Deepak Narula’s mortgage-bond fund is up 39 percent this year. George Sanchez’s monthly annuity payout is down 41 percent.
The near-zero interest rate the Federal Reserve charges financial firms, as well as securities purchases that will balloon the central bank’sbalance sheet to almost $4 trillion next year, have made it easier for Narula’s $1.6 billion fund to thrive and more difficult for Sanchez, a former college library director, to enjoy retirement.
Chairman Ben S. Bernanke’s efforts to energize the U.S. economy since 2008 have been credited with rousing the housing market from a six-year funk, lowering the jobless rate and putting more money in the pockets of both mortgage lenders and borrowers. At the same time, Fed policy has been blamed for starving money-savers of income and boosting certain asset prices, widening the gap between the rich and the rest of the country, said Joseph E. Stiglitz, the Nobel Prize-winning Columbia University economist.
“Monetary policy has been indirectly, surreptitiously helping the top and hurting the bottom,” Stiglitz said.
Fed officials declined to comment for this story on whether their policies exacerbated inequality, said Barbara Hagenbaugh, a spokeswoman for the U.S. central bank. Bernanke said last year that the Fed aims “strictly to do what’s in the interest of the broad public.”
He said last week that the policies are intended to “try and create a stronger economy, more jobs, so that folks across the country, including places like the one where I grew up, will have more opportunity to have better lives for themselves.” Bernanke was raised in Dillon, South Carolina, population 6,745.
Divergent Paths
Since the end of the 18-month recession in June 2009, people like Narula and Sanchez have followed divergent economic paths. Earnings rose 5.5 percent last year for the 1.2 million households whose incomes put them in the top 1 percent of the U.S., according to estimates from the U.S. Census Bureau. At the same time, income fell 1.7 percent for the 97 million households in the bottom 80 percent -- those making less than $101,583.
After two rounds of asset purchases totaling $2.3 trillion through June 2011, the central bank began so-called QE3 in September. QE stands for “quantitative easing,” in which the Fed buys securities to channel cash into the financial system.
The goal is to stimulate spending and boost lending, which is meant to generate more jobs. Bernanke said last week the central bank will purchase $85 billion of assets a month next year “to increase the near-term momentum of the economy.” That would bring its balance sheet to almost $4 trillion, up from $924 billion on Sept. 10, 2008, the week before the collapse of investment bank Lehman Brothers Holdings Inc. deepened the recession.
Commodity Speculation
The Fed’s mortgage-securities purchases have bolstered demand, and the possibility of profit, for fund managers such as Narula. Hedge funds that handle mortgage securities have a 20 percent gain on average this year, according to data compiled by Bloomberg. The fund run by Narula, founder of New York-based Metacapital Management LP, is beating that at 39 percent through Dec. 14, according to an e-mail obtained by Bloomberg News. Narula declined to comment.
With money gained from Fed securities purchases, investors speculated on the future prices of commodities, helping to drive up food and energy prices for consumers, said John Gnuschke, director of the Sparks Bureau of Business & Economic Research at the University of Memphis in Tennessee.
After rising and falling independently for decades, prices for stocks and commodities rose “in lockstep” from 2008 through 2011, when the central bank conducted its first series of securities purchases, said Ruchir Sharma, head of emerging market equities and global macro at Morgan Stanley Investment Management in New York.
Higher Prices
Twenty-two of the 24 commodities in the S&P GSCI Commodity Spot Index have gained since the recession ended in June 2009, with only natural gas and cocoa lagging. Corn more than doubled in price even before this year’s drought sent values soaring. Heating oil is up 77 percent and wheat 58 percent. That means higher energy and food prices for consumers like Arlene McGuirk.
“Prices are ridiculous,” said McGuirk, a 65-year-old in Sterling, Massachusetts, who, like Sanchez, supplements a fixed income with a diminished annuity. “People who say there’s no inflation never go grocery shopping.”
Inflation has been lower in the 41 months since the recession ended than it was before. The Consumer Price Index climbed 7.6 percent since June 2009, the federal Bureau of Labor Statistics said. That compares with an 11.8 percent rise in the 41 months before the downturn.
‘Excess Money’
Commodity prices are trading above their value according to supply and demand, Sharma said. “The increase is because of excess money,” he said.
