Let us first start out with the highly glorified story, regarding the monetary policy of low interest rates. Theoretically, low rates make it easier for people to buy homes and cars. This in turn induces demand for other things like furniture, appliances, and car accessories, which really is a chain reaction that should boost a slow economy.

Additionally, the idea is that people will go out and spend more as low rates help them save on interest costs. On a bigger scale, low rates allow companies and businesses to borrow and invest in buildings and equipment among other things. Returns on these investments will then be worth more in the future if rates are higher than those of todays. Investment in businesses will also, hopefully, increase productivity levels and make the economy grow faster.

Nonetheless, in recent years, low rates have also spurred a refinancing frenzy. Demand for refinancing US mortgages is high due to record low rates. The idea is that when interest rates fall and remain low, homeowners can refinance their fixed rate loans and borrow at a lower cost. However, not everyone is qualified for low rate refinancing due to tight credit standards. In many cases, it can be said that the people who need refinancing most cannot get it, so are low rates really helping those that need to be helped?

The answer is probably yes and no. Yes, as in sure it does allow borrowers to borrow at a lower cost and therefore invest and spur economic activity, which should then theoretically be good for everyone in the country. Another benefactor of low rates, not yet mentioned is our government. By keeping rates low, the government induces people to buy government debt such as treasuries, which makes it a winner.

Moreover, American debt has always been a safe haven for investors. The buying up of American debt by foreign investors have kept rates low to begin with, but the Fed by continuing to buy up government debt has managed to keep rates even lower. The government saves trillions of dollars in interest payments each year by keeping rates low. In fact the recent announcement of a so-called QE3 aims to keep rates low until mid 2015. Yet, rates are kept so low that savers are losing money because bank rates are lower than inflation. Finally, we get to the story of the savers.

Essentially low rates are chipping away savings and forcing those that are planning to live off their savings to retire later. Not only that, many who have retired are re-entering the workforce because they can no longer rely on their savings to sustain the cost of living. A September 10, 2012 New York Times article noted that Dorothy L. Brooks, 65, who retired 10 years ago has decided to go back to work in a local school, and in her words, “I got hit a couple of years ago pretty badly in the stock market, so now my savings are weighted mostly toward bonds... Now both investments are terrible. And I can’t put my money in a money-market account because that’s crazy. That just pays nothing.” It’s literally as if people are paying the bank to put money in the bank.

In today’s low rate environment where inflation trumps savings rates, some people would rather hold on to their cash than put it in the bank. The same New York Times article also noted that Bill Taren, a retiree in Florida, would rather put cash at home, because then he can at least see the cash when he wants to.

Overall, the winners of this low rate story are the borrowers and the government, as the policy makes it easier for these people to borrow. The losers, nonetheless, are the older people, the retirees, and the savers. In the end, the question is, is the cost of low rates worth it? Does the story of low rates providing a boost to the economy still apply today?

Over the past four years, the trends in savings and money market rates have been pretty consistent – down. Week after week we’ve watched banks drop their rates. But in the last several months, a number of banks have reversed that trend and actually increased the rate they pay on their savings and money market accounts.

Among the rate increases we’ve seen are:

• American Express Bank increased the rate on their savings account from a low of .75% APY in the first quarter of 2012 to 0.90% APY today.
• ableBanking recently increased their rate from .85% to .90% APY.
• SallieMae Bank increased the rate they pay on their savings account from .90% to 1.00% APY.
• In March 2012, EverBank re-started their bonus rate of 1.05% on all new savings and checking accounts for six months. Over the summer they increased the bonus rate to 1.25% for six months.

I reached out to these banks for comment and received a response from Debby Hohler at Sallie Mae, who wrote that: “We continuously evaluate our rates to ensure our FDIC insured savings products are highly competitive, providing value to our customers and a mechanism to fund for our financially responsible private student loans.”

To translate, they need the money to fund their student loan business. Deposits have become the most stable, least expensive way to fund a business, and financial institutions that are growing often need more deposits to lend out.

