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Article Artículo

Strange Cases for Fed Rate Hikes: The Poor Savers Story

By Dean Baker and David Rosnick

Over the last seven years there has been a steady drumbeat of complaints from people who are upset by the Fed’s zero interest rate policy. We first heard that it was going to lead to hyperinflation. Then we were told that low interest rates would fuel asset bubbles. More recently a rate hike has become a matter of the Fed’s credibility.

One of the most persistent complaints is that the zero interest rate policy is unfair to small savers. The argument is that we have all these elderly people who depend on the income from their savings who are being destroyed by getting near zero interest on their CDs and money market accounts.

There are two problems with this story. The first one is a logical problem. Interest rates are low because the economy is extremely weak. In the simple textbook story (very simple), the interest rate is supposed to equate the supply and demand for savings. Ever since the recession began we have had an enormous excess supply of savings. This means that the interest rate should be lower than it actually is. However, interest rates don’t fall further because they will not go below zero, or at least not much below zero. People are not willing to pay banks to borrow their money.

Given the market outcome pushing interest rates to zero, those who want the 2–3 percent short-term interest rates of pre-recession years effectively want the government to pay them interest rates that are above the market clearing rate. That’s fine as a demand from a self-interested group — I’d like the government to pay me twice what my house is worth — but it’s not one that deserves much credence in policy debates. Most of us probably think it’s more important to use the Fed’s monetary policy to get people employed than to subsidize the interest received by savers.

The other problem is that the story of small saver suffering because of low interest rates doesn’t fit the data. There just are not very many people with substantial amount of savings in CDs, money market, saving accounts, or other short-term assets who don’t also have large amounts of money in stocks and bonds. Anyone who has large sums in stocks and bonds has done very well in the last five years, as both markets have soared, so if they aren’t earning much interest on their savings accounts it is difficult to feel too sorry for them.

Dean Baker / December 07, 2015

Article Artículo

The Revolving Door with the Banks and "Reform" of Fannie and Freddie

Gretchen Morgensen has an excellent piece in the NYT reporting on the revolving door between Wall Street banks and the Obama administration and the lobbying effort to dismantle Fannie Mae and Freddie Mac. These banks hope to be able to take over the business of the two mortgage giants with a system under which the government would guarantee 90 percent of the value of the mortgage backed securities they issued. While the piece does a very good job detailing the financial connections of the individuals behind this push, there are several important points which make the case against "reform" even stronger than presented in the piece.

To start, the piece tells readers:

"For all the problems associated with Fannie and Freddie, some housing experts say, allowing the nation’s largest banks to assume greater control of the mortgage market would most likely increase costs for borrowers."

Actually, just about all housing experts agree that the privatized system would raise costs. Wall Street types get paid more than government employees and shareholders expect a profit. Therefore, we can be pretty safe in assuming a privatized system will have higher costs. The range of estimates in a Washington Post article from last year was that it would increase mortgage interest rates by between 0.5–2.0 percentage points. (I put myself near the bottom of that range.) If the roughly $6 trillion in mortgage debt on Fannie and Freddie's books were all switched to this privatized system, the additional cost would be $30 billion a year, assuming the bottom end of this range. That is more than the federal government spends on the TANF program each year.

Dean Baker / December 07, 2015

Article Artículo

Latin America and the Caribbean

Venezuela

World

Live-Blogging Venezuela’s December 6 Legislative Elections

Update 12:12 AM: President Nicolas Maduro stated in an address that "we accept" the results, as he had pledged he would.

Update: 12:08 AM (December 7, EST): With participation of almost 75 percent, the CNE has announced that the MUD (opposition coalition has won 99 seats, while the pro-government coalition has won 46. Nineteen seats are to be announced.

Update 11:58 PM (EST): CNE announcement of results beginning. Watch live here. CNE President Tibisay Lucena says process was "clean and reliable."

Update 11:31 PM (EST): The CNE is expected to announce results within minutes.

Update 10:42 PM (EST): Venezuela Analysis reports that a CNE official was attacked in Chacao, Miranda state, while trying to enter a voting center, a few hours ago, with people chasing him shouting "kill him, kill him." Watch the video here.

Update 9:46 PM (EST): Stay posted. Official results are expected soon. Meanwhile, social media is abuzz over the opposition's unofficial claims of victory, helping to create a potentially dangerous situation.

Update 9:37 PM (EST): In an earlier press conference, Venezuela's defense minister said that there have been "72 electoral incidents," of which seven were electoral crimes, and seven individuals arrested.

Update 8:53 PM (EST): Venezuela Analysis notes "Opposition leaders such as Henrique Capriles are celebrating their win on Twitter," and Reuters is likewise reporting:

But the celebration is premature, since, as Reuters notes as the CNE has not announced results yet. Such premature announcements are reminiscent of past elections, such as in 2013, when Capriles cried foul and accused the authorities of a plot to rob him of the election even before results were announced.

Also reminiscent of 2013's elections are attacks on social media accounts of people and outlets considered to be chavista.

Update 8:09 PM (EST): Opal Tometi tweeted:

CEPR / December 05, 2015