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Fed Ends Zero-Rate Era

bloomberg.com

201–210 of 361 posts

Re: Fed Ends Zero-Rate Era

#201

Earlier quoted context omitted.

This is super naive. For much of the past decade, congress could have removed the entire discretionary budget (yes, including the military) and still had a deficit. The deficit is driven by social security, medicare, and medicaid. If you want to balance the budget, you have to reform those.

> The deficit is driven by social security, medicare, and medicaid. If you want to balance the budget, you have to reform those. Or increase taxes? Social security taxation is limited to the first ~$120K of someone's income. Why?

> Or increase taxes? Social security taxation is limited to the first ~$120K of someone's income. Why?

The theory, I believe, is that this is tied to the maximum amount of income that is counted in the benefits formula for SS. OTOH, there's no reason you couldn't count more income toward benefits (there's already at least one bend point where the amount of benefits for each additional dollar of lifetime qualifying income/contributions is reduced, so if you are concerned with the distribution of benefits if more income is counted, you could also add additional bend points.)

If you wanted to go further, you could include personal capital income (perhaps with some limit, or perhaps open ended, with additional bend points, as necessary, as discussed above for increasing/removing the limit on labor income) as SS taxable (and in SS benefit calculations). Given that at least some capital returns are a result of active personal management that can become less practical with age or disability for the same reason that labor can, it makes as much sense to preserve a safety-net retirement for those retiring from such active management as for those retiring from wage labor.

Re: Fed Ends Zero-Rate Era

#202

Earlier quoted context omitted.

> The deficit is driven by social security, medicare, and medicaid. If you want to balance the budget, you have to reform those. Or increase taxes? Social security taxation is limited to the first ~$120K of someone's income. Why?

Because taxing those people won't solve the real issue? I pay more in taxes every year on my income than many millionaires do because my income is primarily salary instead of stocks, etc. 120k may seem like a lot, but it isn't in several parts of the US now (e.g SF Bay Area, New York).

> Because taxing those people won't solve the real issue? I pay more in taxes every year on my income than many millionaires do because my income is primarily salary instead of stocks, etc.

Taxing capital income like other income is another possible solution.

Re: Fed Ends Zero-Rate Era

#203
post #148

Earlier quoted context omitted.

The 500 smartest people? They simply delegate and entrust a small committee of the five most qualified people with the resources they need to get the job done.

Five people controlling the collective spending of the world's 1st or 2nd largest economy... that sounds like a scary amount of power for any small number of individuals. No thanks.

Put cameras on them 24/7, you get a 300 million person watchdog service and create quite a few jobs with CSPANs 4-8.

Re: Fed Ends Zero-Rate Era

#204

Earlier quoted context omitted.

> And how does the government really stimulate demand? Building things (roads, spaceships, bridges, etc), funding things (medical research, education, etc) and other obvious things. Low interest rates make longer term projects much more viable.

Don't forget war. $800 billion to $2.4 trillion spent on the Iraq War depending on who's counting. https://en.wikipedia.org/wiki/Financial_cost_of_the_Iraq_War

> Don't forget war.

This is really the broken window fallacy.

Re: Fed Ends Zero-Rate Era

#205

Fed raising interest rates 0.25% and setting a goal of "normal" 2% by 2018 means little to nothing. Market already priced the miniscule rate hike in as the move was widely expected, and move did nothing to assure markets that the Fed is in control, or set credible, measurable goals for future hikes. Fed can continue to push on the supply side of money at the bank/institutional level all it wants. We need the Federal…

Right, it would help to put $ directly into consumers hands versus buy bonds and putting it back on to bank balance sheets who will not necessarily lend it back out.

Re: Fed Ends Zero-Rate Era

#206
I was thinking about this earlier and I have a question about inflation. Could increasing the interest rate cause inflation to rise a bit in the near term?

My reasoning for this is that given that banks were borrowing at near zero, could they have had no real reason to put all the borrowed money to work since it wasn't costing them anything to hold it in reserve for later when the rates did increase? Now that the rates are increasing would they not have to use the money a bit to ensure they stay ahead of the interest rates. I was also thinking that there is a threshold at which banks wouldn't have any more money that is just sitting there and having to borrow at higher rates reduces their demand for new funds from the fed thus undoing this initial effect to the hike.

Hopefully this isn't completely naive. Please let me know if I'm misunderstanding how the fed and banks relationship works.

Re: Fed Ends Zero-Rate Era

#207

Analysis from TD on how banks (Wells Fargo, US Bankcorp, JPMorgan, M&T, PNC, Citi) rushed to hike the prime rate to 3.50%, and forgot to increase the deposit rate: As CNBC reported [1], "a change in the federal funds rate will have no impact on the interest rates on existing fixed-rate mortgage and other fixed-rate consumer loans, a Wells Fargo representative told CNBC. Existing home equity lines of credit, credit ca…

There is a sticky price effect, but interest rates on savings accounts will inevitably rise as the prime rate increases, as banks compete with each other for customer business. Yes there will be lag time, but it will happen.

I'm not sure if the Fed pulled back the trillions it pumped into the banks during the crisis, but until that happens, banks don't have a real incentive to compete for deposits.

Re: Fed Ends Zero-Rate Era

#208

Fed raising interest rates 0.25% and setting a goal of "normal" 2% by 2018 means little to nothing. Market already priced the miniscule rate hike in as the move was widely expected, and move did nothing to assure markets that the Fed is in control, or set credible, measurable goals for future hikes. Fed can continue to push on the supply side of money at the bank/institutional level all it wants. We need the Federal…

Who's at fault, the druggie or drug dealer? The fed is the enabler

Re: Fed Ends Zero-Rate Era

#209
post #195

Earlier quoted context omitted.

> you want more stuff if you have more money I don't think that's a valid statement. There is only so much 'stuff' that you can use. Beyond a certain level more money does not translate into a better quality of life or more 'stuff' for most people, there are a few outliers but lots of very wealthy people are actually quite modest. They're so modest you won't read about them in the newspapers.

I don't think GP is saying that the demand you add to the economy increases linearly with income. I think the point is that it's essential to have lots of people with a healthy amount of discretionary income, because non-discretionary income can't really be reallocated no matter how compelling your wares are.

Yea, it's more important because there are more (or should be more in this era) people in that range as a percentage of population than strikingly wealthy people.

Re: Fed Ends Zero-Rate Era

#210

Earlier quoted context omitted.

There is a sticky price effect, but interest rates on savings accounts will inevitably rise as the prime rate increases, as banks compete with each other for customer business. Yes there will be lag time, but it will happen.

I'm not sure if the Fed pulled back the trillions it pumped into the banks during the crisis, but until that happens, banks don't have a real incentive to compete for deposits.

Correct, that's the real issue .
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