Who benefits from ultra-low interest rates?

Governments, large corporations and American banks have been the main beneficiaries of lower interest rates, according to a study by McKinsey Global Research.  The results are shown in this chart,

To understand the chart, you have to keep in mind the meaning of the word “net”.  The U.S. government had a “net” improvement in interest income in 2012 over 2007, but what that meant was that it was paying out $900 billion less in interest at the end of the period.   Large corporations and governments in other countries also lowered their borrowing costs, and this constituted a “net” gain for them over the five-year period.

Banks in the U.K. and continental Europe were hurt, but U.S. banks gained because they increased the spread between their borrowing costs and the interest rates they charged.

Families with savings were hurt.  Interest on my own bank account is virtually zero.  Pension funds took a hit.  So did insurance companies; a lot of their income comes from investing the money paid in premiums until it has to be paid out in claims.

The McKinsey analysts, unlike me, don’t think that ultra-low interest rates are driving people into the stock market.  But they didn’t see any signs of increased business investment or economic activity as a result of low rates.  The economy is stuck in low gear, and artificially low interest rates haven’t shifted this.

Winners and losers in the Bernanke era

One way to see who’s winning and losing in the current economy is to track the stock prices of Macy’s, Kohl’s and J.C. Penney, retailers who serve the middle class, with Tiffany, Coach and LVMH, retailers who deal in luxury goods.

Click on Sober Look: 5 Years of QE and the distributional effects for an argument that the Federal Reserve’s policy of quantitative easing (buying up bad investments of the big banks), together with the absence of a U.S. jobs program, helps the elite at the expense of the public.

Too big to bail? the new financial bubble

When the French Bourbon monarchs were restored to power after the defeat of Napoleon, it was said that they had learned nothing and forgotten nothing.  The same is true of the half dozen biggest U.S. banks after the financial crisis.  They are busy doing the same things that led to the crisis in the first place.

Blogger Michael Snyder quoted the following figures from the most recent report of the Office of the Comptroller of the Currency.  The figures show the big banks’ investments in derivatives, which are investments not backed by any asset—in short, they are not investments at all, but gamblers’ bets on the future direction of the economy.  If the banks bet wrong, they crash, and if they crash, they bring down a large part of the U.S. economy with them.

JPMorgan Chase

Total Assets: $1,948,150,000,000 (just over 1.9 trillion dollars)

Total Exposure To Derivatives: $70,287,894,000,000 (more than 70 trillion dollars)

Citibank

Total Assets: $1,306,258,000,000 (a bit more than 1.3 trillion dollars)

Total Exposure To Derivatives: $58,471,038,000,000 (more than 58 trillion dollars)

Bank Of America

Total Assets: $1,458,091,000,000 (a bit more than 1.4 trillion dollars)

Total Exposure To Derivatives: $44,543,003,000,000 (more than 44 trillion dollars)

Goldman Sachs

Total Assets: $113,743,000,000 (a bit more than 113 billion dollars – yes, you read that correctly)

Total Exposure To Derivatives: $42,251,600,000,000 (more than 42 trillion dollars)

That means that the total exposure that Goldman Sachs has to derivatives contracts is more than 371 times greater than their total assets.

via Michael Snyder.

The six largest banks control two-thirds of U.S. financial assets.  The five largest originate 42 percent of loans in the United States.  The four largest employ a combined 1 million people.  If these banks fail, it is not just their executives who will suffer (actually, the executives won’t suffer at all).

The Federal Reserve Board is trying to keep the economy afloat by keeping the big banks afloat, through its policy of Quantitative Easing.  It issues money to buy up the big banks’ bad investments prior to the previous crash, but without doing anything to stop them from setting up the same conditions again.

How much better it would have been to finance the rebuilding of crumbling bridges and dams, water and sewerage systems and other public works!

Stock market recovery rests on thin air

Right now the stock market is like Wile E Coyote in the Road Runner cartoons.  He can run for a while with nothing supporting him—just so long as he doesn’t look down and realizing he is standing on thin air.

Holders of financial assets have enjoyed a good economic recovery.  But what is holding it up is the Federal Reserve System’s policy of keeping interest rates as close to zero as possible.  If savers and investors can’t earn interest on their bank savings accounts or money market funds, and very little in the Treasury bond market, they have no choice but to venture into the stock market if they want income.

The hope of Ben Bernanke and the governors of the Federal Reserve Board is that the recovery will become self-sustaining, but each time they talk about or start tapering off, the stock market drops.  This hope has not been realized.  Without a recovery in the real economy, the employment of people to produce goods and services, stock price averages are bound to fall back.

Standard & Poor’s 500 stock index

.

Click on Here’s The Evidence That The Tech Sector Is In A Massive Bubble for analysis of the stock market bubble by Jim Phillips for Business Insider.  Hat tip to Daniel Brandt.