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Fed is forcing America's retirees to bail out younger generation

By someone else   2015 Oct 16, 7:11am   2 links   8,711 views   38 comments   watch (1)   quote      

http://finance.yahoo.com/news/pnc-ceo-fed-forcing-americas-174354606.html

And so the era of ultra-easy, crisis-era monetary policy goes on. One banking CEO, however, thinks it was a mistake, and the choice is hurting the American economy. According to PNC GroupCEO William Demchak, the Federal Reserve's zero-interest-rate policy is actually hurting the long-term health of the US economy.
"We are basically in the extreme bailing out the younger generation and putting it on the backs of retirees with this interest-rate policy, and I continue to think it's wrong," said Demchak in a quarterly earnings call Wednesday.

Demchak explained that the low interest rates are encouraging irresponsible risk-takers while punishing responsible savers.

"I think that in effect the destruction of retirement income for retirees, we have trained people their whole lives that once they retire and they are supposed to change their 401(k) and put it into kind of a less-risky fixed-rate investment portfolio, today they can't do it, they can't live on it," said Demchak. "So we are stretching out the need for people to work, we are destroying their ability to retire with the savings they have today."

#investing #economics #fed #interestrates

Comments 1-38 of 38     Last »

1   georgeliberte   2015 Oct 16, 7:31am     ↑ like (4)   ↓ dislike   quote    

Sorry Patrick, but no, they are not "bailing out the younger generation" who they will screw also. They are bailing out high roller Wall Street gamblers with everyone else's money.

2   tatupu70   2015 Oct 16, 7:35am     ↑ like (3)   ↓ dislike (6)   quote    

IMO the Fed's influence is vastly overrated. There is simply vast amounts of cash looking for safe places right now and that pushes down interest rates due to wealth inequality. You can see this by looking at velocity of money

There's a pretty strong correlation between velocity and interest rate and it has nothing to do with the Fed.

3   smaulgld   2015 Oct 16, 7:47am     ↑ like (3)   ↓ dislike   quote    

Wait till they go negative interest rates!

Old Savers

The impact of negative interest rates means that retired people can no longer rely on fixed income to fund their expenses because under a negative interest rate regime there are no interest payments.

Artificially low interest rates have already decimated many retirees’ savings as they have had to pull principal out because the interest payments were not large enough to fund their expenses. Under negative interest rates, the bank will perform the task of depleting and accelerating the decline of retiree's principal by taking their cut each month.

Unable to fund their own retirements, many retirees will remain in the labor force or re enter it, competing with younger workers for jobs, or risk their savings in the stock market or vote for increased retirement benefits from their governments.

Central planners are undeterrred by the predicament of the impact of negative interest rates on retirees – old people own stocks and homes too and they go up under our zero and negative interest rate policies, so they too benefit from our interest rate policies. Suck it up!

https://smaulgld.com/dark-side-negative-interest-rates/

4   Dan8267   2015 Oct 16, 8:26am     ↑ like (2)   ↓ dislike   quote    


"We are basically in the extreme bailing out the younger generation and putting it on the backs of retirees with this interest-rate policy, and I continue to think it's wrong," said Demchak in a quarterly earnings call Wednesday.

Oh, now that those low-interest-rates policies have kept up the inflated property values of old farts, it's OK to raise them. No politician ever had a problem fucking over the young to prop up the wallets of the old.

The Fed should have kept interest rates at 7% or more back in 2001 to 2010. There would have been no bubble or burst or Second Great Depression. The Fed should have let property prices fall so that the young could have bought. Then they wouldn't need to bail out the young today. Monetary policy is nothing more than jumping from one bailout to the next, with each bailout caused by its predecessor.

5   Blurtman   2015 Oct 16, 8:56am     ↑ like (3)   ↓ dislike   quote    

Good! Good!

6   Blurtman   2015 Oct 16, 9:03am     ↑ like (4)   ↓ dislike (1)   quote    

Dan8267 says

The Fed should have kept interest rates at 7% or more back in 2001 to 2010. There would have been no bubble or burst or Second Great Depression. The Fed should have let property prices fall so that the young could have bought. Then they wouldn't need to bail out the young today. Monetary policy is nothing more than jumping from one bailout to the next, with each bailout caused by its predecessor.

