The news wasn’t exactly earth-shattering. The credit union for employees of the University of St. Thomas said that because of current credit conditions, it no longer will pay interest on account balances above $45,000.
Since the credit union reportedly has 1,000 members and $2.3 million in deposits, this news isn’t going to shake the financial foundations of institutions in New York, Frankfurt or Tokyo.
It does show, however, that nearly every economic policy is a sword with two edges. Since early January 2001, the Federal Reserve has aggressively expanded the money supply and driven down short-term interest rates in an effort to stimulate the U.S. economy.
Market rates are now so low that banks and credit unions can’t charge enough interest on some classes of loans to break even. And so, they have to try to reduce their cost of funds.
These “depositary institutions” are, after all, intermediaries. When you go to a bank to take out a loan, the bank is not lending you its money, it is lending you someone else’s money.
Depositors like to earn interest on their savings and checking accounts. But any saver is competing with the Fed right now. The Fed has pushed enough money out the door to reduce the Federal Funds rate, a very short-term interest rate that banks charge each other, to 1.75 percent.
That is less than a third of what it was 14 months ago. If the Fed is, in effect, offering money at 1.75 percent, a credit union can’t pay its depositors much more than that and survive.
This is the second edge of monetary policy. Borrowers like lower interest rates, savers do not.
In the late 1980s, my mother-in-law complained with some bitterness that she could no longer earn 14 percent interest on her CDs, as she had been able to do in 1981-83.
Such two-edgedness of economic policy is not limited to the monetary sphere.
A few weeks ago I had to negotiate renting some farmland to a friend and neighbor. Standing in his dairy barn, I said what I wanted in terms of cash rent. The expression on his face told me it was a little higher than he had hoped. But I reminded him, and he agreed, that it was only a few dollars per acre more than what I could get by putting the land in the federal Conservation Reserve Program.
The CRP is a popular program. Introduced with the 1985 Farm Bill, it takes farmland out of production with 10-year or longer leases. The land must be sown to a permanent cover and managed to provide wildlife habitat, and provide other environmental benefits.
It’s intended to benefit the environment and raise farm commodity prices by reducing the amount of land in crops in the United States. But by standing by as a “renter of last resort,” USDA effectively puts a floor under rental rates for eligible counties.
That is good for landowners like me. But it doesn’t help existing farmers like my neighbor who needs more land for his operation to remain viable. Nor will it help his son, Virgil, a hard-working 20-year-old who wants to farm.
Young farmers have traditionally started with rented land, and then moved on to buy a farm of their own. But if Virgil wants to rent land in Murray County, he has to bid against the U.S. Treasury, just as St. Thomas credit union members effectively are bidding against the Federal Reserve.
Virgil’s dilemma would be no surprise to David Ricardo, the British financier who was perhaps the greatest economic thinker of all time. Nearly two centuries ago, Ricardo noted that any factor that made any business based on a fixed asset, such as farmland or a coal mine, more profitable, soon became capitalized into the value of that fixed asset.
When the government moves to raise crop prices, rental rates and land prices go up. Land owners benefit, but working farmers do not.
The Environmental Working Group, a Washington, D.C.-based environmental organization, set up an Internet site that lists all Federal farm payments made in the past five years. When I log on to www.ewg.org, I can see that a neighbor up the street from me in St. Paul collected $385,000 in payments on his farm operation.
My attorney in Eagan got a paltry $2,000 or so and my psychologist around $4,000. Should I be proud that my name doesn’t appear on this list of beneficiaries of public largesse? Of course not.
I benefited proportionately as much from federal farm programs as anyone whose name is on the EWG list. But my benefit is hidden in the higher rent I have gotten and in the higher value of my 200 acres on our balance sheet.
Governments may institute programs or policies to remedy social economic problems.
But such measures, whether aggressive rate-cutting by the Fed or conserving soil and water by USDA, usually have ramifications beyond the intended and obvious ones.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.