Fed Policy Costs Savers Hundreds of Billions

[classhandicapper]

http://www.cnbc.com/id/102537689?__source=yahoo%7cfinance%7cheadline%7che adline%7cstory&par=yahoo&doc=102537689

[tucker6]

I keep no money in cash anymore except for cash on hand. Everything has been put into investment, be they bonds, stocks, and buying actual assets/businesses. Under the right circumstances, you can make a 15% annual return or more for accepting more risk. Not for the faint of heart, but with the proper due diligence, you can select more winners than losers. Similar to whaling at the racetrack.

[whodoyoulike]

I'm uncertain how they arrived at that lost interest income amount but, I'm wondering who benefited, I don't think it was the Fed that's where the focus of the article should have been.

[badcompany]

Yeah, but if the Fed did raise rates significantly, Government interest payments would rise dramatically, and the two big elephants in the room, SS & Medicare, which currently account for half the budget, would have to be addressed.

[Clocker]

I'm uncertain how they arrived at that lost interest income amount but, I'm wondering who benefited

Savers are essentially lenders. They are lending their money to the bank to use, and they are getting paid interest in return. If interest rates are kept abnormally low, borrowers benefit and lenders suffer.

Who is the biggest frog in the borrowing pond? The US Treasury.

The other thing not really discussed in that article is inflation. Here again, inflation hurts lenders and helps borrowers, because the loan is paid back in cheaper dollars.

[whodoyoulike]

Yeah, but if the Fed did raise rates significantly, Government interest payments would rise dramatically, and the two big elephants in the room, SS & Medicare, which currently account for half the budget, would have to be addressed.

I think I understand the reasoning why the Fed attempted to keep rates low at the time but, I would think the effect on SS & Medicare was in the back of their minds. After all, the skyrocketing costs of those two programs were at the time back in 2005 etc., were getting out of hand with no way to control them. And, the government was on the hook for both programs. The Fed seems to have ulterior motives with their moves (saving face with the banks, China and Europe are several of them). Remember back when the Fed was always complaining about the low savings rate of the American people, I haven't heard those statements in a number of years (I was just thinking about this the other day).

[whodoyoulike]

Savers are essentially lenders. They are lending their money to the bank to use, and they are getting paid interest in return. If interest rates are kept abnormally low, borrowers benefit and lenders suffer.

Who is the biggest frog in the borrowing pond? The US Treasury.

The other thing not really discussed in that article is inflation. Here again, inflation hurts lenders and helps borrowers, because the loan is paid back in cheaper dollars.

Thanks. But, I know who benefited given 20/20 hind sight. My question was more rhetorical and a little bit of sarcasm on my part.

[badcompany]

I think I understand the reasoning why the Fed attempted to keep rates low at the time but, I would think the effect on SS & Medicare was in the back of their minds. After all, the skyrocketing costs of those two programs were at the time back in 2005 etc., were getting out of hand with no way to control them. And, the government was on the hook for both programs. The Fed seems to have ulterior motives with their moves (saving face with the banks, China and Europe are several of them). Remember back when the Fed was always complaining about the low savings rate of the American people, I haven't heard those statements in a number of years (I was just thinking about this the other day).

I don't think most people realize how bad it is, and the Boomers are just starting to reach retirement age. Band aid remedies are not gonna cut it. This needs major reform, and with professional politicians being the majority in D.C., not too many are ready to go in front of the American people and say, "You know that money and those benefits you were expecting, well, I got some bad news for ya."

http://i95.photobucket.com/albums/l142/thinlizzy21/477f51142b27d8c0f2a9e4439acbb08a_zps2c707ee8.jpg

[Dave Schwartz]

I admit that when it comes to financial policy I am not the sharpest tool in the shed compared to many of you but my take on all of this is really simple. Now, perhaps there is a lot more to it but it seems to me that:

Banks are thriving at the expense of depositors.

Do I have that wrong?

[whodoyoulike]

I admit that when it comes to financial policy I am not the sharpest tool in the shed compared to many of you but my take on all of this is really simple. Now, perhaps there is a lot more to it but it seems to me that:

Banks are thriving at the expense of depositors.

Do I have that wrong?


Is this question also rhetorical and/or a little bit of sarcasm?

[Stillriledup]

Why is it legal for banks to hold money from customers and not pay a "Fee" for using the cash? Customers pay a fee to borrow, why don't the banks pay a fee to borrow? Where are the lawmakers on this issue?

[Clocker]

Why is it legal for banks to hold money from customers and not pay a "Fee" for using the cash?

Because you let them. It is a voluntary transaction.

[whodoyoulike]

Why is it legal for banks to hold money from customers and not pay a "Fee" for using the cash? Customers pay a fee to borrow, why don't the banks pay a fee to borrow? Where are the lawmakers on this issue?


If I understand this correctly, banks in the U.S. are paying a fee. It just currently happens to be .008 or less per dollar deposited. The lawmakers which you're looking to act on these matters are figuratively being wined and dined by bankers.