Not everyone agrees. Growing demand in emerging countries, including China, helps explain commodity price increases, said Chris Rupkey, chief financial economist for Bank of Tokyo- Mitsubishi UFJ Ltd. in New York.
Still, Sharma said the situation reflects the limits of the Fed’s main tool for influencing the economy -- controlling the amount of money in the financial system.
“You can print all the money you want but you can’t control where it will end up,” he said. “It ends up in the commodities sector and benefitting the wrong people.”
While higher commodities prices can also fuel economic growth, that effect is undercut by the fact that the U.S. is a net importer of commodities, Stiglitz said.
Sheik’s Share
“It’s redistribution from consumers to owners of these resources, from a car owner to a sheik,” he said. The negative consequences fall hardest on low-income people, who spend a higher percentage of their income on food and fuel than better- off people, Sharma said.
Gasoline prices are 23 percent higher than they were in June 2009, according to the American Automobile Association.
In the view of Bank of Tokyo-Mitsubishi’s Rupkey, the bigger Fed-related issue is the comparatively paltry return savers get -- a result of the Fed’s decision to hold near zero the interest rate it charges banks. This week marks the fourth anniversary of ZIRP, the zero interest rate policy, which hurts Sanchez and others who have their savings in interest-bearing accounts to keep the principal safe, Rupkey said.
Sanchez, a 65-year-old former director of library services at LIM College in New York, teaches part-time at the Fashion Institute of Technology to make ends meet.
Unaffordable Retirement
“I couldn’t afford to retire full-time,” said Sanchez, who lives in Manhattan. “I have some money in fixed income and it doesn’t make much money. And I have some money in cash and that doesn’t make any money at all.”
Sanchez said that when he first started an annuity in 2005, his interest rate was 5.25 percent. Now it’s 2 percent, he said. That means that instead of getting a monthly payout of $700, he gets $413.
“The downside of the current monetary policy is that it is corrupting financial decision-making and requiring folks to take a little more risk than perhaps is proper,” said Roy M. Whitehead, chief executive officer of Washington Federal Inc., a Seattle thrift. “We’re penalizing those who behaved well during the time leading up to the financial crisis. It doesn’t seem fair.”
With the Fed’s lending rate at 0.25 percent, JPMorgan Chase & Co. (JPM), which leads U.S. banks with $1.14 trillion in deposits, offers to pay0.01 percent annual yield on savings accounts of less than $10,000.
Withdrawal Fee
Charlotte, North Carolina-based Bank of America, the second-biggest in deposits with $1.06 trillion, offers the same rate on the same deposit amount. Three withdrawals a month are free, according to the bank’s website. After that, the bank charges $3 per withdrawal.
Anne Pace, a Bank of America spokeswoman, declined to comment. Jennifer Zuccarelli, a spokeswoman for New York-based JPMorgan Chase, did not respond to requests for comment.
Bernanke said this month that the zero-rate policy will continue into 2015.
“The way for the Fed to support a return to a strong economy is by maintaining monetary accommodation, which requires low interest rates for a time,” the Fed chairman said in an October speech to the Economic Club of Indiana. “If, in contrast, the Fed were to raise rates now, before the economic recovery is fully entrenched, house prices might resume declines, the values of businesses large and small would drop, and, critically, unemployment would likely start to rise again.”
Four-Year Low
The U.S. jobless rate fell to 7.7 percent last month, the lowest in four years, according to the Bureau of Labor Statistics. The rate hasn’t dipped below 7 percent since November 2008. The central bank said on Dec. 12 for the first time that rates will stay low “at least as long” as the jobless rate remains above 6.5 percent and Fed economists project inflation of no more than 2.5 percent one or two years in the future.
“The losers in monetary policy are the savers,” Rupkey said. “Their rates are at zero for four years with the promise of two-and-a-half more years of zero rates. There’s little hope for the savers out there.”
Mortgage borrowers, on the other hand, have never had it better. Bob Miller, who bought a 2,100-square-foot condo in Greenwich, Connecticut, in September for $680,000, got a 3.5 percent rate on his mortgage. After a 20 percent down payment and not counting taxes and maintenance fees, his monthly bill would be $2,443. At the 18.25 percent rate he paid for his first house 30 years ago, payments would have been $8,309.
