Bernanke’s Zero Interest Rate Policy Turns Out To Have a Big Hidden Cost To U.S. Savers

[girl gone mad]

The Commerce Department’s Bureau of Economic Analysis, which keeps track of this sort of thing, reports that personal interest income received by Americans in 2011 was $997.5 billion. That’s down 28% from the $1.382 trillion in interest Americans earned in 2008. Part of the story may be that Americans who lost jobs have spent down their savings accounts and so have less in the bank to earn interest on, but part of the story, too, is that the low interest rates mean whatever money is left in the bank is generating less interest — to be precise about it, $384.5 billion less interest in 2011 than 2008.

Now, if President Obama or Congress announced that they were going to raise taxes in a way that would take $384.5 billion a year out of American pockets, there would be a huge uproar about it. It would be the lead story on the evening news and there would be 30-second political commercials about it. With zirp, on the other hand, you might see some complaints from Ron Paul, from the Wall Street Journal editorial page, or from a few congenitally cantankerous hedge fund managers, but otherwise, the silence has been deafening.

Mr. Obama has even tried to make a virtue of it. At his press conference last week, he said, “Congress should pass my proposal to give every responsible homeowner a chance to save an average of $3,000 a year by refinancing their mortgage at historically low rates. … That would make a huge difference for millions of American families.”

Mr. Obama is correct that the low interest rates help Americans with mortgages who want to refinance and who are able to do so. But what about those Americans who sold their homes in 2006 or 2007 and have been renting since then? What about Americans who own their homes free and clear of any mortgage?

http://www.nysun.com/national/bernankes-zero-interest-rate-policy-turns-out/87738/

[Warpy]

1. This is the Japan Trap

with low interest + inflation leading to the axiom "a penny saved is nine tenths of a cent lost due to inflation."

Bernanke needs to catch a fuggin clue and get us out of this trap. Japan has been stuck in it and stagnant for 25 years. Interest rates need to rise and the inflated stock market needs to fall because of it. Delaying it is only delaying more of a recovery, especially in things requiring long term lending like housing and industrial refitting.

[CAPHAVOC]

2. Negative

Interest rates coming soon....I am all in for that. I rather have mandatory loans than health insurance.

[Warpy]

7. Get back to me when you're between jobs and need that bypass.

One thing has absolutely nothing to do with the other.

Paying big borrowers to borrow is insane. Besides, we're going to have to give much better rates on those t-bills if we are expecting other nations to buy any of them.

[CAPHAVOC]

8. It was a joke.

I mean they force me to take a loan and pay me interest to do so. Then I can get my by-pass and make money at the same time.

[Yo_Mama]

6. Yes, and it's fundamentally deflationary.

Households save for a purpose - when you are younger, you may be saving for a downpayment on a home or a car - so if your real savings dwindle year after year, you respond by saving more if you can, or you are forced to contemplate poverty in the future if you can't, which makes you very hesitant to take on debt or spend.

Bernanke and the Fed have been focusing on rates in an attempt to goose housing construction and the overall economy. In the past this worked very well, but in a debt-saturated economy it doesn't.

[CAPHAVOC]

9. Here they are fixing up their old houses. Not buying new ones.

[CountAllVotes]

3. what!?

Gee, who would have thought that incomes are down and that the IRS is collecting less. They wonder why when dividends which are taxed no longer exist?



Rates needed to be raised a long time ago.

People have spent it out in many cases.

Bernanke = a damn fool pandering to Wall Street IMO!!!!

[JDPriestly]

4. This really hurts seniors.

It reduces the amount our pension funds can pay if we are lucky enough to have a pension.

It reduces the amount we receive on savings in the bank if we are lucky and prudent enough to have saved.

It reduces the amount we receive in interest and growth on our 401(K)s depending on how conservatively we have invested our money. And anyone over 65 who isn't invested conservatively is a fool.

This means for many of us that, no matter how we scrimped and saved when we worked, the only income we have in retirement is Social Security or the pension from our jobs.

So, this really, really, hurts seniors.