In Europe, I read some banks in certain countries were considering applying negative interest rates on customer deposits. I would imagine a massive exodus of funds if this was to occur.

[RunForTheRoses]

Howard S Katz, who had a blog The One Handed Economist, used to write about the deviousness of the FED (he was a Gold Bug) and how so-called for the poor administrations like FDR actually transferred wealth to the rich.

I can't find his site since he died a few years ago, may look on archive.orgs wayback machine when I have time. He had some interesting iconoclastic views.
http://mitchell-langbert.blogspot.com/2011/01/howard-s-katz-rip.html

http://www.kitco.com/ind/Media/jan062011.html

http://www.kitco.com/ind/index.html#katz

[Clocker]

In Europe, I read some banks in certain countries were considering applying negative interest rates on customer deposits. I would imagine a massive exodus of funds if this was to occur.

The Swiss are looking at negative rates on foreign deposits. It may not result in a massive exodus of funds, because small negative rates can be worth it in the short run to keep the deposits in a stable currency. In many countries, the effective interest rate is negative because the rate of depreciation of the currency is greater than the nominal interest paid paid on deposits.

[Stillriledup]

Because you let them. It is a voluntary transaction.

Its pretty near impossible to pay bills and do other stuff without cards, bank accounts and plastic. Am i going to drive a bunch of cash to the electric company every time my bill is due? The "system" has this set up where you almost have to have a bank account to pay the bills. So to me, its not voluntary, you don't have a choice for the most part.

Also, if you have a decent amount of money, you're not going to have all that cash in a shoe box and drive it around with you when you go on vacation. You need the money somewhere so you dont get robbed.

[Dave Schwartz]

Is this question also rhetorical and/or a little bit of sarcasm?

Actually, no. I am serious.

I am asking, "Do I have it wrong? If so, explain what I am missing."

[whodoyoulike]

I admit that when it comes to financial policy I am not the sharpest tool in the shed compared to many of you but my take on all of this is really simple. Now, perhaps there is a lot more to it but it seems to me that:

Banks are thriving at the expense of depositors.

Do I have that wrong?

IMO, you're correct for the most part. The banks for the most part are able to lend at 3 - 4% or whatever and pay depositors basically less than 1% but again, there are probably several other reasons why banks are thriving (like charging us various fees or investing some of their [our] deposits in the different markets).

[whodoyoulike]

Its pretty near impossible to pay bills and do other stuff without cards, bank accounts and plastic. Am i going to drive a bunch of cash to the electric company every time my bill is due? The "system" has this set up where you almost have to have a bank account to pay the bills. So to me, its not voluntary, you don't have a choice for the most part.

Also, if you have a decent amount of money, you're not going to have all that cash in a shoe box and drive it around with you when you go on vacation. You need the money somewhere so you dont get robbed.

I've read where a good % of Americans don't use the official banking system which is why payday loans are booming.

[Stillriledup]

I've read where a good % of Americans don't use the official banking system which is why payday loans are booming.

It seems like those people are smarter than the people who let these companies hold their money for free.

[whodoyoulike]

It seems like those people are smarter than the people who let these companies hold their money for free.

I don't really think so since fees for payday loans, etc., are exorbitant. And, the ones who use these services are basically stuck to repeat. My understanding of these firms is they even charge a pretty good fee for just cashing checks but again, banks require minimum balances or they charge their own set of fees.

[reckless]

The Federal Reserve is not a part of the Government. It is an independent entity within the US Federal Government. It is, in fact, the Central Bank of the United States. It was created in 1913 with the enactment of the Federal Reserve Act. There were some financial panics in the early 20th century and the government responded to them by creating the Fed.

Conspiracy theorists, then and now, said it was created solely to protect the financial interests of the Rockefellers and those evil New York bankers and financiers. There is some truth there, cloke and dagger stuff notwithstanding.

The major sponsor in the passing of the Bill that created the Fed, and also the Bill that created the income tax, was indeed a 'Rockefeller', Sen. Nelson Aldrich of Rhode Island. His daughter married John D Rockefeller Jr. and was the late great Nelson A(ldrich) Rockefeller's grandfather.

(A lot of the history of the Federal Reserve could be found online, of course.)

To stay on topic, the low (and going lower, I promise you) interest rate policy pushed by the Federal Reserve does in fact 'hurt' savers, but it must be understood that the Fed's role is not to 'help' small savers, nor is it to 'help' everyday people, retail consumers/borrowers, for lack of a better term.

The Fed, as Central Bankers, are in business solely to help the banks to remain solvent and to help those government agencies that provide policy and who are the bank's biggest and most important customers. Why do you think the US Treasury, the Federal Reserve system, and central banks worldwide, all seem to be run by people who worked for and have a connection with the criminal cabal of Goldman Sachs, Citibank, and Lazard Freres?