That will take a revolution.

7   Heraclitusstudent   2015 Oct 16, 9:42am     ↑ like (6)   ↓ dislike   quote    


Fed is forcing America's retirees to bail out younger generation

This is non-sense. Retirees are living off the production of younger generations, not the other way around.
If anything the inflated values of assets are killing younger generations.

8   tatupu70   2015 Oct 16, 9:45am     ↑ like   ↓ dislike   quote    

Dan8267 says

The Fed should have kept interest rates at 7% or more back in 2001 to 2010. There would have been no bubble or burst or Second Great Depression. The Fed should have let property prices fall so that the young could have bought. Then they wouldn't need to bail out the young today. Monetary policy is nothing more than jumping from one bailout to the next, with each bailout caused by its predecessor.

What makes you think that property prices would have fallen further?? There were investors falling all over themselves to buy rental houses in 2009/10/11. The investors complained about a lack of supply of houses. All that would have happened is more hedge funds and Iwogs out there making money renting out houses.

I don't see that as an improvement.

It's amazing to me how many people believe in this cult of the Fed. The problem is NOT the Fed.

9   curious2   2015 Oct 16, 1:45pm     ↑ like (2)   ↓ dislike   quote    


younger

in this instance does not mean millenials; it means boomers, who want to keep borrowing against unreal equity in their houses. Meanwhile, elderly people are required to pay more for Medicare, which is now a requirement to collect the Social Security that they had paid for. They are not allowed to buy what medicine they need without paying for permission first, usually from some indoctrinated salesman less than half their age, or maybe a boomer, whom they are required to overpay. Meanwhile, their income is reduced for the reasons described in the OP.

tatupu70 says

I don't see... It's amazing to me how many people believe in this cult of the Fed.

You don't see because you refuse to look. By bailing out the banks, the Fed enabled the same people to remain in charge, and prevented change. You can see the price rebound around 2010. Also, as the OP described, by creating artificial demand for bonds (QE), the Fed suppressed yields, forcing retirees to stay in stocks, as described in the OP. Stocks have done well, so retirees with stocks haven't felt the pain yet, but they will howl when stock prices fall or CPI increases. By propping up asset prices, the Fed has maintained a high ratio of asset prices to consumer prices, which is politically popular in the short term. The problem is it has replaced market pricing with centrally planned pricing based on political decisions, and in the long run that doesn't work: "in the short run, the market is like a voting machine--tallying up which [assets] are popular and unpopular. But in the long run, the market is like a weighing machine...." The best analysis of this comes from iwog, who wrote that current fiscal policy funnels surplus money supply up to the top 1% and thus suppresses consumer demand at the CPI level but widens the gap between rich and poor. Prices in federally subsidized sectors (e.g., medicine, education, real estate) continue climbing, as do prices in the trophy properties that the top 1% compete for (e.g., the Hamptons), but otherwise workers can't bid up prices on everything else. Certain deluded people insist the solution is to raise CPI, which they imagine will somehow raise wages, which is like pushing on a rope, or putting the cart before the horse. When prices rise, standard of living falls, as retirees are experiencing with their medical bills rising even as their income falls due to low yields, and as workers are experiencing as their wages don't keep up with the price of subsidized necessities like housing.

As for hedge funds and other investors looking to buy houses around 2010, yes that was happening, for several reasons. Mainly they could see the writing on the wall: houses had become the new "risk free" investment, replacing cash, because the Fed declared it would sacrifice all other priorities in order to prop up housing (and thus the executives of member banks). That increased the value of housing relative to other investments, raising demand and prices. "Housing can only go up." The question is, when does the game end, and when does the ratio of asset prices to consumer prices return to normal? As iwog wrote, probably around 2017, when we get a new team in charge; the question is whether they will sacrifice housing prices or allow inflation. iwog guesses the former, and I guess the latter. Either way, the Fed effect is limited by the operation of time and the fundamental forces involved; I certainly don't worship the Fed or imagine they can continue forever to prop up the asset:consumer price ratio, but they have voted to do so for as long as they can.

