Former Fed Chairman Ben Bernanke on Why Interest Rates Are So Low

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Former Federal Reserve Chairman Ben Bernanke lifted the curtain on a new Blog he will write and it's already interesting reading for those who follow the interest rate environment. In it, he explains why interest rates are so low and directly addresses critics who have accused him of throwing seniors under the bus by engineering a low savings rate environment.

Former Federal Reserve Chairman Ben Bernanke lifted the curtain on a new Blog he will write (visit the Blog) and it's already interesting reading for those who follow the interest rate environment. In it, he explains why interest rates are so low and directly addresses critics who have accused him of throwing seniors under the bus by engineering a low savings rate environment.

First, the reason that rates are so low. Ben Bernanke explains that the Fed sets interest rates based on an ideal equilibrium rate that is based on the return of capital. In simpler terms, the interest rate is set based on the growth of the economy. If the economy is in recession or growing slowly, then interest rates will be low. If an economy is healthy and expanding, then interest rates will be high. Interest rates have been low for so long because the economy is just not growing very much.

Over the years, many commentators on this site and on other banking sites have complained  that the Fed is killing savers and especially the elderly, who rely on fixed income investments (often CDs) to fund their livelihood. Mr. Bernanke responds to that criticism directly:

" When I was chairman, more than one legislator accused me and my colleagues on the Fed’s policy-setting Federal Open Market Committee of “throwing seniors under the bus” (to use the words of one senator) by keeping interest rates low. The legislators were concerned about retirees living off their savings and able to obtain only very low rates of return on those savings.

I was concerned about those seniors as well. But if the goal was for retirees to enjoy sustainably higher real returns, then the Fed’s raising interest rates prematurely would have been exactly the wrong thing to do. In the weak (but recovering) economy of the past few years, all indications are that the equilibrium real interest rate has been exceptionally low, probably negative. A premature increase in interest rates engineered by the Fed would therefore have likely led after a short time to an economic slowdown and, consequently, lower returns on capital investments. The slowing economy in turn would have forced the Fed to capitulate and reduce market interest rates again. This is hardly a hypothetical scenario: In recent years, several major central banks have prematurely raised interest rates, only to be forced by a worsening economy to backpedal and retract the increases. Ultimately, the best way to improve the returns attainable by savers was to do what the Fed actually did: keep rates low (closer to the low equilibrium rate), so that the economy could recover and more quickly reach the point of producing healthier investment returns."

What he is saying here is that the Fed had no choice but to keep rates low because that is what the economy warranted. The Fed didn't choose the rate, the economy did. If the Fed had raised rates when it wasn't warranted, the economy would have gotten worse and forced the Fed to lower them again for a potentially longer period of time.

He finished with the following statement:

"The state of the economy, not the Fed, is the ultimate determinant of the sustainable level of real returns. This helps explain why real interest rates are low throughout the industrialized world, not just in the United States."

It's hard to argue with this logic. The real pain for savers over the past seven years came from the collapse of the largest housing bubble in history, as well as shifts in technology, trade, and demographics that have put enormous stresses on Western economies. Until Western economies figure out how to stimulate real growth again, the Fed will just be the caboose laying down low rates for the foreseeable future.

BestCashCow Best Bets for 2015

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Shopping for a new CD, savings account, or credit card in 2015? Below are the BestCashCow best bets.

Most Innovative Online Banking Product for 2015

The most innovative online banking product introduced in 2014 and available to consumers in 2015 is CIT Bank’s flexible CD products known as RampUp CDs.    The RampUp products are Certificates of Deposit that allow online savers to take advantage of higher CD rates, yet avoid what many perceive to be the pitfalls of locking money up for an extended period of time when we may be on the precipice of dramatically higher moves in rates.   

CIT Bank is the only online bank offering RampUp CDs which range in duration from 1 to 4 years.  With more flexibility than a standard CD product, CIT’s RampUp CDs are suitable for those with either short- or longer-term savings goals.  In today’s challenging economic environment, this flexibility can help customers achieve their savings goals more easily.

Each of the RampUp products allows a 1 time rate increase if rates should rise.  The 1 and 2 year products – called RampUp Plus - also allow depositors to add to their CD balance 1 time during the course of the CD.   While CIT Bank itself offers slightly higher rates on 2, 3 and 4 year Jumbo CD products, the RampUp products all offer extremely competitive rates and are a Best Bet for 2015.