They are there only and solely to protect and promote the financial interests of the major banks and investment houses around the world.

One reason interest rates in the USA are low is to hold down benefit costs of Social Security and other transfer welfare payments. Some have annual cost of living adjustments so the government lies about inflation so that only nominal increases are passed along. Additonally, as we know, our government borrows billions and billions at today's near zero rate to pay off higher interest rated loans that were floated 10-15-20 years ago. This spread lowers our overall budget deficit/debt and that's why our politicians don't 'cut' the budget the way they should -- by cutting expenses. All politicians lie about this sleight of hand game which are part and parcel the reason all this waste and excess is out of hand.

Ask yourself how come interest rates have been historically quite low and yet it is almost impossible to borrow money to start a business or buy a house? In a low inflation rate and low interest rate economy as we have these past years one would think the economy would be booming, unemployment nominal and other areas of growth -- housing, commodities, etc. None of that is really happening, is it.

But Wall Street is booming quite well, thank you. Corporate America's stocks are booming with no real sales and earnings growth. Why? Cheap money, thanks to the Fed, make borrowing costs nominal. These large companies borrow this cheap money to buy back stock or buy other smaller companies. Higher stock prices comes next without real growth. Financial engineering it is called on CNBC and in the Wall Street Journal.

Low rates mean no growth. Put stupid partisan politics aside, the economy is in poor shape and the numbers belched out by the governments, here and abroad, are a lie and a joke. Please don't buy the 'better than expected' baloney spewed out by Wall Street. That's a joke, that phrase.

There is so, so much to talk about when the talk is about the Federal Reserve but I must never forget this is primarily a horse racing site so I'll stop here.

There is a lot out there if one is interested. Just remember to think for yourself.

[GameTheory]

Manipulation of the value of money has been going on since the invention of money. It either benefits debtors at the expense of savers/creditors (like in the case), or the reverse. (If you are holding cash, you are a creditor.) The push and pull is always between those two groups.

[Saratoga_Mike]

Actually, no. I am serious.

I am asking, "Do I have it wrong? If so, explain what I am missing."

You actually are mistaken. Banks' NIMs (net interest margins) stink right now. Why? Loan demand isn't that great given where we are in the economic cycle, and long rates are very low. Banks have access to lots of cheap deposits, but the deposits aren't well deployed at this point in time.

[whodoyoulike]

The Federal Reserve is not a part of the Government. It is an independent entity within the US Federal Government. It is, in fact, the Central Bank of the United States. It was created in 1913 with the enactment of the Federal Reserve Act....

I like a lot of what you've written. I don't agree with everything but, I do like it.

Isn't an independent entity within the Federal Government a part of the Government?

They're supposed to be independent but, I believe they still are accountable to one or both branches of Congress.

[reckless]

I like a lot of what you've written. I don't agree with everything but, I do like it.

Isn't an independent entity within the Federal Government a part of the Government?

They're supposed to be independent but, I believe they still are accountable to one or both branches of Congress.

Here's a link about the Federal Reserve. The President makes appointments to Fed and the Senate confirms but that's basically it. In my opinion they are accountable to no one except the banks and the investment houses (Wall Street) they 'work' for and in their interests they protect.

http://www.factcheck.org/2008/03/federal-reserve-bank-ownership/

[whodoyoulike]

I admit that when it comes to financial policy I am not the sharpest tool in the shed compared to many of you but my take on all of this is really simple. Now, perhaps there is a lot more to it but it seems to me that:

Banks are thriving at the expense of depositors.

Do I have that wrong?

This is a round about way to illustrate how banks are thriving the last few years. Using JP Morgan Chase bank as an example, as of a recent report they had > 241k employees (see at a glance section).

http://www.marketwatch.com/investing/stock/jpm/profile

from a 2013 article:

http://www.reuters.com/article/2013/02/27/us-jpmorgan-jobs-idUSBRE91P0GX20130227

"... JPMorgan Chase overall earned $21.9 billion last year, excluding accounting charges linked to changes in the value of its debt. The bank said it has the potential to earn about $27.5 billion, thanks in part to efficiency gains. It aims to cut overall expenses by $1 billion in 2013.

To reach the $27.5 billion profit figure, the bank is also counting on costs for lawsuits to fall as disputes over bad mortgages are resolved, as well as seeing a one percentage point rise in interest rates, said Chief Financial Officer Marianne Lake.

The profit scenario also depends on the bank not being hit by another trading debacle like the $6.2 billion loss last year on derivatives trades placed by the London Whale, (whose money was the source of this) the nickname given a London-based JPMorgan trader for the size of the positions. ..."

And in 2014, I remember the bank was fined by the DOJ $17 bln. plus the billions probably paid to the lawyers.

Now, I wasn't there but I understand someone said "oh well" when the penalty was announced.

So, I would agree with you that the banks are thriving in the aftermath of the recent financial meltdown which I'm guessing they may have had something to do with it.