'm just confused now.

That is, you're saying that you expected interest rates to be low but intentionally kept your money liquid. Things worked out just as you wanted --what's the problem?
Are you deliberately mis-stating what I said just to start an argument? My investments are quite diversified, though I stayed more liquid than I would have liked because I could see a real-estate crash coming, and wanted to be able to jump on distressed undeveloped properties if they came on the market. I expected low interest rates, but got essentially NO interest. I haven't paid any interest in well over 20 years. If my wife and I can't afford something, we don't buy it. Period. We will ride this out. Unfortunately, there are probably lots of older people out there who saved and saved, but didn't have enough resources to diversify properly (stocks, bonds, mutual funds, property), and they are getting so little interest on their savings that the erosion of their buying power is eating up their savings.

My wife and I bought this little place (and over-paid a bit) in 1995 so that we could sell our big place in town and cash out before the housing crash that we knew was coming. The fellow who listed our house is a very close friend of mine and he and his wife followed suit, after some long talks about how the economy was trending. They are living out in the woods, too, just a few miles from here. Some of our friends called us stupid then - they don't say that any more. On a couple of threads about financial instability and recession on this board, quite a number of members gave me, Astronuc, and others a raft of crap because we had the temerity to highlight all the warning flags as we saw them. You can't cheerlead yourself out of a wide, systemic subversion of our economy, though some members seemed convinced that it was possible. Finally, when the wheels were falling off, housing collapsed, and mortgage defaults skyrocketed, Bush announced his bail-out plan, and the neo-cons decided to drink the bail-out Kool-Aid. Too late to do any good. BTW, the people that bought our old place defaulted and lost the house to foreclosure.

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Homework Helper
Are you deliberately mis-stating what I said just to start an argument?

I wasn't trying to argue in that post, I was just confused. (If you want an argument, see post #23; that's about as argumentative as I get.) I still am, in fact -- though hopefully by the time I finish this post of yours it will make sense.

I expected low interest rates, but got essentially NO interest. I haven't paid any interest in well over 20 years.

So you expected low interest rates and got very low interest rates.

Unfortunately, there are probably lots of older people out there who saved and saved, but didn't have enough resources to diversify properly (stocks, bonds, mutual funds, property), and they are getting so little interest on their savings that the erosion of their buying power is eating up their savings.

I certainly agree that a person keeping their money in cash or checking/savings account would have been hurt in this recent economic climate -- I said as much in post #19.

My wife and I bought this little place (and over-paid a bit) in 1995 so that we could sell our big place in town and cash out before the housing crash that we knew was coming. The fellow who listed our house is a very close friend of mine and he and his wife followed suit, after some long talks about how the economy was trending. They are living out in the woods, too, just a few miles from here. Some of our friends called us stupid then - they don't say that any more. On a couple of threads about financial instability and recession on this board, quite a number of members gave me, Astronuc, and others a raft of crap because we had the temerity to highlight all the warning flags as we saw them. You can't cheerlead yourself out of a wide, systemic subversion of our economy, though some members seemed convinced that it was possible. Finally, when the wheels were falling off, housing collapsed, and mortgage defaults skyrocketed, Bush announced his bail-out plan, and the neo-cons decided to drink the bail-out Kool-Aid. Too late to do any good. BTW, the people that bought our old place defaulted and lost the house to foreclosure.

Still confused. Your posts #22 and #26 both seems to say, in short, "I correctly predicted what would happen and prepared for it, to my benefit". Your post #1 said, "In the meantime, the cheap Fed money means that banks pay me and others like me almost nothing on our savings." which I interpret as a complaint that the inflation/interest rates are low.

So what's it going to be? Would you have preferred that your predictions went wrong (allowing your savings to earn nominal interest)? Or are you just pining for a have-and-eat-cake world where the housing market crashed, inflation is low, yet the banks choose to pay high interest?

Edit: In case of confusion: no arguments from me anywhere in this post, just trying (and failing) to understand you.

WhoWee
Donald Kohn is stepping down as the #2 on the Fed and there are currently two other vacancies on the board. Obama must nominate and the Senate gets to confirm or deny the appointments. Recently, we had an opportunity to rid the Fed of Bernanake, and lost the chance, to the detriment of all of us older people who have saved all our lives.

Under Bernanke, and Greenspan before him, the Fed has continually suppressed interest rates, claiming that this would stimulate the economy. It did not. It made money so cheap that investment banks and speculators could borrow all they wanted. They didn't re-loan that money out so that business could borrow at favorable rates. Instead they used the money to gamble on "investments" with a high potential for large pay-backs, and often defrauded (and then bet against) their own customers by selling them worthless bundled loans and investing in derivatives that would pay off nicely when the customers lost their shirts.

In the meantime, the cheap Fed money means that banks pay me and others like me almost nothing on our savings. Banks adjust their interest rates to follow Fed rates, and when the Fed keeps money cheap for Wall Street, private individuals with liquidity take it in the neck. Why should the bank pay me more for the use of my money than they pay the Fed? I'm getting very sick of the Fed's policy of welfare-for-Wall Street, while making the common people pay the bill. Obama should nominate some people who are less concerned with preventing inflation and more concerned with keeping the US treasury and US citizens solvent. So far his monetary policies seem in-line with that of the neo-cons. Neo-cons didn't elect him and won't vote for him next time, so if he wants to be a two-term President he would do well to remember that.

If you REALLY want to rant - follow the interest rate cuts back to just after the S & L crisis and evaluations of the pension funds. If you recall, savings had increased, interest rate cuts began and savings moved into the market - you know the rest.

Proton Soup
I mean exactly what I said. Our currency is being devalued WRT foreign currencies because of out-of-hand governmental and institutional debt. Those holding long-term debt are OK with this because they will repay the debt with devalued currency. Who pays the bill? Ordinary people whose buying-power is being reduced. It would not be as much of a problem if the US had lots of domestic production of clothing, electronics, durable goods, etc. Unfortunately, that is not the case, and the Chinese are not going to tolerate being paid in increasingly devalued dollars forever.

maybe a good thing, atm. it makes our exports more competitive, which means more jobs here at home (or fewer jobs lost, depending on how you want to look at it). and it's the same thing that china has been doing forever, devaluing their own currency to make their products more competitive to increase their exports. let them have a taste of their own medicine.

Galteeth
While I'm no fan of the FED, I don't understand why, given your expectations, you choose to hold your wealth in USD.

Gold Member
While I'm no fan of the FED, I don't understand why, given your expectations, you choose to hold your wealth in USD.
My holdings are highly diversified - I have some holdings in USD because liquidity is essential if you want to be prepared for an opportunity to snap up some acreage at attractive prices. I think I have only mentioned that several times in this thread.