Most Interesting Opportunity Nationally for depositors to take advantage of a development in local banking

Over the last 18 months or so, several regional Massachusetts based banks have begun offering online banking at extremely competitive online savings rates.   Five banks in particular (Salem Five, East Boston Savings, Bank 5, Radius Bank and Northeast Bank) offer online savings rates above 0.85% and, even more importantly, four of the five offer these rates to residents of all US States (East Boston restricts online accounts to residents of New York State and New England).   This heavy online banking presence by Massachusetts banks is particularly interesting to savers as banks chartered in Massachusetts are covered by DIY insurance, a special insurance fund that covers deposits to a limit of $1 million per account holder (FDIC insurance only provides coverage to $250,000). DIY insurance applies regardless of the account holders’ state of residency.   While service levels may be less than optimal in some of these online banks, and banking interfaces may be less easy to work with than those of the better known online banks, this development gives those looking to deposit sums up to $1 million in a single online banking account more flexibility to pursue the most competitive rates.

Most Valuable Travel and Rewards Card for 2015

The editors of BestCashCow have voted the US Bank Club Carlson card a Best Bet for 2015.   In our view, the card ranks far and away as the best value in hotel loyalty programs for those who are able to optimize the redemption opportunities offered to its users.  The card has significant sign up and renewal benefits that are on par with any hotel rewards credit card.  New card members receive 50,000 Club Carlson Gold points immediately after signing up, plus 35,000 points after spending $2,500 in the first 3 months; card members also receive 40,000 points on each anniversary.  Moreover, each $1 spent on the card accrues 5 Club Carlson points.  Since BestCashCow values each Club Carlson point with a redemption value as high as 2 cents, this card can deliver as much as 10 cents in value per $1 spent.  A card-holder will only receive these high point redemption values if the points are redeemed at the most luxurious Radisson Blu properties in New York, London, Chicago and Paris, and if a holder also takes advantage of the last night free option on a stay of over one night.


Thinking of Buying a Variable Annuity?

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Can variable annuities make sense even if you are not in the highest tax bracket? This article is going to focus on non-qualified annuities, and in particular whether the cost of the annuity is justified based on the insurance company guarantees and tax-deferral, as well as some potential emotional advantages of annuities.

When you buy a variable annuity, you invest in sub-accounts that will rise in and fall with the value of their securities. You receive some guarantees, for example, if you die before taking withdrawals your beneficiary will receive no less than your initial contribution even if the value of investments has decreased.

Before we start analyzing whether variable annuities make sense, let’s list their advantages:

  • Tax-deferred accumulation
    • Death benefit protection
    • Longevity protection
    • Premium bonuses, and
    • Creditor protection in some states

Other than the first one, these advantages are quite small unless you are in a business where you could get sued, you live in a state where annuities are free from creditors, and sheltering significant assets from creditors is of value to you. In most cases you will not need longevity protection, that is, protection against outliving at least some of your assets, while you are accumulating wealth.

The disadvantages are as follows:

  • Surrender charges if minimum holding periods are not met
  • Mortality and expense charges
  • Administrative fees
  • Rider charges
  • 10% penalty on withdrawals prior to age 59.5
  • Withdrawals are of earnings first, then principal, and are taxed at ordinary income rates

A variable annuity could have an expense ratio of about 1.25% and investment management fees of 0.50%. Is that price low enough so that the after-tax value of the annuity exceeds the after-tax value of investments purchased outside of the annuity? Let’s look at an example:

Hypothetical Example – owner age 30, 28% tax bracket (therefore no net investment income tax from the Affordable Care Act), 8% investment return, $50,000 initial investment

At age 65, the account would be worth $417,333. A lump sum, which is not required but used here as an example, would trigger federal income taxes of $102,853, leaving the annuity owner with $314,479.

The net investment income tax would likely apply and decrease the account even further. Alternatively, by paying tax on gains each year, half at capital gains rates, half on ordinary income rates, with the same 0.5% investment management fee (so a net investment return of 7.5%), the account would grow to $370,284.  Note that this alternative assumes the owner is making investment decisions himself as working with an advisor would likely increase the investment management fee.

If the tax bracket were increased to 33%, and the 3.8% net investment income tax applies, then the account would only grow to $336,951. The higher the tax bracket and the higher the investment returns, the more valuable the tax-deferral feature of an annuity can be relative to the taxable alternative.

Circumstances will vary, and tax rates may change, but under typical circumstances the advantages of tax deferral do not outweigh the annual costs of the annuity with the possible exception of those in the highest tax brackets and those with very high investment returns.  And of course you cannot withdraw your money without penalty, and possibly adverse tax consequences, for a period of years.

