How you can pick Terry’s brain
In this column, I’ll respond to your most frequently asked questions regularly. Of course, you always can submit individual questions on my Sun-Times blog, reached on the home page at www.TerrySavage.com.
Updated: May 3, 2013 12:15PM
Q. We are seniors and are wondering why interest rates on deposits are so low — while rates banks charge on credit-card balances are so high? We just went to renew our three-year, 3 percent certificate of deposit and found we can get only 0.79 percent. How are we expected to survive on that?
A. You make a very good point — and it’s not your imagination that savers are getting “ripped off.” And with the Fed’s recent announcement that it would keep rates low for the foreseeable future, the situation is not likely to change.
The Savage Truth is that you and all other depositors are rescuing the banking system by allowing them to make huge profits and re-establish liquidity. In fact, you’re doing more for the banking system than all the TARP programs combined!
Here’s how that works. According to Bankrate.com, the national average rate being paid on a 6-month insured certificate of deposit is 0.24 percent. On a one-year CD, the national average rate is 0.39 percent.
Yet banks routinely charge anywhere from 14.99 percent to as high as 22.99 percent on credit-card balances. In fact, if you’re a bad credit risk, or go over your spending limit, you could wind up paying 29 percent, or higher, on your outstanding balance. And that doesn’t include the fees you pay for the card each year, or the fees for being late or over-limit.
Hey, what business couldn’t make money with a spread like that?
There’s still nearly $1 trillion in consumer debt, revolving and paying steep interest rates. And if the banks don’t want to take risk in making credit-card loans or lending to businesses, they can always invest in Treasury securities, getting a yield of 2 percent for 10-year notes.
Until the latest drop in rates, this was a very profitable trade for banks, even at shorter maturities. And those profits are sitting on bank balance sheets, after offsetting write-offs on bad loans and mortgage foreclosures.
The banks should be saying a nice “thank-you” to the patient depositors who are making these profits possible. But they don’t have to do that. They don’t have to give you toasters, or free checking, or higher rates. They know that you are too scared to take any risk with your money.
Chicken money, by definition, belongs in the bank — where it is insured against loss. But today’s low rates stress the patience of those who have saved over the years, hoping to live on the interest in their retirement years. Even as prices for medicine, gasoline, food and property taxes keep rising, interest rates are kept artificially low. The “spread” that works to make profits for the banks, eats into the financial security of savers who need the income to maintain their lifestyle.
The current low interest rates, held down by Fed policy, are a “tax” on seniors, who tend to be the savers. This is part of the unfolding “generation warfare” that I’ve been writing about for years.
While seniors are savers, younger people are likely to be home buyers, benefitting (if they have the courage, down payment and job security) from low mortgage rates held down by the Fed.
Yet, after all of this very real complaint, I cannot advise you to take any more risks with money you cannot afford to lose — your chicken money.
If you get impatient enough to pull the money out of the bank to lock yourself into a slightly higher, long-term fixed rate, you’ll be caught in the whiplash. Eventually, the markets will recognize that the recent huge increase in credit is translating into inflation — and then even the Fed won’t be able to keep rates from rising.
Hang on. You’ll benefit because short-term rates are set by the market. And when inflation fears come, short-term rates will soar. And that’s The Savage Truth.
Terry Savage is a registered investment adviser