10   tatupu70   2015 Oct 16, 2:08pm     ↑ like   ↓ dislike (1)   quote    

curious2 says

You don't see because you refuse to look. By bailing out the banks, the Fed enabled the same people to remain in charge, and prevented change

How? The banks are private corporations and they lost Billions. If their board of directors were OK with their management staff making decisions that caused their shareholders to lose Billions of dollars, how is it the Federal Reserve's fault??

curious2 says

Also, as the OP described, by creating artificial demand for bonds (QE), the Fed suppressed yields, forcing retirees to stay in stocks, as described in the OP.

The bond yields have been following the same amazingly consistent trend with or without Fed intervention. The Federal Reserve did pretty much nothing to bond yields. If you think low yields are bad, blame inequality. That's the culprit.

curious2 says

The problem is it has replaced market pricing with centrally planned pricing based on political decisions, and in the long run that doesn't work:

I couldn't disagree more. It is market pricing.

curious2 says

that current fiscal policy funnels surplus money supply up to the top 1% and thus suppresses consumer demand at the CPI level but widens the gap between rich and poor.

Iwog is correct, but as you should know, the Fed has zero responsibility for fiscal policy. My argument is that you see the Fed bogeyman behind every tree, in every nook, and in everything that is wrong with the economy. The truth is that the Fed is trying to keep the economy from imploding with the only tools in its arsenal. It's actions are a symptom of the problem--not the cause. 30 years of conservative, trickle down economics have gotten us here...

11   dublin hillz   2015 Oct 16, 2:57pm     ↑ like   ↓ dislike   quote    

The elderly can create a portfolio of 60% stocks, 40% bonds funds and withdraw 4% per year. As low interest rates inflated stock values due to kick in the ass money flow follow, their portfolio balances would have increased and they would not have to rely on traditional low risk CD approach to make it through retirement. In most cases, 4% withdrawal rate can last indefinitely even in cases of significant market downturns.

12   curious2   2015 Oct 16, 3:09pm     ↑ like (3)   ↓ dislike   quote    

tatupu70 says

If their board of directors were OK with their management staff making decisions that caused their shareholders to lose Billions of dollars, how is it the Federal Reserve's fault??

You're getting excited or your "?" key is repeating. I'm not going to waste time on your excitement. Obviously the personnel decisions result from the fact that the executives succeeded in getting the "TBTF" banks more money than ever before, via the Fed and federal bailout legislation. If the "TBTF" had been allowed to fail, they would have gone BK or been bought out. Many banks, probably most, had better management and some would have been in a position to replace the failed banks if the failures had been allowed to fail. That's how a market works, when it is allowed.

tatupu70 says

My argument is that you see the Fed bogeyman behind every tree....

That is merely a lie, not an argument. You like fights, and you seem to do nothing else. I referred already to fiscal policy, and I could also mention extraordinary legislation enacted by Congress at the behest of Hank Paulson, among other factors. The Fed did have some very significant effects though. If you think all its actions had no effect, then obviously you must conclude that its continued existence is a waste of money and it should be abolished. Congratulations, you must now vote for Ron Paul.

13   tatupu70   2015 Oct 16, 3:46pm     ↑ like   ↓ dislike (1)   quote    

curious2 says

You're getting excited or your "?" key is repeating. I'm not going to waste time on your excitement.

My apologies. I will keep close tabs on the number of question marks that I use from now on.

curious2 says

Obviously the personnel decisions result from the fact that the executives succeeded in getting the "TBTF" banks more money than ever before, via the Fed and federal bailout legislation

So, what you're saying is that the directors were OK with losing Billions as long as they were able to make millions in the following years?

curious2 says

If the "TBTF" had been allowed to fail, they would have gone BK or been bought out. Many banks, probably most, had better management and some would have been in a position to replace the failed banks if the failures had been allowed to fail. That's how a market works, when it is allowed.

