Lost among all the talk of rising inflation and the effects of rising food costs on those who can least afford it (and the rest of us), is the cost to those who live off of savings and the interest from those savings.
The Fed has lowered rates by 3.25% since September (according to Yahoo Finance). Money market accounts and CD’s that were paying over 4% interest last fall are paying around 2% now. I just had a client in my office this morning. Her money market account was giving her over $400/month last fall. The most recent month, she earned $157 on just about the same balance. Since she takes $400/month out per month, she is now eating into principal. Basically the Fed will cost her roughly $3,000 this year- in other words, in order to bail out imprudent home buyers, the Fed has stolen billions from retirees – as Jim Grant says, the prudent are bailing out the imprudent.
Another client, that came in yesterday, “paid” (the loss on interest) roughly $7,000 annualized due to this move. couple seniors on a fixed budget with decreasing interest returns and increasing living costs, and you get disaster. And just in case any of you “I feel sorry for the homeowner” types starts blabbing about their plight, let’s reexamine this issue again.
Let’s use a hypothetical scenario. A person wants to purchase a primary residence. let’s say this fellow can afford up to $1,200 per month (wonderful planning method on purchasing using “what can you afford? as a starting point – pure genious). He (yes i used “he” and not “he/she” which Strunk & White taught me was terribly poor writing style – besides ladies, this person is going to hypothetically do something dumb so be glad it’s a “he.”) looks at a condo costing $175,000. if he qualifies for a 6% loan, his payments will be $1,049.21 for a 30 year mortgage leaving him $150 or so per month for taxes.
However, he learns about an interesting loan idea – which will offer him 3% interest only for the first 3 years then convert to an adjustable rate loan. he learns that at 3%, his $1,200/month can get him a $400,000 loan because at 3%, his payments are only $1,000/month!!! Of course 3 years later, when rates adjust to the market level of 6%, his payments more than double and he can’t afford it. he then forecloses and cries to his congressman.
Sorry folks, but I don’t often feel sorry for adults. Especially when the decisions are in his control. he chose whether through greed, keeping up with the Joneses or simply not worrying about later times, to risk future economic pain. the seniors losing interest can do nothing ab0ut their predicament except be good soldiers and take one for the ‘team.’
I’ve had this debate a few times recently, and the people who disagree with me I find are those that feel sorry for everyone – no one ever deserves what they get in their eyes. I’ve made mistakes and I like to characterize the cost of my mistakes as “tuition.” I haven’t made those mistakes again (not surprisingly). i think it would be a good lesson for our nation and those involved to learn financial responsibility and I don’t think you need to be ‘educated’ to know the difference. And by the way, ‘educated’ is a favorite word of the “bail them all out” contingent, somehow feeling that those who messed up with mortgages are ‘uneducated.’ I’d be willing to bet that some very smart people, along with some very dumb people screwed up here. It’s not a matter of ‘education,’ a left-brain intellectual issue. It is more a matter of greed, envy, lack of patience in wanting something NOW (like an incorrigible child), or having a pollyanna view of the future – it is actually an emotional ‘right-brain’ mistake.
And it is absolutely proper not to bail out such foolishness, especially at such a cost to those who saved diligently and need those savings to earn interest to live.