A Middle Finger to the American Savers

First, I would like to congratulate myself on two posts in two days. After a year of blogging, I realized that even my virtual free association on economic matters needs to take some time off every now and then. I sense that the blogging vacation is officially over, so back to work I go.

Business Week's article, Why American Savers Have Drawn the Short Straw tells us what we already know; sucks to be us. And by us I mean the savers, today's white unicorn.

Presumably right about now it's the savers who should be rewarded. We lived within our means and ignored the white noise of those big bad institutions who were trying to get us snookered into their own profit making scheme. We paid down/off credit card debt instead of punting it to the moon. We put a little away for retirement, for a rainy day, for a future purchase to be paid in full. And now when everything comes tumbling down, we should be basking in our glory, the proud but silent collective I told you so!

Fat chance.

Even with a current account deficit that, starved of domestic savings, requires $2 billion a day in foreign financing, economic policymakers are fixated on propping up credit and giving the participants in the housing bubble second chances. In order to do so, they are stripping the hides off of net savers.

Since August of last year, the Federal Reserve has slashed interest rates from 5.25% to 2.00%—wielding a blunt instrument that was swung enough to bend the yield curve in favor of suffering banks. You know, the institutions that screwed up but were too big and important to be deprived of an inalienable right to cheap deposits that they can loan out at several points higher.

My ING savings accounts are certainly not keeping up with inflation. I've tapered off what I save to the bare bones because things like groceries and gas are taking a noticeably bigger bite out of my monthly budget. And my Roth IRA is losing money as fast as I'm putting it in. So when I read this morning's WSJ headline announcing that the Federal government is taking over Fannie and Freddie, I'm having an apoplectic seizure in front of my laptop. Sure, I'm a just little guy (or gal, as it would be), my piddling savings isn't propping up nearly half of the outstanding mortgages in this country (like Fannie and Freddie, in case you were wondering why they get the bailout). But seriously. Moral Hazard anyone?

Moral Hazard is a term economists like to banter about; it basically means that if you don't hold companies in check, they think they can do whatever the heck they want. And they do. And the bailout of Fannie and Freddie, and previously Bear Stearns, pretty much fits the bill of creating a moral hazard. Joseph Stiglitz did an outstanding job of breaking down Fannie and Freddie's moral hazard in a recent article for the Financial Times.

Defenders of the bail-out argue that these institutions are too big to be allowed to fail. If that is the case, the government had a responsibility to regulate them so that they would not fail. No insurance company would provide fire insurance without demanding adequate sprinklers; none would leave it to “self-regulation”. But that is what we have done with the financial system.

Even if they are too big to fail, they are not too big to be reorganised. In effect, the administration is indeed proposing a form of financial reorganisation, but one that does not meet the basic tenets of what should constitute such a publicly sponsored scheme.

First, it should be fully transparent, with taxpayers knowing the risks they have assumed and how much has been given to the shareholders and bondholders being bailed out.

Second, there should be full accountability. Those who are responsible for the mistakes – management, shareholders and bondholders – should all bear the consequences. Taxpayers should not be asked to pony up a penny while shareholders are being protected.

Finally, taxpayers should be com­pensated for the risks they face. The greater the risks, the greater the compensation.

All of these principles were violated in the Bear Stearns bail-out...

But the proposed bail-out of Fannie Mae and Freddie Mac makes that of Bear Stearns look like a model of good governance. It sets an example for other countries of what not to do. The same administration that failed to regulate, then seemed enthusiastic about the Bear Stearns bail-out, is now asking the American people to write a blank cheque. They say: “Trust us.” Yes, we can trust the administration – to give the taxpayers another raw deal.

So, I would like my bailout, please. I would like the consumer savings account to have its own interest rate, and I would like it to be at least 1% higher than the rate of inflation. I'm sure this would cause all sorts of problems for Fannie and Freddie, and I'm sure that it is a suggestion only an economic neophyte could make. But think of it this way. Maybe American savers can bail out America, instead of China doing it for us. If only you'd stop giving us the middle finger.