4.26.2010
For most of her retirement, your elderly mother has relied on the interest from her bank savings for a significant portion of her income. What is this in real numbers? For example, if a 77 year old has $100,000 in the bank, she would earn $5,000 in interest earnings per year at 5%. However, recently, this rate has been under 1%. Why?
Over the past 2-3 years, Uncle Ben Bernanke has taken that away from her. In order to MAKE SURE that Citigroup, Bank of America, Wells Fargo, etc could pay back the loans from the government, and boost lending, and earn a profit, Chairman Bernanke lowered the Fed Funds Rate (the rate that banks pay to borrow) to effectively ZERO. By allowing them to borrow at zero, and lending out at 5.25%, they are making HUGE profits. In fact, even though consumer interest rates on mortgages and such are historically very low, the spread that banks are earning (5.25-0% = 5.25% SPREAD, or GROSS PROFIT) is much higher than historical averages. Therefore, big banks can start earning big profits again, perhaps to help offset foreclosing customers and pay those bonuses that were missed in 2008.
5 Year rate is 2.5% - 1 Year Yield is MUCH Lower
The result though, when Fed Funds Rates are low, is that CD and savings account rates are also low (remember, a CD or savings account is the bank BORROWING FROM YOU to lend to others). Therefore, your mother has lost $5,000/year in income due to Ben Bernanke. I covered this in articles before in many ways, including the stimulus checks that were sent out a couple of years ago to the tune of $250 billion – Americans got the stimulus check but lost $150-200 billion in interest earnings from lower rates – so all we did was add to the national debt, replace annual interest earnings with a one time stimulus gimmick, and give the banks more profit.
I would expect to see grandma’s all over the US marching on Washington demanding that prudent savers not suffer in order to bail out imprudent banks – but we are not seeing this. Mainly because grandma doesn’t understand who is responsible (Central Planners at the Fed – FOMC). If she did, she would complain. It is likely however, that she may blame Wall Street, which is the distraction that politicians are using to deflect criticism on the government – the bogeyman so to say. Not that Wall Street is innocent, but 0.5% CD’s are not Wall Street’s fault – Bernanke (and the FOMC) could fix that tomorrow if he were serious about savings, investment, and stable currency. However, as we discussed last week, Big Ben is a Keynesian, and he will print money and keep rates super low until he sees the economy look exactly like he wants it to. And just like a person saying “I will spend on my credit card until my house looks EXACTLY like I want it,” we could get the nice house (economy), then lose it quickly after.