Despite the encouraging rate increases from these banks, don’t expect to see wholesale increases in rates over the next year. Savings rates from local banks and CD rates continue to fall. And while the top online rate in July was 1.25% APY it is now down to 1.05% (a savings account from CIT). We expect the Fed to keep rates at or close to 0% through 2014, if not longer. With job growth anemic, it appears that rate increases are the exception rather than the norm.

As local bank savings rates continue to drop, the online savings rates continue to remain the most competitive option for savers. While local banks often offer more competitive CD rates, especially in longer terms, our data shows that online banks offer the best savings and money market rates. According to the BestCashCow database, only 14 brick-and-mortar banks and credit unions out of over 13,000 beat the best online savings rate.

• Find the best savings account rates
• Find the best CD Rates

For a number of years there has been a move towards consolidation in the banking industry; in 1997 there were 9,143 banks in the United States, now there are only 6,263.[1] This trend is predicated on several factors: many banks made bad loans and then either failed during the credit crisis or were bought out by competitors, while others have struggled to pay back loans from TARP (the Troubled Asset Relief Program) with the same blend of results.[2] However, there are less well publicized and more troubling reasons for the decrease in the number of lending institutions including the inability of many smaller banks to cope with the post-financial crisis regulatory environment. In a classic case of unintended consequences, the requirements of the Dodd-Frank Act, a bill designed to make the banking industry more stable, may be accomplishing just the opposite as small banks have been closing their doors or have been acquired by their larger brethren due to the costs of the additional regulatory paperwork. The smaller institutions lack manpower and automated systems and are thus less efficient and profitable, making it difficult, and often impossible, for them to remain competitive.[3] Additionally, in an interview given to CNBC on July 13^th, 2012, John Kanas, CEO of Bank United attributes the struggles of small banks to what he refers to as the “obsession with Keynesian economics” which are driving interest rates down to such low levels that making money the traditional way -making loans within the local communities and taking in deposits- is no longer possible.[4]

This does not appear to be a transient state of affairs as according to the FDIC 29 banks have failed so far this year and 180 have been absorbed through mergers and acquisitions. 418 fewer banks are projected to exist by the end of 2012 than existed when the year began. Additionally, fewer banks than ever before are making their way into the market. Again, according to the FDIC, applications for bank charters have plummeted since 2008, with only 37 applications being filed in the past four years, none so far in 2012, with the latter representing the lowest number since that statistic began being tracked in 1934. In comparison 164 such charter applications were filed in 2007, just prior to the onset of the credit crisis.[5]

All of this has led to an even greater concentration of assets among a smaller group of lenders as nearly two-thirds of all U.S. commercial bank assets are now housed at only five financial institutions.[6] There are fewer banks currently operating that are larger in size than before, a trend that some have described as oligopolistic; clearly banking activities and their associated interest rates are being dominated by a decreasing number of banks of greater size and influence.

The control of lending and interest rates by such a small number of large financial institutions is problematic for a number of reasons. The lack of small banks could hamper the ability of small businesses and entrepreneurs to gain access to capital; given that small businesses generate most employment growth in the United States, such a lack of capital could hinder economic growth.[7] The control of interest rates by such a small number of banks can lead to abuse of the power inherent to such exclusive influence as the ongoing LIBOR scandal illustrates quite clearly.[8] Additionally, although interest rates are at historically low levels, making it a borrowers market, this will not always be the case, and with so few lenders participating in the process of setting rates and offering loans, borrowers will have a correspondingly limited set of options available to gain access to capital.

In order for borrowers to have the greatest accessibility to the lowest rates there must be an optimal level of competition in the market. With an increasingly small group of lenders comprising that market it is questionable whether such optimal competition can exist. Without an efficient market, one that allocates capital to those best suited to employ it, economic growth will not be maximized. Without competition in the capital markets, in other words, the United States economy will have yet another headwind it can ill afford. The continued concentration of the finance industry through institutional consolidation and the lack of new entrants into the market is an issue that must be addressed in order to ensure that those seeking to borrow money do so in a market that sets an equitable rate, one that is not unduly influenced by a minimal number of massive banking institutions.