The Federal Reserve’s risky effort to reduce interest rates is hitting swing-voting retirees in the wallet — and Fed Chairman Ben Bernanke is blaming the financial crisis.
“I know that people who rely on investments that pay a fixed interest rate … are receiving very low returns, [which is] a situation that has involved significant hardship for some,” he said in an Oct. 1 speech in Indianapolis.
However, he added, “I would encourage you to remember that the current low levels of interest rates … are in a larger sense the result of the recent financial crisis — the worst shock to this nation’s financial system since the 1930s.”
The Fed’s decision to lower interest rates cuts the income on interest earned by retirees who depend on savings.
These retirees are important during elections because they’re swing voters. For example, retirees can sway the presidential vote in Florida — a must-win state for the Republican nominee Mitt Romney.
Former Massachusetts Gov. Romney and President Barack Obama are neck-and-neck in the state, while both sides spend heavily to tout their support for Medicare and Social Security, and slam their opponent’s proposed policies.
That Medicare-focused debate may be expanded by Bernanke’s admission that the government’s low-interest policy hits retirees.
Bernanke’s effort to blame his low-interest policy on the housing bubble and the subsequent economic meltdown, however, is undermined by the Fed’s role in creating the bubble.
Through the 1990s and 2000s, the Federal Reserve used its regulatory power to boost mortgage lending to poor Americans. That policy was pushed by the Democratic Party’s progressive wing — including Obama while he was working in Chicago — but it inflated the housing bubble. The bubble burst in 2007, destabilizing Wall Street and severely damaging the economy. (RELATED: With landmark lawsuit, Barack Obama pushed banks to give subprime loans to Chicago’s African-Americans)
The Fed is not formally part of Obama’s administration, but it works closely with each administration, and is now working closely with Obama’s deputies to spur the economy and revive housing prices.
Bernanke justified his low-interest rate policy by saying it would spur the economy, which has slowed to crawl amid record deficits, record unemployment and declining wealth.
“The crisis and recession have led to very low interest rates, it is true, but these events have also destroyed jobs, hamstrung economic growth and led to sharp declines in the values of many homes and businesses,” Bernanke said.
“What can be done to address all of these concerns simultaneously? The best and most comprehensive solution is to find ways to a stronger economy … [and] the way for the Fed to support a return to a strong economy is by maintaining monetary accommodation, which requires low interest rates for a time.”
To aid the economy, the Fed is also creating money via a quantitative easing policy.
Under the so-called QE-3 policy, the Fed is buying an additional $40 billion in mortgages from Wall Street every month. The Fed is already buying $45 billion mortgage-backed securities each month.
The purchases are funded by the Fed’s ability to create money.
But the flood of extra money being created by the Fed threatens to boost inflation, according to classical economic theory. If it does, inflation could further cut the effective income of people living on savings or on Social Security.