DealBook: How Much Does the Fed’s Plan Really Help Main Street?

Ben Bernanke, the Federal Reserve chairman, said Thursday that the Fed’s new stimulus was meant to help Main Street.

One way to gauge the extent to which Main Street might benefit is to look at the interest rates ordinary people pay on their mortgages, credit cards and car loans. Those rates, however, don’t make the strongest case for Mr. Bernanke being a man of the people.

Since 2008, the Federal Reserve has purchased some $2.75 trillion of bonds. On Thursday, it promised to keep buying bonds until it felt comfortable that the jobs market was properly back on its feet.

The Fed’s purchases aim to drive down borrowing costs for companies and consumers. In theory, this will make them more likely to take out loans to buy goods and services, stimulating the wider economy in the process.

By some measures, the Fed’s policies have worked. Mortgage rates have fallen to multidecade lows, large corporations have had no trouble issuing bonds, the economy is growing and the private sector has been adding jobs for months now.

The Fed’s largess has even helped borrowers much lower down the credit scale. Lenders are making lots of subprime auto loans right now. Some $14 billion of such loans have been packaged up into bonds and sold to investors so far this year, according to Fitch Ratings. At the rate companies are lending, the 2012 total for subprime car loans could exceed $20 billion, which would put this year on par with 2005, a boom year.

But in many cases borrowers could be getting an even bigger benefit. As the Fed’s actions have pushed down some key rates, the ones that consumers borrowed at haven’t fallen anywhere near as much.

The federal funds effective rate, one short-term rate that banks use to lend to each other, is at 0.14 percent. That compares with a rate of 3.62 percent in September 2005.

The 10-year Treasury note has a yield of 1.87 percent, down from 4.2 percent in 2005. These are huge declines.

Yet the cost of credit card loans has hardly budged. The Fed’s own data shows that average credit card interest rate was 12.06 percent earlier this year; in 2005, it was 12.45 percent.

One explanation is that the banks making credit card loans have to charge that level to cover the costs of their own borrowing. But that doesn’t seem to be the case.

For instance, JPMorgan Chase, a big credit card lender, paid an average of just 0.76 percent on its liabilities in the second quarter of this year. That’s way down from 3.1 percent in 2005.

The banks’ fears of credit-card defaults could be a driver. They may want to charge more than 12 percent to cover these potential costs, which are always part and parcel of doing credit card loans. If so, that fear could prevent certain consumer rates from falling much further, limiting the impact of the Fed’s policies.

But even when fear of default is removed from the equation certain interest rates seem to be stuck too high.

Take mortgages. The federal government agrees to shoulder the cost of defaults in nearly all of the mortgages made today. Banks make mortgages to borrowers, and then take those loans and attach the government guarantee of repayment to them.

After that, they package the loans into bonds, which they then sell to investors. The Fed’s purchases of these bonds have helped their yields fall to 2.2 percent. But the cost of mortgages to borrowers hasn’t fallen anywhere near as much.

The banks are choosing not to reduce mortgage rates further. One reason: By keeping the rates elevated, they are able to earn much larger profits when they sell the mortgages into the bond market. If the level of profits on those sales stayed at recent average levels, borrowers might, for instance, pay $30,000 less in interest payments on a $300,000 mortgage, according to a recent New York Times analysis.

Based on these practices, it seems as if the banks are an obstacle to the Fed’s latest efforts to generate economic growth. It’s almost impossible to imagine the Fed forcing banks to lower credit card rates, or take lower profits on their mortgage sales.

Main Street may therefore have to wait a long time for the full effect of the Fed’s latest actions.

Article source: http://dealbook.nytimes.com/2012/09/14/how-much-does-the-feds-plan-really-help-main-street/?partner=rss&emc=rss