Super Bowl
The difference helped Miller, 57, and his wife, now empty- nesters, pay for re-carpeting and painting their new place, which overlooks a pond where they plan to take their 3-year-old granddaughter to feed the ducks. Miller is also in the market for a big-screen, high-definition television.
“I’m going to watch my New York Giants repeat as Super Bowl champions and then I’ll watch the Yankees in the summer,” said Miller, who leases commercial space for a living.
The Fed’s rate pushed 30-year mortgage-borrowing costs to 3.31 percent last month, the lowest in history, according to Freddie Mac, the government mortgage buyer. At the same time, U.S. home prices have risen 7 percent so far this year after losing 35 percent from their July 2006 peak, according to the S&P Case-Shiller Home Price Index.
Low rates have sparked a boom of home-loan refinancings. The Mortgage Bankers Association expects $1.7 trillion of mortgages to be written this year, the most since 2009. About 71 percent will be refinancings, the group says, up from 46 percent in 2008.
Seven-Year Wait
Not everyone can take advantage. Damian Bertain is one of the 4 million Americans who went through foreclosure in the last 3½ years, according to RealtyTrac Inc. Bertain, a broadband technician who works out of Suddenlink Communications’s Eureka, California, office, quit paying his mortgage, lost his home and filed for bankruptcy after a divorce from his wife of 12 years that was finalized earlier this year. He was forced, at the age of 39, with joint custody of three children, to live with his parents.
Borrowers must wait as much as four years following a bankruptcy to qualify for a Fannie Mae-guaranteed mortgage, according to the U.S. agency’s guidelines. A seven-year wait is required after a foreclosure, or three years with documented extenuating circumstances, such as a job loss.
The house in Fortuna, California, that Bertain bought for $522,000 in 2006 was sold out of foreclosure last year by Bank of America for $244,000, he said.
Starting Over
“I have to start over and rebuild my credit and that’s definitely frustrating,” said Bertain.
Borrowers whose credit was wrecked during the housing bust are going to have difficulty despite the Fed’s efforts, Eric S. Rosengren, president of the Federal Reserve Bank of Boston, said in a Dec. 3 presentation in New York.
“Does it work perfectly? No,” he said of keeping interest rates at rock bottom. “Does it work better than not doing it? Definitely. You have to weigh the costs and the benefits. I think so far the benefits have outweighed the costs.”
Not all the benefits go to the borrower. Mortgage lenders are able to profit from the sale of their home loans to the Fed, said Rael Gorelick, co-founder and principal of Charlotte, North Carolina-based Gorelick Brothers Capital LLC, which invests in mortgage funds. The central bank buys mortgage-backed securities at a 2.5 percent yield, meaning the banks make the difference between that and the prevailing home-loan interest rate, he said. That’s about 1 percentage point on every loan that ends up on the Fed balance sheet.
Making Money
“The mortgage banking people are making a ton of money, they just don’t want anybody to know about it,” said Paul J. Miller Jr., a bank analyst at FBR Capital Markets Corp. in Arlington, Virginia. Critics could cast the Fed’s asset purchases as another back-door bailout of the big banks, Miller said, though bank profits will decline once the Fed-fueled refinancing boom is over.
The largest residential lenders are San Francisco-based Wells Fargo & Co. (WFC), with about one-third of the market, and JPMorgan Chase.
Wells Fargo said 72 percent of the mortgage applications it received in the third quarter were for refinancings, up from 39 percent in the same period in 2008, the last before QE began. The bank said it received $188 billion in applications, more than double the $83 billion in the three months ending September 2008. Spokesman Ancel Martinez declined to comment.
‘Getting Crushed’
The boon for the banks rankles David A. Stockman, a former Michigan congressman and director of the U.S. Office of Management and Budget under President Ronald Reagan.
“The Federal Reserve is in the tank for Wall Street,” said Stockman, who headed auto-parts maker Collins & Aikman Corp. “That’s why the 1 percent are thriving on financial speculation while savers, workers and retirees are getting crushed by zero interest rates and inflationary food and energy costs. It’s damn unfair, and it doesn’t work either.”
Bernanke said last week that it’s important to remember the real people with real troubles behind the economic statistics tracked by the central bank.
“It’s very important to try to keep in mind the reality of unemployment, of foreclosure, of weak wage growth, etc.,” Bernanke said. “So we always try to do that.”
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