THE BEST WAY TO UNDERSTAND THE GLOBAL FINANCIAL SYSTEM 179
rate promise even though they intuitively understand
that if things get better the promise will be rescinded.
This produces confusion.- People are not automatons who mindlessly do what
Yellen wants. In the face of the embedded contradic-
tions of Yellen’s model, people prefer to hoard cash,
stay on the sidelines and not get suckered by the
bait-and-switch promise of optimal control theory.
The resulting lack of investment and consumption
is what is really hurting the economy. Economists
call this “regime uncertainty” and it was a leading
cause of the length, if not the origin, of the Great
Depression of 1929–1941. - In order to make money under the Fed’s zero interest
rate policy, banks are engaging in hidden off-balance
sheet transactions, including asset swaps, which sub-
stantially increase systemic risk. In an asset swap, a
bank with weak collateral will “swap” that for good
collateral with an institutional investor in a transac-
tion that will be reversed at some point. The bank
then takes the good collateral and uses it for margin
in another swap with another bank. In effect, a two-
party deal has been turned into a three-party deal
with greater risk and credit exposure all around. - Yellen’s zero interest rate policy constitutes massive
theft from savers. Applying a normalized interest rate
of about 2% to the entire savings pool in the U.S.
banking system compared to the actual rate of zero,
reveals a $400 billion per year wealth transfer from
savers to the banks from the zero rates. This has con-
tinued for six years, so the cumulative subsidy to the
banking system at the expense of everyday Americans
is now over $2 trillion. This hurts investment, penal-
izes savers and forces retirees into inappropriate risk
investments such as the stock market. Yellen supports
this bank subsidy and theft from savers.