FED Bloodletting Has To Stop

October 23, 2012 at 6:44 am Leave a comment

In the old days, before doctors knew what they were doing, they used to drain blood from sick patients in the hope that this would make them better.  No one really knew the impact of this procedure, but it probably felt good to be doing something to help sick patients even if they were actually making them sicker in the process.  I was thinking of this analogy this morning as I read an article in this morning’s Wall Street Journal, which confirms what credit unions and other small financial institutions have known for a while now:  the FED’s policy of keeping interest rates artificially low is hurting financial institutions, consumers who want to save money, and the recovery of our still faltering economy.  It clearly has outlived its usefulness.

The article points out that the net interest margin of banks has dropped to its lowest level in three years and that as the FED’s policy continues, banks are being forced to consider new ways of offering services or charging additional fees.  And in this environment, even betting on mortgages can be dangerous as a sudden spike in interest rates could put tremendous pressure on earnings.  As pointed out in another blog, Hudson City Bancorp, one of the oldest community banks in the country, was recently forced to merge and it disclosed in regulatory filings that the FED’s manipulation of interest rates “had an adverse affect on the bank.”

It would have been nice if the article referenced credit unions, which face even fewer options than community banks as they seek ways to eek out earnings in a low-interest rate environment while welcoming a record number of members fed up with banks.  That being said, it’s time for the FED to reconsider Operation Twist and its progeny.  Increasingly, it appears that the continuation of this program is doing more harm than good to the economy.  It hasn’t fueled home buying so much as serial mortgage refinancing and if it was the FED’s hope that banks would be forced to engage in other types of lending such as increased small business lending, this has not materialized.  It’s time to let the free market run its course.

Entry filed under: Advocacy, Economy, General. Tags: , , , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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