Why has so much money has found its way into these products? Perhaps people don’t like taxes and look for ways to defer or eliminate them, even if the cost to do so outweighs the benefits. In addition, people may feel more comfortable with a guarantee that their initial contribution will be paid back in the event of death. They are also much more comfortable rebalancing their portfolios when taxes and transaction charges are removed from the decision. The decision not to rebalance a portfolio because of increased taxes may be more damaging than the taxes themselves.  Finally, some of the money that has found its way into annuities was in liquid savings and wasn’t needed for emergencies, so the right financial comparison in this instance is the annuity return versus 1% in a savings account.

There are scenarios where owning a variable annuity makes a great deal of sense, even when comparing to a similar investment approach outside of the annuity.

Some products offer a guaranteed increase in value (often called a step-up), regardless of market performance, for a set number of years as long as that minimum value is converted to an income benefit. Let’s examine a 55 year-old buying a product with a guaranteed step-up of 6% per year and a guaranteed minimum income benefit (a rider available at an extra cost) of 5% at age 65. His $50,000 contribution is guaranteed to generate annual income of $4,477 at age 65 and he has received his premium back in annuity payments by the time he is 76 and 2 months. All future payments are those provided by interest and/or losses to the insurance carrier. If investment performance exceeds 6% after fees, he can receive higher payments and/or possibly leave a death benefit to his heirs.

If the annuitant lives to age 90, then the internal rate of return on this investment, assuming only the minimum income benefit and ignoring taxes, is approximately 3.9%. For some people that is a reasonable rate of return for an investment with the risks and benefits of an annuity. Some variable annuities offered step-up rates of 7% or more, and annuitization rates of 7%, before the financial crisis.

Those annuities have in all probability created losses for the insurance carriers and better sleep for the annuity holders.

Before purchasing a variable annuity, answer the following questions for yourself:

  • Have I maximized my tax-preferential opportunities (401(k), IRA, etc.)?
    • Am I making a single contribution, or contributing over a period of years? (People who will be contributing over time may do better elsewhere)
    • Are step-ups and annuitization rates likely to yield increased distributions in retirement?
    • Am I going to change my investment risk because of an annuity?
      • Do I generally avoid the temptation of selling when investments have gone down and buying after they’ve already increased in value?
      • How long might I live and what will be my fixed sources of payments (e.g., Social Security and pensions)?
      • Do I understand all of the features and costs of the variable annuity being examined?


Weighing an annuity involves weighing risk, return, liquidity, tax-efficiency, and the strength of guarantees.  Some individuals have done very well by putting money into annuities, better than they would have with an alternative. Every investment product tries to fill a specific need, it’s just a matter of whether the expense of the product can be justified by the performance and the financial security provided. The average variable annuity owner is going to receive less in benefits than a similarly invested alternative. This should be intuitive as insurance carriers are in business to make money.

If you are looking to accumulate the most after-tax money and aren’t in the highest tax bracket, you could be better off with taxable investments than a variable annuity. But if an annuity is a way for you to increase some investment risk, gives you confidence that you’ll continue to get a check as long as you live, or you value the opportunity to get an increase in your monthly check, a variable annuity can make sense.

Securities and Investment Advisory Services offered through NFP Securities, Inc., Member FINRA/SIPC. NFP Securities, Inc. is not affiliated with J Matrik Wealth Management. NFP Securities, Inc. does not provide legal or tax advice.

NOTE: Variable annuities are long-term investments designed for retirement purposes. In the Accumulation phase, they can help you build assets on a tax-deferred basis. In the Income phase, they can provide you with guaranteed income through standard or optional features. Variable annuities are subject to insurance related charges including mortality and expense charges, administrative fees, and the expenses associated with the underlying funds. Early withdrawals are subject to company-imposed surrender charges. Withdrawals are also subject to ordinary income tax, and if taken prior to age 59½, a 10% federal tax penalty may apply. Investment involves risk, including the possible loss of principal. Your contract value when redeemed may be worth more or less than your original investment.

All optional benefits such as riders and bonuses are available for an additional cost. The guarantees associated with optional benefits are backed/subject to the claims-paying ability of the issuing insurance company. It is important to weigh the costs against the benefits when adding such options to an annuity/life insurance contract. The cost for riders varies widely but is generally between .15% to .75% of the account.

