NY Times Article on How Low Interest Rates Hurting Investors

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Every now and then the mainstream media will do an article on the hatchet job that the Fed has done on the savers of this country. Today they printed one such article.

Every now and then the mainstream media will do an article covering the hatchet job that the Fed has done on the savers of this country. Today they printed one such article, entitled At Tiny Rates, Saving Money Costs Investors.There's really nothing in the article that we haven't said a million times before: the Fed is reinflating the economy at the expense of savers, the very investors who were least responsible for the economic collapse. The elderly who lived off a fixed income are being especially hard-hit as saving and CD rates tumble from 5-6% to under 2%.

Perhaps the most interesting part of the article was the following quote:

"Experts say risk-averse investors are effectively financing a second bailout of financial institutions, many of which have also raised fees and interest rates on credit cards.

“What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco. “It’s capitalism, I guess, but it’s not to be applauded.”

I've written about this before also and it's appalling. What the banks do is borrow money from me and you, or even the Fed for 1% and under and then lend it out at 5-6%. They can't lose money. Banks are reporting profits because they are in a no-lose interest rate environment and also because they changed the accounting rules to make their bad assets disappear. You'd think they'd be sharing the wealth, but instead, credit is tight, and the banks are raising credit card rates and lending standards.

We help them recapitalize and strengthen and they stick us with the bill. Oh, and they pay themselves nice fat bonuses. Give me a break. A high schooler could recapitalize a bank in today's interest rate environment.

Is there anything you can do? Yes, if you plan to deposit money, make sure you deposit it into a high yield savings or cd account. You might as well get the best savings rate or best cd rates you can. Reward the banks that are willing to pay a bit more for your hard-earned cash.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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Comments

  • Shorebreak

    December 26, 2009

    The pathetic part of this is that the situation will continue for the foreseeable future. As more and more accounts mature, those savers who rely on interest from CD accounts for living expenses will be forced to move their funds into more risky vehicles such as equities and bonds. Most of this will be funneled through mutual funds who charge expenses and fees. When the free money bubble eventually breaks, as the Fed at some point is forced to raise interest rates, the former savers, now investors, will face loss of principal. Same old story, as by this time the Wall Street banks will be out of the risk while selling it to the hapless public.

  • harold

    December 26, 2009

    You are right on the money with this one. Inflation may be in check and that is preventing some sort of Russia-like or Argentina-like tragedy for those on a fixed income. But, the reality is that for many, especially those in retirement, unearned income is the difference between living comfortably and just surviving.

  • Sol Nasisi

    December 27, 2009

    In some cases, the banks aren't even lending the money. They are taking free money from the Fed and parking it into no-risk Treasuries that are paying 3%+. That's why they don't need to lend and why Treasury rates haven't gone up even though the government is printing money.

  • Jeff Nalle

    December 27, 2009

    Why dont we invest it ourselves in a business, or directly with someone who needs capital? When we choose not to use our brains in how we invest, then we get the lazy persons pay (1 % interest). I know no-one has time to search things out, but there must be a way to set something up to directly invest. I have no-one to blame but myself and my lack of true commitment to financial risk/gain.

  • Jeff Nalle

    October 30, 2010

    I take that back. It's all about the meat

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