Some were bought out and a couple were allowed to fail. Certainly that would have been the ideal solution. Whether or not you agree, the people in charge thought there was a real risk of the economy imploding. That would have been a market "working" sure. But "working" can mean 50% unemployment, millions homeless and hungry. Wouldn't you rather have a market that was helped over that?

curious2 says

That is merely a lie, not an argument

You clearly don't know the definition of lie.

curious2 says

You like fights, and you seem to do nothing else. I referred already to fiscal policy, and I could also mention extraordinary legislation enacted by Congress at the behest of Hank Paulson, among other factors. The Fed did have some very significant effects though. If you think all its actions had no effect, then obviously you must conclude that its continued existence is a waste of money and it should be abolished. Congratulations, you must now vote for Ron Paul

That's quite amusing, coming from the poster that has picked a fight was almost everyone here. Fiscal policy is legislative action. The Fed does not control legislative actions.

The Federal Reserve actually contributes money to the Federal Government. I'm not sure abolishing it would save any money. Regardless, I think it does serve a purpose and its actions do have some effects. Just not the effects you attribute.

14   curious2   2015 Oct 16, 5:24pm     ↑ like (1)   ↓ dislike   quote    

tatupu70 says

That's quite amusing....

Thanks. I've learned a lot from some of the PatNet posters, and I wish that I could include you in that list. Since I can't, I don't see a need to waste time on your endless questions.

15   tatupu70   2015 Oct 16, 5:31pm     ↑ like   ↓ dislike (2)   quote    

curious2 says

Thanks. I've learned a lot from some of the PatNet posters, and I wish that I could include you in that list. Since I can't, I don't see a need to waste time on your endless questions.

Suit yourself. I only count two questions in my last post, but it's certainly your prerogative to answer or not answer whatever you please.

16   Booger   2015 Oct 16, 7:35pm     ↑ like (1)   ↓ dislike   quote    

dublin hillz says

The elderly can create a portfolio of 60% stocks, 40% bonds funds and withdraw 4% per year. As low interest rates inflated stock values due to kick in the ass money flow follow, their portfolio balances would have increased and they would not have to rely on traditional low risk CD approach to make it through retirement. In most cases, 4% withdrawal rate can last indefinitely even in cases of significant market downturns

Yeah, but how many people are going to be able to come up with ~ 2M needed it invest at 4% in order to comfortably retire+

17   indigenous   2015 Oct 16, 10:53pm     ↑ like (1)   ↓ dislike (2)   quote    

The Fed has been stealing through counterfeiting and financing war since it's inception.

Very simply stealing through inflation.

Here is a historic inflation calculator:

http://www.westegg.com/inflation/

do an experiment enter 1 dollar in 1800 and then enter 1912. You will find that you could buy a dollar's worth of goods in 1912 for 57 cents pointing out that there was deflation from 1800 until 1912.

Then from 1912 until 2014 and 1 dollar's worth of goods will cost you $24.16

The Fed steals money through counter fitting. I know this is impossible to understand for the libbys. But for the rest of you this clearly proves what the Fed does.

18   georgeliberte   2015 Oct 17, 7:05am     ↑ like (2)   ↓ dislike   quote    

Indigenous, if you are going to insult people and imply they are unintelligent, at least spell "counterfeiting" correctly. Otherwise your post will become self-satire. BTW what do you have against G.Gorden Libby and his family, they are fascists.

19   indigenous   2015 Oct 17, 7:46am     ↑ like   ↓ dislike   quote    

I don't like some of the can goods

Yet no mention of the inflation thing...

20   zzyzzx   2015 Oct 17, 8:35am     ↑ like   ↓ dislike   quote    

Sure, seniors are being screwed by low interest rates, but that's why they got Medicare Part D.
https://en.wikipedia.org/wiki/Medicare_Part_D

Medicare Part D, also called the Medicare prescription drug benefit, is a United States federal-government program to subsidize the costs of prescription drugs and prescription drug insurance premiums for Medicare beneficiaries.

Of course when interest rates go back up they will still have their new welfare plan.

21   mell   2015 Oct 17, 8:41am     ↑ like (1)   ↓ dislike   quote    

tatupu70 says

IMO the Fed's influence is vastly overrated.