Citibank's Latest 10% Structured Note Could Be Worth A Look

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Citibank latest Structured Note uses the 30-5 CMS spread like a lot of recent issues, but it also has a 9x multiplier making it very interesting.

I’ve written about Structured Notes previously.  Most of what is being marketed as Structured Notes, especially those products tied to individual equities or equity indices, should be avoided unequivocally.  Yet, I occasionally come across a product that could make sense for those seeking much higher yields than CDs offer on a small percentage of their cash, with only very negligible risk.   The Citibank note currently in syndication under 1730T0R50 / US1730T0R502 seems to fit the bill.

This Citibank Note has a 20 year maturity.  Even though it is callable earlier, it should not be considered for anything other than a very small amount of money that you do not reasonably anticipate needing in the short or even intermediate term.  It returns 10% interest over the first year in quarterly installments.   In years 2 through 19, it pays the difference between the 30 year Constant Maturity Swap (CMS) less the 5 year CMS, less 25 basis points, times a multiplier of 9.  The CMS rates are observed and payment is determined every three months, at which point the Note pays an quarterly payment which cannot be greater than 2.5% of the principal amount (or 10% a year).   (CMS basically tracks LIBOR which basically tracks 10 year US Treasuries at these maturities; you can learn more here).

The Note goes out over 20 years and anything can happen over that period, including a default by Citibank which is the only risk to principal here.   The more likely concerns are (1) that we hit a period of hyperinflation where the savings rate goes well above 10%, or whatever the Notes are paying, at some point during much of the next 20 years, and/or (2) that the yield curve becomes very narrow.   If there is less than 1.365% of premium of the 30 year CMS over the 5 year CMS, the Note will return less than 10% annually, and for any period during which it is less than 0.25%, it will pay nothing.

However, I believe that any hyperinflation would be short-lived and that there will always be an inherent time premium to the 30 year over the 5 year.  I also believe, from looking at the graph below which reflects on the last 7 years and includes both a recession and a recovery, and that that premium is likely to remain wider than 1.365%.  Therefore, in my estimation this Note is likely to deliver a 10% annual return for much, if not most, of the next 20 years or until called, and 10% is not a bad return annually.

Author's Note: The author recommends nothing greater than a very small position in these or any debt-side Structured Notes.  Most individuals will find current five year CDs to be more appropriate intermediate and long terms stores of cash.

Editor’s Note: We are often contacted at BestCashCow with queries about how to purchase these Notes.  Please note that they are available though a broker that is part of the Citibank syndicate, and not through an ordinary Citibank branch.

The Three Best Online Banks for Seniors in 2014

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Following its recent study of services provided related to the 10 most important factors in investment banking for seniors, BestCashCow today releases the following results.

Seniors, like all other Americans, seek the safety of FDIC insurance and higher returns on their cash when depositing money in an online bank.  However, those in their third age are particularly sensitive to the following ten factors:

  1. Website Clarity – the website should be clean and absent of clutter from the moment the user signs on and thereafter. 
  2. Website Ease of Setting up Account  – It should be easy to set up an account, including the ability to easily create passwords and password hints.  The user should not be put through contortions here.
  3. Availability by phone of US-based customer service personnel skilled at directing newcomers through the website
  4. Brand Recognition and Comfort
  5. Ease of Use and Access to Account on a regular basis – seniors need to know that they have arrived at the landing for accessing their savings and CD accounts, and the website shouldn’t share an interface for accessing information about car loans, student loans or home loans
  6. Clear Disclosure of Savings and CD rates at all times (seniors do  not want to be vulnerable to bait and switch; they want to know their rate at all times)
  7. Ease of setting up and directing ACH transfers to savings and checking accounts at other institutions. 
  8. Quick execution of ACH or wire transfers
  9. Absence of all limitation (e.g. d low volume and dollar limits) on ACH and other transfers
  10. Absence of account service and maintenance fees or other hidden fees

On each of the above ten factors, BestCashCow has ranked the following as the three best online banks:

Personal Savings by American Express

American Express’s Personal Savings product offers outstanding online and phone service from a name that is well recognized and trusted.  The bank ranks excellent on each of the above factors, but excels particularly in all aspects involving phone support.  Plus, with no minimum opening balances or minimum maintenance requirements, Personal Savings by American Express is a clear winner for folks in their third age in 2014.  One clear downside of Personal Savings by American Express, however, is that their rate is currently slightly below that of their competitors and their CD rates are not competitive.


