Wikinvest Wire

Punish the savers - April Fools' Day edition

Wednesday, April 01, 2009

One of the things that has always bothered me about this brave new world of serial asset bubbles, where freakishly low interest rates are simultaneously the cure for the bubble that just burst and the fuel for the bubble about to inflate, is that a nation in dire need of savings unnecessarily punishes its savers.

Up until the current decade, with few exceptions such as in 1992-1993 when the Fed's short term lending rate dropped to just three percent, you could pretty much count on getting at least five or six percent interest at just about any bank.

Well, not any more.

Rates for certificates of deposit are now at once unthinkable levels as shown above according to and there is a disturbing new trend in recent years where the banks paying the highest interest rates seem to go belly-up shortly after you open an account.

GMAC is the latest example of this, offering over two percent for a savings account and closer to three percent on one-year CDs when most banks pay only a fraction of that amount. You may even be able to see this for yourself as ads for their products are likely to have popped up above and/or to the right as a result of this little rant.

In something of a cruel April Fools' joke today, part of a long-standing routine during the first couple days of the month to update Quicken personal finance records with monthly interest earned as reported by the bank, these lower interest rates are hard to ignore.

Unfortunately, in preparation for the possible purchase of a house this year (now put off for at least another year) a bunch of our CDs have recently expired and where you used to be able to get over four percent, you can't even get two percent now.

It really is disgusting.

While it doesn't impose a hardship on us (it's more an annoyance than anything else), the worst part about this development is that you've got senior citizens out there who, during just about any other period in American history could be assured of getting a decent return on their savings, are now getting the short end of the stick - first from Greenspan and now from Bernanke.

For as long as I can remember from being a kid, you could always get five or six percent on a safe and sound investment at the local bank - no risk, no big upside, just a steady stream of interest payments for letting them use your money.

A half million dollars should be able to generate at least $25,000 or $30,000 a year in absolutely risk free income, an idea that was once at the very heart of the U.S. banking system.

Today, you'd be lucky to get $10,000 a year from that same pile of savings. That's probably not even enough to cover routine medical expenses for your typical retired couple.

There is something seriously wrong with a savings-short American financial system that, since about 2002, has punished its savers.


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Anonymous said...

Yes, my parents are among the people being punished (middle class retirees who have lost hundreds of dollars a month by seeing CDs reset). And what can I tell them? Try to spend less ....

There is not much else that can be advised, since it seems there is a systematic plan to screw savers and reward debtors in this country and it's become policy.

Anonymous said...

My interest rate in New Zealand has gone from 9% to 4% in the last year. Thats a big hit to my income, but I am hoping that American made inflation will pop that right back up in a year or two.

Effective Demand said...


I posted the new Ventura County sales versus distressed sales:

Dan said...

Try being a Gen-X'er...

Not to literally say, "boo hoo", I truly am sorry, but, where does that leave us?

Does a sinking tide sink all boats?

acai berry said...

Yes. And the low interest rates that punished the savers also laid the foundation and provided the capital for the bubble in housing prices and financial instruments like mortgage backed securities > derivatives > credit default swaps > collapsed financial system.

Anonymous said...

being a gen-x'er is one of the best positions right now. Even if this mess turns into a 10-20 year slump, boom times will be back before we need to live off our savings. So what to do between now and then? Well I'm going to buy a house and maybe a shiny new chrylser 300. I wasn't established firmly enough to get them during the bubble run-up and wasn't willing to get in during the height of the insanity. But now there are reasonable prices out there and I can get what I want and do it the right way. I just wish the buffoons in the government would step back and let what is happening happen already so we could just bite the bullet and get on with our lives. Change was happening before the election. It didn't need a facilitator. And now the one we have is thrashing to try to maintain status quo. That's no good. We need to let bad businesses fail so that better managers can pick up the pieces and rebuild them in a functional manner. But I'm digressing quite far here. All I mean to say is that if you're under 40, this not-so-great depression we're in now is one of the best things that could have happened. Just as long as the radical elements in our society don't use this as opportunity to dismantle the institutions that will see us through this.

Finance Guru said...

Thanks for writing an excellent analysis of the current economic situation. I learnt something new. Awesome article!!

David said...

Totally afgree with you Tim.

If someone had taken their money out of the bank during the past few years and instead put in real estate or stocks they would also have been screwed.

It is a war on the savers! and I have had enough!

John S said...

Then to add insult to injury, the government seizes one-third of your meager interest earnings through the income tax.

Anonymous said...

You can thank Keynesian economics for the war on savings that is carried out as a matter of government policy.

The Keynesians regard savings as unproductive "leakage" from the economy, and so they do everything they can to discourage savings by stimulating spending.

They miss the plain fact that savings go to banks, get lent out to businesses and thereby become the basis of sustainable economic growth.

We literally have a government acting to undermine economic growth in the deepest possible way by systematically fighting the formation of savings and capital... “The horror, the horror.”

For an excellent analysis of our current situation, see Robert Stewart's article "The Crisis in 10 Points".

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