You can't and will never win this argument, since the Fed could and should be abolished then. Calling pumping trillions of "liquidity" into the economy overrated influence is simply denial.

22   Bellingham Bill   2015 Oct 17, 10:22am     ↑ like (1)   ↓ dislike (1)   quote    

Dan8267 says

The Fed should have kept interest rates at 7% or more back in 2001 to 2010. There would have been no bubble or burst

No, the bad lending came from bad underwriting, bad appraising, bad bond rating, bad derivatives engineering, and bad due diligence.

funny thing all these bad actors doing these bad things made tons of money, the beauty of the un- or de- regulated free market.

8 million loans were foreclosed in the aftermath, and interest rate policy had JACK SHIT to do with that.

Tho Fed intervention did prevent ANOTHER 8 million loans from defaulting 2010-now.

8 million loans doesn't sound so bad until you do the math on $200,000 per of unrecoverable debt. That's a trillion or two.

Shows the $7T debt bubble we were sitting on going into the down cycle.

Now, the Fed was also responsible for policing our financial system, and that is something Greenspan and his cohorts utterly failed at, because markets cannot fail, only be failed.

23   Dan8267   2015 Oct 17, 10:50am     ↑ like   ↓ dislike   quote    

Bellingham Bill says

No, the bad lending came from bad underwriting, bad appraising, bad bond rating, bad derivatives engineering, and bad due diligence.

None of that deters from the fact that very low interest rates drove tens of millions to speculate in real estate. Without demand for loans, the bubble and burst and economic collapse would not have happened.

24   tatupu70   2015 Oct 17, 1:55pm     ↑ like   ↓ dislike   quote    

mell says

You can't and will never win this argument, since the Fed could and should be abolished then. Calling pumping trillions of "liquidity" into the economy overrated influence is simply denial.

I'm under no illusion that I could ever change your mind.

But I didn't say putting liquidity in the market was overrated. Or at least I didn't mean to--only that claiming that the Federal Reserve sets 10 year treasuries or LIBOR is ridiculous. Interest rates are set by the market and while the Fed can influence them over short periods, the market is large enough that it sets the rates.

But saying that the Fed doesn't set rates doesn't mean they are useless and should be abolished. Being a lender of last resort is valuable. Having an independent entity control money supply is valuable as well--although I would agree that the independence of the Fed is sometimes in question.

25   iwog   2015 Oct 17, 3:06pm     ↑ like   ↓ dislike (2)   quote    

It's not the fed and again I'll point out that fed cult worship is going to send this country down the drain because you people are going to be blindsided by the REAL problem.

The more idle cash there is in the world, the lower long term interest rates will go as that idle cash bids up the price of long term bonds.

NOTHING The fed has done, is doing, or will do can possibly have any long term effect on this process.

26   iwog   2015 Oct 17, 3:14pm     ↑ like (1)   ↓ dislike (1)   quote    


Demchak explained that the low interest rates are encouraging irresponsible risk-takers while punishing responsible savers.

Nope, that isn't what is happening.

A long term bond rate of 2% means there aren't any safe opportunities for people to invest and earn higher than 2%. What's incredible about this is that the 2% is BEFORE INFLATION AND TAXES so essentially there aren't an safe opportunities for people to invest and earn anything at all.

This is not a supply side crisis, this is a demand side crisis. Interest rates aren't going to increase until consumers get more money through wages or government entitlements or borrowing. Pick one.

27   marcus   2015 Oct 17, 3:56pm     ↑ like   ↓ dislike   quote    

iwog says

This is not a supply side crisis, this is a demand side crisis. Interest rates aren't going to increase until consumers get more money through wages or government entitlements or borrowing. Pick one.

I think there are (at least one or two) other scenarios under which it can happen. Think about it.

Although I guess the kind of market or dollar crises I'm thinking of would not be totally independent of consumer spending.

How about if Bernie Sanders is elected President while the so called House Freedom Caucus simultaneously gains power. What happens then ? Will it just be more of the same? OR could it trigger some sort of reckoning.

