A research group at McKinsey & Company set out to follow the distribution of money in the economy as a result of post-crisis central banking. The team examined the low-interest rates, and tools — conventional and unconventional — central banks have been using to keep rates low. From a profit standpoint, the winners included governments, non-financial corporations, and — in the case of the U.S. — banks. Household income, pensions and insurance, and the rest of the world have lost in terms of net interest income.
The researchers examined the policies of the U.S. Federal Reserve, the Bank of England, the European Central Bank, and the Bank of Japan. They outline how originally, the banks adjusted short-term interest rates through conventional measures, and drove the rates down. When they could push no further, having reached “zero lower bound,” the banks used unconventional measures to retain the low-interest levels, including large-scale asset purchases.
This is known as “QE” in the U.S., or the Fed’s bond buying program. At some point in time, all the central banks participated in a similar program. The result, the report says, is that the combined balance sheets for the banks grew between 2007 and the second-quarter of 2013 by $4.7 trillion dollars.
In order to assist with contextualizing this number, McKinsey’s researchers said to “consider that this increase is so far approximately equal to the annual GDP of the United Kingdom and France combined.”
The Fed establishes monetary policy in the U.S. The Federal Open Market Committee (FOMC) handles “open market conditions,” namely, the purchase and sale of securities as a way to impact the market. In January, the FOMC announced that its monetary policy is set for “promoting maximum employment, stable prices, and moderate long-term interest rates.”
As of the last FOMC meeting in October, the U.S. economy had not experienced the growth necessary to ease bond purchases. Members cited “the ambiguous cast of recent readings on the economy” as a reason it was “prudent to await further evidence of progress before reducing the pace of asset purchases.”
The McKinsey team pointed out that they did not enter into this evaluation to study the effects of central banking policy on all of the economy, or to make judgements about the correctness of such policies. It is the distributional effects of the low-interest rates that were under consideration. How the distribution occurred, the report states, was likely not intentional. Nevertheless, they are what they are. Payments to borrowers, and interest earned on income for savers declined when interest rates did.
“Long-term investors such as pension funds and life insurance companies, as well as households, have lost net interest income because they hold far more interest-bearing assets than liabilities,” the researchers found. However, non-financial entities and governments do not hold nearly as many assets that earn interest, holding instead interest-bearing liabilities, contributing to profits in these sectors.
The low-interest rate played out favorably for banks in U.S., but not in other regions of the world. Total bank deposits in the U.S. rose following the crisis, and banks are able to offer very low interest rates on checking and savings accounts. On average, the rate paid to depositors fell, from 3.4 percent in 2007 to 0.5 percent in 2012.
To examine household savings, the report took into account bank deposits, mutual funds, retirements savings, and so on. It found that in the U.S., as well as in the UK and the Eurozone, households are net savers, and hold more interest-bearing assets than debt. “Ultra-low interest rates have therefore lowered household interest income on assets more than they have reduced debt service payments.”
According to the researcher’s analysis, since 2007, overall U.S. households have lost $360 billion in net interest income. The top 10 percent in the U.S. saw the largest net interest income decrease, and a more minimal decrease was felt by the remainder.
In addition to on average, not being a boon for net interest income in the U.S., the report does not find support that equity markets have benefited from the policies of the central banks. The researchers are also skeptical that households have expanded levels of consumption, because housing has not approached peak pricing.
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