My insurance clients are telling me that the persistent low/zero/negative interest rates are wreaking havoc on the insurance business. Expect rate increases.
My insurance clients are telling me that the persistent low/zero/negative interest rates are wreaking havoc on the insurance business. Expect rate increases.
Natch. Insurance companies take in the premiums, finance their business operations, and then invest that balance to generate money for claims and profits.
If investment income falls……….well.
How many times do I have to say it. I look at policies through the prism of what it will mean for the majority of the population. A “Big Bank’s” cost of raw material is the cost of money. If money is cheap, and if a policy is instituted for them to invest it at a small, but also riskless arbitrage, guess what.
This low interest policy is the result of three things: a) boneheaded policy beliefs, b) get Obama re-elected, c) curry favor with the institutions that are the biggest campaign contributors to Obama – finance.
Obama supporters need to look in the mirror and ask how they could be so cruel to The Average Joe.
Drew,
There’s a huge chasm in perspective between liberal and conservative minds. What a liberal defines as moral and sympathetic a conservative sees as enabling and extending more misery on the masses..and visa versa. I sometimes don’t see how such opposite views of the world can ever be bridged.
@Drew- You support higher rates with unemployment this high? With GDP growth stalled? How much higher? How will that help the Average Joe? Why not just stop paying interest on reserves?
To the broader point, I have noted this before in my own writings as a cause of increased health insurance costs. Half of the population denied this, sure that it was the ACA responsible for rate increases.
Steve
We have four years of data that low interest rates have been ineffective at stimulating loans. The Fed can keep pumping up bank reserves all it wants: it won’t change anything.
“Why not just stop paying interest on reserves?”
I agree.
steve – you are a doctor. If a patient presented with flue symptoms but really had colon cancer, would you spend all of your efforts on relieving the flue symptoms? Of course you wouldn’t. (I’m not saying you wouldn’t attempt to take very short term actions re: the flue.) But you would do everything in your power to treat the most serious issue.
But look at our policymakers. They are all about short term gain for political reasons. I understand their problem and motivations, I’m just not sympathetic. Contrary to the usual inane invective I receive, I’m really interested in policies that will assist the majority (and by inference the proverbial “Little Guy”) in enabling him/her to achieve their objectives in the long term. Yet so much policy is to let the powerful rent seekers win, and just put the losers on the dole to keep them docile and a reliable voting constituency.
This is just foul and shameful policy.
I diddn’t address this:
“You support higher rates with unemployment this high? With GDP growth stalled? How much higher?”
steve – markets are markets. Let them find their way. How has market manipulation of interest rates been working the last 3 years? Not. I have proffered any number of ideas the last few years……..none have involved artificially reducing interest rates.
My ideas have not been part of the Obama policy mix……but could they conceivably have been worse than Bammy’s?? The guy needs to go.
“This is just foul and shameful policy.”
It’s a problem of incorrect understanding. Neo-liberal economists argue that by beefing up bank reserves the money multiplier will kick in and spur lending, job creation and economic growth. Hence the
Fed is paying interest on reserves as an incentive to keep reserve balances high.
The problem is that the money multiplier is a myth: bank reserves have risen 2,100% since 2007 yet lending has remained flat. Ironically, at the same time the Fed is trying to push up reserves the Treasury is selling debt and DRAINING reserves. Bernanke and company aren’t evil, they’re ignorant of how the banking system functions.
Tyler Cowen calls this a bailout by some other name:
[T]he Federal Reserve System has recapitalized major U.S. banks by paying interest on bank reserves and by keeping an unusually high interest rate spread, which allows banks to borrow short from Treasury at near-zero rates and invest in other higher-yielding assets and earn back lots of money rather quickly. In essence, we’re allowing banks to earn their way back by arbitraging interest rate spreads against the U.S. government. This is rarely called a bailout and it doesn’t count as a normal budget item, but it is a bailout nonetheless. This type of implicit bailout brings high social costs by slowing down economic recovery (the interest rate spreads require tight monetary policy) and by redistributing income from the Treasury to the major banks. [The Inequality That Matters]
“This type of implicit bailout brings high social costs by slowing down economic recovery (the interest rate spreads require tight monetary policy) and by redistributing income from the Treasury to the major banks. ”
Cowen was doing ok up until this. The Fed does not use funds from Treasury to pay out interest on bank reserves.
“Hence the Fed is paying interest on reserves as an incentive to keep reserve balances high.”
One has to wonder if their real concern isn’t loan portfolio quality, and hence adequate reserves.
This low interest policy is the result of three things: a) boneheaded policy beliefs, b) get Obama re-elected, c) curry favor with the institutions that are the biggest campaign contributors to Obama – finance.
This is exclusively an Obama thing? Didn’t we go through a similar situation in the early Aughts? Yes we did. Electing Romney next year isn’t likely to change things all that much.
To the broader point, I have noted this before in my own writings as a cause of increased health insurance costs.
When I worked at Disney, we were mostly self-insured. (There were a small number of people at Disneyland that were actually using an insurance company policy.) At the Walt Disney World Resort we were completely self-insured, which included 39,000 insured employees. We saw annual increases in charged medical expenses of 8-10% a year for the years I had data available. How are the low interest rates causing doctors, hospitals, labs and pharmaceutical companies to raise their fees 8-10% a year? The increases we were experiencing from the insurance company that administered the program were a small part of the increase in costs.
“Electing Romney next year isn’t likely to change things all that much.”
The Republicans will suddenly be fine with low rates once they control the administrative branch; we won’t here any more about letters to the Fed, etc.
Neo-liberal/New Keynesian economics says the economy can be fixed through monetary policies, and since it isn’t working they just keep doing it like a machine resetting itself. Had they listened to MMT they would have known loose monetary policies were ultimately futile.