September 27, 2012

John Delaney is co-founder and chairman of CapitalSource, a commercial lender based in California. He is the Democratic nominee for Maryland’s Sixth District in the U.S. House.

With the Federal Reserve’s recent move to make historically low interest rates even lower, debate is raging over the efficacy and advisability of such actions: Will easy money lower unemployment significantly or simply cause higher inflation?

Fed Chairman Ben Bernanke has said that while the Fed is doing all it can, monetary policy offers no simple solutions to our employment challenges. I’m not an economist, but I have spent time around thousands of small-business owners and investors, and I remain skeptical — despite the best intentions of the Fed — that even lower interest rates can make a meaningful dent in our unemployment problem. And while the risk of inflation is important, such low interest rates pose a more immediate problem for senior citizens and middle-class families who rely on savings.

The impact of low interest rates is broad and deep. Many Americans rely on interest income from their savings to help cover their cost of living. Americans planning for retirement 10 years ago were expecting a much higher return on their savings than they earn today. The same is true for families saving for college.

Wealthier Americans with substantial investment portfolios will lose some interest income but can afford to take more risk; that’s why they invest far more in stocks and real estate than in the certificates of deposit and money-market funds on which middle-class families rely. Stock investments do well with easy money (see the 1.68 percent jump in the Dow Jones Industrial Average in the wake of the Fed’s announcement); CD rates only go down. This unintended consequence of easy money exacerbates income inequality.

It’s also unlikely that low interest rates will encourage corporations to invest and create jobs. U.S. corporations are sitting on more cash than ever. At this point, their investment decisions aren’t tied to the cost of debt but, rather, to their perception of opportunities. It’s hard to imagine that lowering their borrowing costs from 1.1 percent to 1.0 percent — what just happened for investment-grade borrowers — will spark corporate investment.

Low interest rates benefit individuals or investors who own or want to buy assets; in that regard, they disproportionately benefit wealthier Americans. Commercial real estate and corporations effectively rose in value on the recent Fed news, and money became cheaper for those looking to buy these assets, which, of course, unemployed Americans are unlikely to own.

Lower interest rates are often cited as a benefit to the housing market. Here, too, however, well-off Americans are more likely to gain than those who are struggling. Wealthier Americans have accrued equity in their homes more quickly than others, the St. Louis Fed reports, and probably have higher credit scores. Lower mortgage rates have allowed many of them to refinance and lower their monthly payments. But many middle-class homeowners are underwater on their mortgages and can’t refinance. The Christian Science Monitor recently reported that at the end of June, 69 percent of U.S. mortgage borrowers had interest rates above 5 percent, according to CoreLogic data, and 84 percent of underwater borrowers had loans with interest rates over 5 percent.

In addition, marginally lower mortgage rates — off of historical lows — may not improve the overall housing market in ways that would restore some of the value lost in their homes or materially accelerate the emerging housing recovery. About 7 percent of the roughly 50 million U.S. mortgages are delinquent, Lender Processing Services reported this month. Despite historically low interest rates, millions of households that could benefit from refinancing and are current on their loans haven’t done so. These borrowers have an average home value of $197,300 — solidly middle class.

Fed officials were heroic during the financial crisis and their actions clearly contributed to the recovery. For the good of the country, they are now trying to make up for congressional inaction. In the end, however, they can’t. They might be able to move the needle ever so slightly, but the process of doing so will exaggerate financial inequality.

The United States faces structural employment problems because of the long-term effects of globalization and technology. This was only exacerbated by the Great Recession. The most effective solution would be for Congress to pass laws positioning our country to better compete in the rapidly changing 21st century; we need to prepare more Americans to benefit from globalization and technology. Options for lawmakers include changing our immigration policy to allow job creators and science, technology, engineering and math graduates to stay in the United States; crafting a national energy policy with incentives to make the United States a leader in energy production and advanced energy utilization and technology; creating a framework and funding mechanism for significant investment in our aging infrastructure; driving educational reforms to improve children’s outcomes and train workers; and eliminating fiscal uncertainty with a a Bowles-Simpson-style deficit deal.

Addressing these five issues would improve employment and narrow the income gap more than any actions by the Federal Reserve. At a minimum, with these solutions in place, the Fed’s actions would be unnecessary — or more effective.

In short, what we need may be less easy money from the Fed and more hard work from Congress.