Fed Out of Bullets? Here's an Idea
Warren Buffet’s purchase of Bank of America preferred stock will pay out a 6% dividend each year. This infusion of capital is good news for shareholders, but dismal news for depositors at B of A.
I think it is quite safe to say that a 6% dividend to preferred shareholders will be achieved by holding savings rates down on depositors for years to come. In addition, these low interest rates put a huge drag on the economy by preventing people on fixed incomes from being consumers, thus delaying our much longed-for recovery.
It is my opinion that the Fed needs to take some additional risks to infuse capital into our banking system and hopefully jump-start our recovery as well.
Using the B of A example, if the Fed would have backed a five-year 4% CD issued by B of A, the bank could have raised capital at a much lower rate which would enable the bank to repair its balance sheet sooner, rather than later, and depositors would enjoy interest income of 4% (which will be taxed at a higher rate than the dividends of the preferred shareholder).
Make sense?
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