Low interest rates have cost consumers $750 billion

The Federal Reserve's policy of low interest rates is a "stealth bailout" of the banking industry that has cost Americans three-quarters of a trillion dollars over the past five years, according to a new report.

The report, by MoneyRates.com, estimates consumers would have had $758 billion more in purchasing power over the past five years if deposit yields kept pace with inflation.

For example, a year ago U.S. banks had $9.4 trillion on deposit. In the 12 months since, then the average interest paid by banks on money market accounts ranged from 0.08 percent to 0.10 percent. At the same time, inflation ran at about 1.5 percent -- a very low pace, but still more than interest rates paid to savers. As a result consumers lost money by putting it in savings.

After accounting for these two factors, MoneyRates researchers found that bank depositors lost $122.5 billion they would have earned if the Fed hadn't been keeping interest rates artificially low. The total amount depositors would have earned since 2008, when the Fed began cutting interest rates in an effort to protect the economy, is three-quarters of a trillion dollars.

"Bailouts were largely seen as a necessary evil in the aftermath of the financial crisis. But at least with the bailouts of Wall Street firms and the auto companies, the price tag was disclosed on the front end," Richard Barrington, chief financial analyst for MoneyRate.com, wrote in a blog post Tuesday. "Super low interest rates are effectively another form of bailout. They have helped to artificially support the banking system and the housing market. In this case though, it has been a stealth bailout, as no price tag has been disclosed."

Barrington says the cost of this goes beyond the money that depositors didn't get in the form of earned interest. He writes that the economy is now overly dependent on low interest rates, but that neither the stock market nor the housing industry still needs them.

Also, he says low rates have encouraged people to take on too much debt -- non-mortgage borrowing is up 20 percent since 2009. He further notes that even after several years of this Fed policy, the U.S. economy still hasn't been able to sustain a steady recovery, with GDP rates flickering wildly from one quarter to the next.

"Now, however, the Fed is cutting back on its program to keep long-term rates like mortgage rates down," he writes. "At the same time though, it is continuing to keep short-term rates, such as deposit rates, near zero. The net result is the worst of both worlds for bank customers: It still does not pay to save money, but it now costs more to borrow it."

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    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.