Low Interest Rate Damage

[Chuckanut]

Here is a quote from George Melloan in today's WSJ

"The Fed's low interest policy is doing little to help banks and doing a lot to put public pension funds in jeopardy."

I am glad somebody is starting to see that the ultra low interest policy is doing some harm. I know many retired folks who have severaly cut back their spending because their interest income has dropped by many thousands of dollars, some by tens of thousands of dollars. I also know middle aged people who were using interest income to suppliment earnings. This has been wiped out by the ultra-low interest policy we are following. I think some balance is in order. My 2 cents.

 

[foxfirev5]

I'm not sure how all of this works. I notice that CD's are yielding higher rates than US Treasuries. The yields of Treasuries are set at auction. Right now there's a lot of $$$ going into Treasuries from around the world and various institutions. Until the economy starts rolling along and investing rather than sitting on $$$ takes place we're stuck.
I don't see what the Fed does with extremely short term rates will do for savers. Of course there's a lot I don't know. Right now I'm sitting on about 16% cash as I have for the last few years,

 

[pimpmyretirement]

I can only imagine what housing prices would do if mortgage rates jumped back up to 6-7%...

 

[ratto]

Maybe the Fed could consider using some wisdom out of the advice Jerry gave to George: "if every instinct you have is wrong, then the opposite would have to be right".

 

[steelyman]

I recently heard an interview with an Illinois finance professor who pointed out that increases in interest rates would also have the effect of increasing the interest expense that must be paid on the outstanding debt, and given the current situation, that's not very appetizing to the Fed.

 

[Telly]

In a couple of articles Scott Burns has pointed out the hit that the elderly and others have taken because of the low low CD rates. I never heard anyone else being concerned about it. Scott has been a lone voice in the wilderness.

 

[DesertDweller]

The Fed is keeping interest rates low to prop up our banking system. I think that is the only reason they are doing it, despite whatever else they say. Banks are borrowing at essentially no cost to them, and making money off the unprecedented spread they can now exploit. And they need that money to deal with their massive portfolios of underwater mortgages.

 

[frank]

and what do the savers, who depend on cd income use to cover the spread and pay their mortgages? look at any people that invest. universities have to raise tuition because their trust funds get no interest. all the pension funds are in trouble because the money they are sitting on collects no interest. banks are not the only ones in trouble and need to be considered.

 

[MichaelB]

A question to those critical of the Fed low interest rate policy: what actions do you suggest?

 

[Beryl]

This won't be popular to some but I'd like to see progressive interest benefits.

Today, if you have more money in a financial institution, you earn higher interest (1-1.5%) than those how have less (0-.5%). Although, I personally benefit by the status quo, I'd like to see this substantially reversed. Those with less money should earn substantially higher interest on their funds. Not sure what the clip level should be but you get the idea.

 

[HawkeyeNFO]

This won't be popular to some but I'd like to see progressive interest benefits.

Today, if you have more money in a financial institution, you earn higher interest (1-1.5%) than those how have less (0-.5%). Although, I personally benefit by the status quo, I'd like to see this substantially reversed. Those with less money should earn substantially higher interest on their funds. Not sure what the clip level should be but you get the idea.

On the surface, that is a disincentive to save. But if that were the setup, I'd just open more accounts.

 

[audreyh1]

and what do the savers, who depend on cd income use to cover the spread and pay their mortgages? look at any people that invest. universities have to raise tuition because their trust funds get no interest. all the pension funds are in trouble because the money they are sitting on collects no interest. banks are not the only ones in trouble and need to be considered.

Um, maybe they should have paid off their mortgage before relying on CDs for income?

I see the super low interest rate as mainly keeping the economy from collapsing during a period of high unemployment and dropping home prices while many individuals and corporations pay off the debt they overaccumulated during the 2000s. We don't have a booming economy or moderate to high inflation right now, and we have pretty high unemployment, so I don't see how higher interest rates are justified?

Audrey

 

[Gumby]

Here is an interesting recent post from Reuters' Felix Salmon regarding ZIRP. The comments affixed to this blog entry are as interesting as Felix himself.

Why ZIRP doesn’t work | Felix Salmon

 

[Running_Man]

A question to those critical of the Fed low interest rate policy: what actions do you suggest?

I would suggest an immediate increase to 1 percent for short term interest rates. This would be met with immediate pain but the problem with a zero interest rate policy is that inflicts no pain on politicians in addressing serious issues and merely is a mechanism to defer addressing the real problem. An example is the 2 percent "payroll tax" cut, which really is just reducing the social security holdings from jobholders and borrowing at zero percent interest by the federal government to make up for the lost revenue. There is no "pain" from this actual inaction on the issue of social security because the "solution" actually has no cost today. But those 2 percent's are being accumulated in the total national debt. A few percentage points of interest would force politicians to make real choices.


The longer one stays at zero interest, the policy will act as a block hole and like Japan there will be no way out of it as you can create huge deficits while your interest bill on a total countries debt actually falls for a time.

 

[ratto]

To be honest, I don't think anyone in the Fed can do anything now to quickly turn things around. The current economy is like a patient with multiple chronicle illnesses due to bad life style and poor choices gradually accumulated for decades. The doctor who's treating the patient should not play god in trying to mask or remedy one symptom at the expense of others. The recovery process will be slow, challenging and even painful; it will be totally fruitless just with doctor's treatment alone without strong will and commitment from the patient as well.

