MARCH 26, 2015
Swiss Re's report called the impact of low-rate
dollar-cheapening policies "indisputable."
The Federal Reserve's efforts to stimulate the U.S. economy
after the financial crisis ended up costing savers nearly half a trillion
dollars in interest income, according to report released Thursday.
Since the central bank dropped interest rates to near zero
at the end of 2008, savers have labored under plain-vanilla bank accounts and
money market funds that have yielded close to nothing. Critics have long said
the Fed's quantitative easing efforts have boosted asset prices, particularly
in the stock market, but exacted severe costs across other parts of the
economy.
In a landmark report, Swiss Re quantifies just how much
savers and others have languished while the policy has pushed the Fed 's
balance sheet past the $4.5 trillion mark but failed to generate above-trend
economic growth or substantial core inflation.
The reinsurance firm put the number at $470 billion in the
2008-13 period studied, so the number is likely even higher now.
Swiss Re called the impact of low-rate dollar-cheapening
policies "indisputable. Meanwhile, the impact of foregone interest income
for households and long-term investors has become substantial."
After more than six years of the zero interest rate policy,
or ZIRP, the Fed is preparing its first steps this year toward normalizing
rates. Most economists and market participants expect a rate hike at either the
Fed's June or September meeting, though recent weak economic numbers post a
quandary.
Financial markets have come to depend on the Fed's largess,
which has included three rounds of bond buying that have expanded its balance
sheet, plus another round called Operation Twist, in which it bought and sold
securities at roughly the same level.
Supporters of the policy say it was necessary to resuscitate
the economy with liquidity after the housing market collapsed and the stock
market lost about 60 percent of its value.
However, Swiss Re said the "financial repression"
has taken its toll not only on savers but also on some areas of investing and
insurers like the firm itself, which needed a $2.6 billion cash injection from Warren
Buffett 's Berkshire Hathaway (BRK-A) during the crisis.
"Besides the impact on long-term investors' portfolio
income, the consequence for capital market intermediation is not negligible
either," Swiss Re CIO Guido Furer said in a statement. "Crowding out
investors due to artificially low or negative yields will reduce the
diversification of funding sources to the real economy, thus representing a
risk for financial stability and economic growth potential at large."
An index the firm uses to calculate financial repression
levels is actually off its peak from 2011-2012 despite aggressive efforts from
other central banks around the world to goose their own economies through
Fed-style QE. The index measures yields and their divergence from fair value,
as well as regulatory issues and bank debt holdings.
"Keeping interest rates artificially low through
official intervention hampers the ability of long-term investors to deploy risk
capital into the real economy. It has broken the financial market
intermediation channel by crowding out viable private markets, lowering the
funds available from long-term investors to be used for the real economy,"
Swiss Re said. "Investments in infrastructure could repair this damage and
address weak economic growth."
Indeed, U.S. companies in particular have used the low rates
to borrow money and buy back their own shares and boost dividends, helping
bottom-line profit levels but also contributing to low top-line sales growth.
S&P 500 (^GSPC) earnings are now projected to be
negative in the first and second quarters and grow just 0.3 percent for the
year, according to S&P Capital IQ.
"Financial repression is likely to remain a key tool
for policymakers given the moderate global growth outlook and high public debt
overhang. Whether the costs outweigh the benefits largely depends on the
ability of governments to take advantage of the low interest rate environment
by implementing the right structural reforms," Swiss Re said. "So far
the record for doing so hasn't been comforting."