We were once again undercut by the Federal Reserve
on interest rates when the Fed announced this week that the bargains for bank
borrowing will continue. When I say “we”, I mean people like me, and hopefully
you, who might have a few dollars in a savings account or a money market fund
or some similar cash like investment, made with the hope of actually getting
paid some interest on it. And also a
little weary of the up and down stock market.
As long as banks can get money from Mr. Bernanke
and other government elements for virtually nothing, there isn’t much reason
for them to pay us anything. One thing that has allowed this in the past year is
that we are worried about putting money in stocks. After the collapse last year people have been
willing to give up earnings for an assurance of preserving capital. In the interest of salvaging principal, we
have given up interest. But this is not
a natural situation and can’t continue indefinitely. In the long run, people aren’t going to
invest money just to get free storage.
When I first had a money market account in the
early 80’s, it was paying over 18%. Now
I’m only getting a quarter of a percent.
Neither extreme is good. Rates
need to be high enough to make it worthwhile to invest but low enough that
borrowers have a reasonable hope of making enough money to pay the rate and
have a little left over for themselves.
So how long can this go on? Let’s look at a few things. The government is putting out cheap money to stimulate the economy. But a big part they are trying to stimulate is the building industry. The problem in real estate is the collapse of home prices, not high interest rates, except for the ones where the rate balloons. There is no benefit to the economy to help people refinance a mortgage from 6% to 4.8%. This just helps the particular individual. There is a benefit to refinance a mortgage that is in threat of foreclosure because the interest rate went up and tripled the monthly payment and the homeowners can’t make the payment. But the current plans don’t seem to recognize this.
We need to find a way to remind those in power that we are still out here and we are the good guys. There is too much emphasis on helping those who are overextended at the expense of those who have done the right thing like saving money to take care of their expenses and old age. So write your congressional delegation and anybody else you can think of. Sooner or later they need to come around.
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