Generally, investment bankers have been pleased with central bank policy over the past five years. So why are investment bankers happy with central banks? There are two main reasons.
First, investment banks benefit from the increased risk taking, trading activity, and deal volume that lower interest rates encourage. Second, keeping interest rates low reduces any interest costs on investment banks’ balance sheets. With these two reasons in mind, it is completely unsurprising that investment bankers are nervous about impending rate hikes in the U.S.
Central Bankers’ Loosening Cycles
As of writing, observers of Federal Reserve policy place the end of the current loosening cycle (a time when the Fed is not increasing interest rates) somewhere around June 2015. (The June 2015 is squishy; even voting members of the FOMC disagree strongly on when rate hikes will take place.) Presuming the Federal Reserve actually raises rates early next summer, it would mark the end of the current loosening cycle that began September 18, 2007.
A loosening cycle of eight years is quite long. What makes the current Fed loosening cycle so interesting is that Yellen and company have not only kept rates low for so long, but that they have kept rates so low. In addition to being the longest loosening cycle ever, the Fed has interest rates at the lowest levels in history.
Investment bankers, of course, cheer such policy on. However, are investment bankers really happy with how much savings is missing in the world because of historically low central banks’ policy rates?
A Look at the Numbers
The first graphic shown contains a history of what central bankers across the globe have done with their main policy rate since 1990. Overall, rates have been on a long-term trend downward for some time. The chart also shows that central banks generally think alike, with very little competition for business.
Moving on to the topic of interest – savings. When investment bankers encourage the Federal Reserve and other central banks to keep interest rates low, they are adversely affecting some individuals. Chief among those adversely affected are savers, a large portion of whom are young workers and elderly or soon to be elderly Americans.
By how much have central bankers adversely affected savers? The following two graphics have the answer. (A note on the numbers: interest income statistics by country comprises a number of estimating procedures; the following numbers are best interpreted as rough estimates.)
The first graphic puts the missing interest income at about $1.6 trillion in 2014, or about 2% of global GDP. The second graphic looks at the missing interest income on a cumulative basis. The cumulative missing interest income (savings) is around $7 trillion (2009 to 2014). The places where savers have been hurt the most are in Europe ($1.5 trillion), the U.S. ($1.4 trillion), and China ($800 billion).
Is the Missing $7 Trillion Worth It?
How can investment and central bankers argue that the global economy is better off without the $7 trillion? The answer is that investment bankers and like-minded individuals think the global economy has been boosted by at least $7 trillion. Is there evidence that the global economy has been boosted by $7 trillion? The honest answer is – no. There is literally no evidence. In fact, if one simply takes correlation as evidence, the current economic situation is much worse than historical recoveries would have predicted.
Therefore, whether hurting savers has helped the global economy comes down to presumptions, not evidence.
The Question at Hand
Getting back to the question posed originally – are investment bankers happy with how much savings is missing in the world? The answer is probably yes. Investment bankers, as a group, see the missing $7 trillion as more of a “thank goodness that cost is not there” situation. Whether they are right that hurting savers by $7 trillion is worth any potential benefit depends entirely on your assumption about the state of the global economy. It has nothing to do with evidence.