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The Wall Street Wealth Transfer

The general public, especially those who are part of the 10% unemployed, are angry that “stimulus” money was spent to bail out the economy yet many individuals have felt nothing close to an economic stimulus.  The government spent $700 on the troubled asset relief program (TARP), $787 billion on the economic “stimulus” program, and over $1 trillion buying agency mortgage backed securities to support the mortgage and housing market.  Some of this money in the TARP and MBS repurchase program can be thought of as a loan from the government to stabilize the markets, but any losses from the support will ultimately be borne by the US taxpayers.  These facilities have much more transparency over a wealth transfer which is only starting to be discussed by the general media.  The largest contributor to the banking sector’s rebound has been the low interest rate environment provided by the federal reserve.  This is a tax akin to inflation, a preferred method for quietly raising income taxes.

When taxing the public, the government prefers to collect the taxes in the most opaque manner possible.   Increases on income or property taxes are hotly debated and political parties often choose their side of the battle so that higher income tax rates are difficult to achieve.  The more insidious form of taxing is through inflation.  The federal reserve can print money which means that it can increase the money supply thereby reducing the buying power of each dollar that is currently in circulation.  This is a tax because the cost of goods rise so that every dollar that you saved is worth less.  When inflation is at 7% you have effectively been taxed 7% on every dollar that you have saved along with every dollar that you earn as income.  This is insidious because we have no control over the level of inflation as the federal reserve basically acts under autonomy.

Currently, inflation is quite low, but the government has found another way of indirectly taxing its citizens.  Interest rates are supposed to be the reward for having money saved and lending it out to others.  By keeping interest rates at or near zero, the federal reserve has taken away all incentives for those who have saved money and has pressured individuals and institutions to reduce cash positions and increase riskier investments.  On the flip side of this equation are the banks.  The banks are able to borrow money at these incredibly low interest rates thanks to the Fed.  The banks are borrowing from institutions and individuals at zero percent through savings accounts and they are allowed to borrow directly from the Federal Reserve at about .5% and either lend it out to individuals and institutions at very high rates or simply invest the borrowed money in longer term treasury securities or even more risky assets.  Borrow at zero, lend at 3-6% depending upon the riskiness of the assets.  Who is paying for this?  Without real growth, this is a zero sum game right?  If one institution or individual wins then it must be at the expense of someone else?  It is at the expense of savers and at the expense of taxpayers.  The government is merely a servant of its citizen taxpayers.  When the federal reserve lends out money at zero percent, you, as a taxpayer are lending money out at zero percent.  Likewise, when the government supports lower interest rates by keeping the short term interest rate low and/or buying longer securities to keep longer term interest rates low, they are effectively stealing that yield from individuals and institutions who are invested in those same longer term maturity securities.

So the next time you hear a record profit quarter for a bank, just know that if you are paying taxes in the United States, they owe a bit of thanks to you.

Posted in Markets, Politics.

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