GE Capital Bank

GE Capital Bank benefits from the solid GE and GE Capital brands.  It also provides no minimums, no transaction fees and multiple ways to access capital easily and quickly.  Customer service that is available during normal business hours and responsive immediately to online requests makes GE Capital Bank an online bank where seniors should feel comfortable stashing cash.   


CIT Bank

While perhaps less well known than others on this list, CIT Bank offers a high quality online savings account with virtually no fees to open, maintain or operate as long as a $100 minimum balance is maintained.  Those maintaining $25,000 or more in an account with CIT Bank also receive a slightly higher rate and a waiver of outgoing wire transfer fees (ordinarily only $10).   With both outstanding service and great rates make CIT Bank an excellent choice for seniors.


An account with each of the above three online banks provides someone in their third age with the ability to comfortably and safely deposit, fully insured by FDIC, up to $750,000 ($1,500,000 if a couple) and to earn much more on this money than he or she can through any other absolutely safe, no risk investment (6.5x to 8x what is earned at brick and mortar banks).  In short, these three banks are safe for anyone and worth looking at, but especially worthy of a look for seniors who have until now been uncomfortable with online banking.

NOTE:  BestCashCow undertook this survey and analysis totally independently of the banks studied, including the above three winners. 

For the sake of disclosure, CIT and GE Capital Bank are advertisers on BestCashCow.   They did not directly sponsor this article or the study behind it.

Compare all online savings rates here.

Barclays and Natixis Offer Investors a Chance to Get 10% or 11% Annually

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I have written previous on about debt side Structured Notes. While these Notes involve real risks, they present those investors with a long-term time horizon with the opportunity to pick up yield.

I am a big proponent of keeping money that you absolutely cannot afford to lose in savings and CD accounts and is the best place to find and identify the appropriate online and local accounts for your needs.  It makes sense in the current interest rate environment for investors to look carefully at placing very small amounts of their cash that they want to be sure is secure, but do not need to access for a long period in bank-issued Structured Notes in order to avail themselves of the opportunity to earn higher rates over time.  While we have seen such Notes in the past offered by the likes of Morgan Stanley, Citibank, Chase, Goldman and HSBC, the offerings currently in syndication are offered by Barclays Bank PLC, the British bank rated A-/A3, and Natixis, the French bank rated A/A2. 

The Note currently in syndication by Barclays Bank PLC is a 15 year Note paying 10% for the first year and then as much as 10% in subsequent years (on quarterly payment dates) based on the difference between the 30 year less the 5 year Constant Maturity Swap (CMS) rate.   The Note is the same structure as an HSBC Note that I wrote about here and to a Citibank Note discussed here.  Unlike those notes, this one is using a multiplier of 5 that offers a higher likelihood of getting closer to 10% (the 30 year CMS needs to stay only 2% above the 5 year on quarterly measurement dates for payment to 10%).  The Note is callable after the first year and on each quarterly payment date, which is a feature that is unattractive, but does not jeopardize the 10% that this Note produces during the first year.  Those interested in this Note can learn more about it by referencing CUSIP 06741UBK9 or ISIN No. US06741UBK97.

A Natixis Note in syndication is a 20 year Note that pays 11% for the first year and then as much as 11% in subsequent years (on quarterly payment dates) based on the difference between the 30 year less the 2 year CMS rate (the multiplier is 4).  The Note does not pay on quarterly measurement dates if the S&P 500 trades more than 25% below its price on closing, and is not callable.  This Note is similar in structure to a JP Morgan Chase Note that I wrote about last Fall.  The main difference from the JP Morgan Note is that it is 20 years, instead of 15. Those interested in this Note can learn more about it by referencing CUSIP 63873HKC7or ISIN No. US63873HKC78

The Natixis Note is more interesting than the Barclays Note for several reasons – it is not callable, is based on the 30-2 spread instead of the 30-5 spread, may pay a higher interest rate (has a higher cap), and is issued by a credit that is currently rated to be slightly stronger.  Nonetheless, I have had a tough time getting my hands around this one for two reasons.  First, while 15 years is already certainly pressing the length of time for which anyone should lock up their money in an illiquid investment, 20 years is just much too long.  Second, I find the S&P contingency something that is different to stomach, especially as the S&P could easily fall more than 25% and stay down there for a lengthy period of time.  I therefore personally bought a small stake in the Barclays Note, but avoided the Natixis one. 

Structured Notes are interesting ways to pick up yield, but investors should always take a very measured approach.  Both of these Notes are illiquid and involve real interest rate risk, and could very well wind up paying little or no interest for lengthy periods of time.