Back in March 2011, author Carmen
Reinhart wrote a comment in Bloomberg describing the terms “financial
repression.” He wrote:
“As they have before in the
aftermath of financial crises or wars, governments and central banks are
increasingly resorting to a form of “taxation” that helps liquidate the huge
overhang of public and private debt and eases the burden of servicing that
debt.
Such policies, known as financial
repression, usually involve a strong connection between the government, the
central bank and the financial sector. In the U.S., as in Europe, at present,
this means consistent negative real interest rates (yielding less than the rate
of inflation) that are equivalent to a tax on bondholders and, more generally,
savers.”
In
the FDIC data released this week, the financial repression imposed by Ben
Bernanke, Janet Yellen and the rest of the Federal Open Market Committee over
the past five years is very apparent. Chief
among the data points to be noted is that net interest expense, which is the
money paid to depositors at banks, continues to fall. While all banks earned about $118 billion in
interest income last quarter, they paid just $13 billion to depositors, a
graphic example of the “financial repression” used by the Fed to subsidize the
US banking industry.
http://www2.fdic.gov/qbp/qbpSelect.asp?menuItem=QBP
Notice
that while the Fed has maintained the net interest income to banks, the
earnings of depositors have fallen more than 90% since 2008. Via QE, the Fed is subsidizing all banks to
the tune of over $100 billion per quarter in artificially depressed interest
cost and income to depositors of all stripes. By robbing consumers and all
savers of income, the FOMC is in fact feeding deflation and hurting growth and
employment. The chart below using data
from the FDIC shows the interest earnings, expenses and net interest income through
the end of September 2013 for all US banks.
Prior to the 2007 financial
crisis, total interest expense for all US banks was over $100 billion every
three months and interest income was almost $200 billion. In order to maintain the net interest margin
for banks at +/- $100 billion per quarter, the Fed is confiscating income of US
savers, including companies, investors and the elderly, of almost the same
amount each quarter in badly needed income.
This data graphically illustrates the deflationary nature of current Fed
interest rate policies and why Janet Yellen and the Federal Open Market
Committee need to raise interest rates soon.
In a paper published this month
by Carmen Reinhart and Ken Rogoff, the authors argue that financial repression
is a necessary part of the adjustment process for heavily indebted nations,
even the advanced nations. The Guardian
reports: “They say that if history is any guide countries will not be able to
return to more sustainable levels of public debt through a combination of
austerity and growth. They cite Europe, where the assumption is that normality
can be restored by a combination of belt-tightening, forbearance and rising
output, as an example of Panglossian thinking.”
Say Reinhart and Rogoff: “The
claim is that advanced countries do not need to apply the standard toolkit used
by emerging markets, including debt restructurings, higher inflation, capital
controls and significant financial repression. Advanced countries do not resort
to such gimmicks, policy makers say.”
The Guardian: “Historically, this is poppycock according to
Reinhart and Rogoff. Rich countries, when faced with high levels of debt in the
past have been more than happy to default, inflate away their debts or indulge
in financial repression (capping interest rates or putting pressure on savers
to lend to the government).”
The current policy mix in the US
certainly shows this tendency to resort to financial repression, but the real
question is whether current Fed policy has not resulted in a deflationary trap,
with falling income driving consumption, jobs and economic activity lower. Taking $100 billion in income away from
savers each quarter does not seem to be a recipe for economic growth.
But as Reinhart and Rogoff
document well, there is no easy solution available for the US, EU, Japan and
other heavily indebted developed nations.
Once interest rates start to rise, the necessity of debt restructuring
in Europe, Japan and even the US will become more apparent. There is no free lunch. Either we kill growth via financial
repression of savers or we embrace the painful process of debt restructuring
for the major industrial nations.
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