The Great American Bank Robbery

The largest bank robbery in history is in process, but no police cars have been dispatched to the scene of the crime.

That’s because no bank is being robbed. Instead, the banks are robbing their depositors. While all depositors are victims, some people are suffering greater losses than others. I call them “the Solvent Seniors.”

You are a Solvent Senior if you are old enough to be collecting Social Security, and your income on your savings is (or was) greater than your Social Security benefits. We’re talking about millions of people. According to the “Basic Facts of Social Security” 48 percent of married couples and 28 percent of single people have more income from savings and other sources than from Social Security. We’re not talking about rich people here, just people who saved to maintain their independence and dignity in their old age.

Television economist Lawrence Kudlow raves on CNBC about the opportunities in bank stocks and how much money banks can make with virtually no cost for deposits. What Mr. Kudlow and the other talking heads don’t mention is that the same conditions are a disaster for Solvent Seniors.

Worse, this can become a long-term disaster. As I pointed out in an earlier column, if you’re retired and get half your retirement income from interest on your savings, current interest rates translate into a whopping 23 percent drop in income from 2006, just a few years ago. What neither political party nor the Federal Reserve will admit is that every dime our banking system is making through low deposit costs is coming out of the pockets of savers. Some would call this theft, even though it isn’t being done with a gun. Others may say it’s a tax that doesn’t have to be called a tax. You decide.

Based on $7 trillion of bank deposits, what is happening amounts to a gigantic income transfer. The income goes straight from Solvent Seniors and others to the bankers. No bullets fired, no blood on the floor, no awkward displays of public carnage.

Of course, the same below-inflation interest rates also make it easier for Washington to pay the interest on our massive federal debt.

Skeptical? Then consider recent history. In early 2006 the yields on guaranteed investments like Treasurys and CDs were nearly 1 percent better than the rate of inflation. That’s quite low by historical standards. But today, even a 5-year Treasury note is yielding 1 percent a year less than the trailing inflation rate. A 6 month CD yields a whopping 3 percentage points less than the trailing inflation rate (see figures in the table below).

The Great American Bank Robbery

This table compares the yields on a variety of guaranteed savings instruments, high rated corporate bonds and home mortgages at the beginning of 2006 and the beginning of 2010 with the trailing rate of inflation for both periods. The measure of inflation used is the CPI-W, the same measure used for calculating changes in Social Security benefits.

Measure Rate at 1/2006 Rate at 2/2010
Avg. 6 month CD 4.69 percent 0.30 percent
1 year Treasury 4.45 0.35
2 year Treasury 4.40 0.86
3 year Treasury 4.35 1.40
5 year Treasury 4.45 2.36
High Quality Corporate Bond 5.29 5.35
Avg. Conventional Mortgage 6.15 4.99
Trailing Inflation (CPI-W) 3.7 3.3 (to 1/2010)

It’s a tax or a robbery but it’s called monetary policy. It takes money from one and transfers it to another, just as a tax or robbery would.

How large is that transfer?

Try $70 to $140 billion. That’s a guesstimate based on taking 1 or 2 percentage points from that $7 trillion in deposits.

But that’s not all.

While income is down this year, the longer this goes on, the greater the long-term impact. Here are a few of those impacts:

  • More seniors will go broke. If the Solvent Seniors don’t reduce their spending they will run out of money before they die.
  • Long-term care insurance premiums will rise. Investment income is an important part of what makes long term care insurance work. Policy premiums earn investment returns. If insurance company portfolios earn less, they will have less in reserves against future benefit payments. Result: Higher annual premiums. More seniors will drop their policies because their income is down and their premiums are up.
  • More seniors on Medicaid. Combine the two, and more seniors will find themselves in nursing homes on Medicaid, adding substantially to future government expenses.

That, of course, is tomorrow. Not today. But make no mistake about it. A government can raise “taxes” on one group (Solvent Seniors) and transfer income to another group (bankers and their banks) without ever calling it a tax.

How? Just do what the Federal Reserve has been doing, holding short-term interest rates well below the rate of inflation.