And considering that Obama gives lip service to supporting Social Security but actually does not seem to understand how this policy hurts many seniors, well, it's no wonder that so many of the Tea-baggers are seniors. Even if we are healthy, employers aren't going to hire us in this economy, so we are stuck. This is not what you can call "hope." I'm a Democrat through and through so even though I am a senior and suffer from this misguided policy I will vote for Obama. But Obama needs to think more about the increasingly large senior population. We count too. And we definitely vote.

This is particularly puzzling because credit card interest rates are very, very high, and banks are extremely aggressive about collecting on those debts. If you consider the difference between the interest rates banks charge on credit cards and the interest banks pay savers, somebody is walking away with a lot of money.

[Yo_Mama]

5. A couple of things

Seniors and near-retirement persons are an extremely difficult reelection hurdle for Obama, because the fact is that current policy strikes hard at these individuals.

Regarding CCs, servicing costs are high and losses are high. Cost of funds means little for CCs in comparison to the other two.

Interest rates are determined on an equation that looks like servicing costs + cost of funds + credit expenses (losses) + profit = interest rate.

There's a commercial bank survey that shows credit expenses (at least the chargeoff portion) as an annualized cost rate that's equivalent to interest rate, so you can calculate this for yourself:
http://www.federalreserve.gov/releases/chargeoff/chgallsa.htm

That 4.93% seasonally adjusted rate means that although things have improved, banks are still writing off nearly 5% of their CC portfolios each year.

Servicing costs for large bank CCs generally run between 2-3%. That includes collections/mitigation. So now the base cost (before any profit) is say:

1-2.5% for cost of funds, plus
5% for credit losses, plus
2-3% for servicing costs =
8-10.5%.

You want at least a 1.5% profit margin (it should be 2-2.5%) which takes you to between 9%-13%. Nationwide consumer credit average (this is higher than bank average, because it includes outfits like Compucredit that cater to poor credit risks) is about 12.5%:
http://www.federalreserve.gov/releases/g19/current/default.htm

For higher risks you will have higher expected credit losses, so you will charge more.

Additionally, changes to law on CCs have made it harder to cushion rate risk, so there is an additional factor now. It used to be that rates were a bit lower in the present, but that was because most of these account agreements included provisions allowing the CC lender to raise the rate at any time. Thus when their cost of funds increased, they passed it immediately to the borrowers. Since they can't do that any more on pre-existing balances, they have to add in a little margin to cover future potential costs. The repayment period on a balance can be 15 years if you let the balance go up much, so credit limits are lower to limit the impact and current rates are a bit higher.

Most people don't understand anything about how these rates are set, or the rate risk environment lenders are facing. Net interest margins are quite low by historical standards now:


Combine that with very low rates by historical standards, and there is real risk. Banks and CUS have to be very careful about how they are accumulating exposure to rate risk.

[jtuck004]

10. write off 5% of 800 billion, gone is 40 bill. Collect 13% (average APR) on the balance,

so 760 * .13, nearly another 100 bill after that, certainly more with fees and penalties.

Poor, poor banks.

They shepherd the principal to avoid loss, but seek the vig and the fees like flies seek horse dung.

Yeah, it's more complicated than that, we don't know the math, lots of costs, you just don't know. everyone in the bank is more informed, they are creating business, yada, yada, yada. Yet, much like the criminal after the robbery, they seem to be the ones with the cash.

As far as the "Seniors", IIRC they didn't exactly turn out in droves for Obama the first time. And if they raise interest rates, their homes sales plummet. (So where's that interest come from in a country where the unemployment rate isn't gonna see 5% for another 10 years?) Gonna be fillin' someone's bowl with sour milk no matter what.

[Yo_Mama]

11. Do the math

So far you're good, but banks pay someone for the money they are lending.

So another 5% on cost of funds plus servicing costs is
12.78% X 800 billion = 102.24. - 80 billion cost of money plus losses plus servicing leaves 22.24. Out of that you reserve a chunk. The rest is profit, but it's well under 3%.

Banks have a lot of deposits, but they have a cost. Most of these are securitized, and investors need more than 1%.