28   landtof   2015 Oct 17, 4:00pm     ↑ like   ↓ dislike   quote    

iwog says

this is a demand side crisis.

true story.

what businesses do as a result of the monetary policy used to deleverage debt from 2008's bust is not exactly "all the fed's fault." when share buybacks are far more lucrative and way safer than CAPEX or IR&D - we've got a "weak buyer" problem. commodity prices are of course a much more direct gauge of this.

however, the usefulness of the fed's policy in the US today is questionable. the concern over EM's and the Eurozone will not improve simply with the passage of time. a return to normal monetary policy is a signal to change course, and that is necessary for a public that has been stretched very thin over the last 7-8 years.

29   bob2356   2015 Oct 17, 8:12pm     ↑ like (1)   ↓ dislike   quote    

Dan8267 says

Bellingham Bill says

No, the bad lending came from bad underwriting, bad appraising, bad bond rating, bad derivatives engineering, and bad due diligence.

None of that deters from the fact that very low interest rates drove tens of millions to speculate in real estate. Without demand for loans, the bubble and burst and economic collapse would not have happened.

Is that why there has been a real estate bubble and crash roughly every 18 years from the start of the republic until the great depression then the cycle restarted after WWII no matter what the interest rates were? Interest rates were 10% or more for the 1980's housing bubble which burst in 1989. http://www.businessinsider.com/the-economic-crash-repeated-every-generation-1800-2012-1?op=1

30   indigenous   2015 Oct 17, 9:54pm     ↑ like   ↓ dislike (1)   quote    

bob2356 says

Is that why there has been a real estate bubble and crash roughly every 18 years from the start of the republic until the great depression then the cycle restarted after WWII no matter what the interest rates were?

That is interesting, so the next one will be in 2024.

31   Tenpoundbass   2015 Oct 17, 10:04pm     ↑ like (1)   ↓ dislike (2)   quote    

When Altimeters starts to set in on me, I'll take all of my money out of the bank and bury it somewhere.
Ask me where I hid it some two years later, when I'm drooling my 12 O Clock apple sauce.
If I guess right you can have it.

32   tatupu70   2015 Oct 18, 5:39am     ↑ like (1)   ↓ dislike   quote    

Tenpoundbass says

When Altimeters starts to set in on me

When?

(sorry, you left the door wide open)

33   BlueSardine   2015 Oct 18, 7:31am     ↑ like   ↓ dislike (1)   quote    

Pneumatic tube travel will displace air travel in the not so distant future, forcing plane parts onto the Amazon Ebay juggernaut...

tatupu70 says

Tenpoundbass says

When Altimeters starts to set in on me

When?

34   Entitlemented   2015 Oct 21, 2:30pm     ↑ like   ↓ dislike   quote    


"I think that in effect the destruction of retirement income for retirees, we have trained people their whole lives that once they retire and they are supposed to change their 401(k) and put it into kind of a less-risky fixed-rate investment portfolio, today they can't do it, they can't live on it," said Demchak. "So we are stretching out the need for people to work, we are destroying their ability to retire with the savings they have today."

True, but do we expect to enact progressive laws for Manufacturing and Innovation support when the goverment has grown 3X over the past 20 years while private sector manufacturing has shrunk 2.5x?

If not then what are the options?

35   indigenous   2015 Oct 21, 7:21pm     ↑ like   ↓ dislike   quote    

SoftShell says

Pneumatic tube travel will displace air travel in the not so distant future, forcing plane parts onto the Amazon Ebay juggernaut...

Is that true? Cool!

36   ThreeBays   2015 Oct 21, 8:39pm     ↑ like   ↓ dislike   quote    

I thought America's irresponsible retirees are going to leave a ton of debt for the younger generation.

For the 40% of boomers that have no retirement savings it doesn't matter. For those that do, doesn't the asset price inflation help them?

37   georgeliberte   2015 Oct 22, 12:19pm     ↑ like   ↓ dislike   quote    

38   TwoScoopsMcGee   2015 Oct 22, 1:31pm     ↑ like   ↓ dislike   quote    

Tax Breaks for Import Substitution.

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