 

[ratto]

A question to those critical of the Fed low interest rate policy: what actions do you suggest?

I would suggest an immediate increase to 1 percent for short term interest rates. This would be met with immediate pain but the problem with a zero interest rate policy is that inflicts no pain on politicians in addressing serious issues and merely is a mechanism to defer addressing the real problem.

A symbolic rate hike might not be a bad idea, at least it forces policy makers to face ugly reality check sooner instead of later.

 

[soupcxan]

Can most people agree that much of the financial crisis was brought on by too much debt? Both banks and households were over leveraged. So how exactly does providing even cheaper debt get us out of this mess? Hasn't the last three years shown us that you can't refi your way to long-term prosperity?

 

[haha]

Can most people agree that much of the financial crisis was brought on by too much debt? Both banks and households were over leveraged. So how exactly does providing even cheaper debt get us out of this mess? Hasn't the last three years shown us that you can't refi your way to long-term prosperity?

There is no way to get out of this mess, other than to let some protected players go down. Which the best congress money can buy is not going to allow.

All the talk and posturing is just theater.

Therefore, we are screwed.

Ha

 

[Chuckanut]

A question to those critical of the Fed low interest rate policy: what actions do you suggest?

Hmm.... how about low interest rates instead of the ultra-low ones we now have. What if the 1 year T-bill yielded 1/2 of the inflation rate, for starters.

The more i think about this the more I go back to the age old advice of diversification. There is simply no way to control or predict the future so one gets exactly what one wants.

 

[NYEXPAT]

Therefore, we are screwed.

Ha

For many years I carried a condom around in my wallet and never understood why as all coeds were using BC. It was only years later when I realized Karma/guvmint was going to turn the tables and I was about to be the one getting it. Since that point in time I realized how important it was to "protect my ASSets"!

 

[growing_older]

Today, if you have more money in a financial institution, you earn higher interest (1-1.5%) than those how have less (0-.5%). Although, I personally benefit by the status quo, I'd like to see this substantially reversed. Those with less money should earn substantially higher interest on their funds. Not sure what the clip level should be but you get the idea.

That kind of arrangement is available. My kids for instance earn 5% on their savings account (up to the first $1000 on deposit). The banks hope to attract other profitable business from the family, as these are money losing accounts for them. I could try to open (and keep track of) many of these accounts if I wanted to chase this great rate, but it's not worth the time and effort to me. I'm surprised that it's worth the time and effort to the bank, but they must have some intention to make the relationship profitable eventually. I suspect they would be less interested in offering above market rates to people with small balances if it were mandated or if it were less likely that more business would be forthcoming in the future.

 

[Sandhog]

I'm not sure how all of this works. I notice that CD's are yielding higher rates than US Treasuries. The yields of Treasuries are set at auction. Right now there's a lot of $$$ going into Treasuries from around the world and various institutions. Until the economy starts rolling along and investing rather than sitting on $$$ takes place we're stuck.
I don't see what the Fed does with extremely short term rates will do for savers. Of course there's a lot I don't know. Right now I'm sitting on about 16% cash as I have for the last few years,

I personally think the Fed want us, savers to loosen our purse strings and buy distress properties as real estate investment/invest in stock market by keeping interest rate low. As saver depending on amount of cash allocation, we are actually losing money with even minor inflation. I don't understand it at all and will not try to understand. All I know is that we are screwed as Ha have said. I heard on the radio other day that US Treasuries yield was negative yet all the money is pouring into US Treasuries. Go figure.

As old saying goes, "if you try to please everyone, no one will be pleased." Or something like that. With low interest rate, I'm sure debtors are happy. If and when interest rates rise, I'm sure savers are happy. I can not control what's going on with interest rate. Only thing that I can control is how much to save and where to allocate my asset that would afford me to finally stop working.

 

[Sandhog]

This won't be popular to some but I'd like to see progressive interest benefits.

Today, if you have more money in a financial institution, you earn higher interest (1-1.5%) than those how have less (0-.5%). Although, I personally benefit by the status quo, I'd like to see this substantially reversed. Those with less money should earn substantially higher interest on their funds. Not sure what the clip level should be but you get the idea.

I heard on the news that lots of bank were thinking about charging fees for large depositors since it cost them more to keep depositors money in the books. I don't know exactly how they work.

 

[brewer12345]

I heard on the news that lots of bank were thinking about charging fees for large depositors since it cost them more to keep depositors money in the books. I don't know exactly how they work.

Very simply, if the banks take a large, liquid deposit they have to put up capital against it and pay deposit insurance premiums on it. However, since the money is in a liquid account, they cannot safely deploy the funds in loans or other interest earning assets to make a return on the capital they put up against the cash. This means that it costs the bank money to accept these deposits. Not surprisingly, some of the big banks have told large depositors that they will charge fees on such deposits.

 

[Sandhog]

Very simply, if the banks take a large, liquid deposit they have to put up capital against it and pay deposit insurance premiums on it. However, since the money is in a liquid account, they cannot safely deploy the funds in loans or other interest earning assets to make a return on the capital they put up against the cash. This means that it costs the bank money to accept these deposits. Not surprisingly, some of the big banks have told large depositors that they will charge fees on such deposits.

+1 Thanks for simple explanation. I have no fear of bank charging me such fees.