This is what Wells Fargo is borrowing at:
http://www.sec.gov/Archives/edgar/data/72971/000119312512111469/0001193125-12-111469-index.htm

[jtuck004]

14. This bank took interest from cheaper federal money they used to purchase

Treasuries, according to this report on Bernie Sanders site. They had about $18 billion outstanding at one time, at .25%, another quarter showed 29 billion at 1.4%. That would have been in addition to TARP, in 2009, dated the date of the original prospectus of the addendum in that link above. That oughta help their "costs".

Oh, that whole "costs of doing business" thing - like salaries -

"Wells Fargo & Co. will increase salaries for its CEO and three other top executives, the Associated Press reported Aug. 6. The salary increases are not in salary, but in company stock, which cannot be issued until the bank repays the money it was lent by the federal government under last fall's Troubled Assets Relief Plan. The pay increases mean Wells Fargo CEO John Stumpf now will receive $4.7 million in stock along with a $900,000 salary; other executives will receive $2.2 million to $3.3 million in stock along with salaries of $600,000 to $700,000. Wells Fargo said it had to raise the compensation to bring it in line with compensation at other banks."

Poor, poor banks.

All that aside -

You are correct, people need, expect, want interest on their "savings". But that interest needs to come from business, even as an expense, and there's a WHOLE lot less business than there used to be. The pushers at the mortgage companies ran away from their lending standards in pursuit of ill-gotten gains, people charged their cards to the hilt, we sold our wealth-creating jobs...we created so much debt we couldn't pay for it and now everything is imploding on itself.

I wonder if it is delusional that people expect interest to come from an economy which has been decimated, which may not see full employment for at least another 8 years, maybe more, given that millions upon millions of those positions are now the equivalent of replacing $40/hr factory jobs with $6/hr folks to stick umbrellas in those little drinks. And then we tossed 10-15% of the workforce into the street, just for good measure.

Who is gonna pay the interest and with what? And if they do it takes away from growth, gets us nothing productive, doesn't do research so we can have an Internet or new forms of energy or deperately needed improvements in health care. We used to be about building great things, and we need that kind of effort and passion now, to figure out how to move into our future. Because if we don't grow, at least in the model we have always lived by, we die.

It may just be that people who thought they were going to live on the interest wind up eating through their principle and have to get by with even less as we move further into a world where we have swapped our reverence to paying it forward for paying it back.

[Yo_Mama]

15. Oh, yeah, you are right about the interest

Real interest comes from Main Street economics, not Fed games.

Well, long Treasuries are jacking up. We will see, we will see.

[dmallind]

16. Not only that, but a huge number use credit cards like I do

I never pay a dime of interest because I don't carry a balance. You could give me a 99% APR card and I'd be fine. BUT I use the card heavily and get the 1% cash back. The banks may still make money on me indirectly via merchant fees, but not a whole heck of a lot (and probably not adding in all costs), and I make money on them directly.

[banned from Kos]

12. Why do savers deserve high interest rates?

Inflation is on its death bed and real estate prices are falling.

The market is not asking for their money.

[girl gone mad]

13. Even you should be able to understand something this basic..

Bernanke.. keeps doing exactly the opposite of what is needed to grow the economy, and when the economy doesn’t grow much, he does the same thing, even more so.

Let’s keep it in language simple enough even for politicians:

1. Adding money to the economy stimulates it; taking money from the economy slows it.

2. High interest rates force the federal government to pay more interest on its bonds, notes and bills. Low interest rates allow the federal government to pay less interest.

3. Government interest payments go into the economy (except for foreign payments). This enriches and stimulates the economy. Low interest rates provide less money, so enrich and stimulate less than do high rates.

And this is why, contrary to popular myth, low interest rates do not, can not and never will grow the economy. If you own any T-securities, you understand that the government pays you less when rates are low, which gives you less money to spend. (As my grandson would say, “Well, duhhh!”)

http://rodgermmitchell.wordpress.com/2012/01/25/dr-bernanke-im-puzzled-i-keep-drawing-blood-from-the-patient-but-he-hardly-improves-at-all

[mbperrin]

17. Thank god I have not used banks for anything since 1978.

Banks are simply an added layer of costs in an economy. They provide nothing, build nothing, do nothing except take take take.