How savers get punished while big banks that acted irresponsibly get rewarded
By James P. Gannon
My local bank, Rappahannock National Bank, notified me the other day that a $20,000 certificate of deposit that I took out almost a year ago will mature in a few days. The 11-month certificate paid an annual interest rate of 3.6%.
Here’s what I was told the CD would earn if I renewed it for another year: 1.05%. So instead of the $668.56 in interest I earned over the past 11 months, I would earn about $210 over the next year.
This sharp reduction in my interest income comes courtesy of a government that punishes small savers while rewarding the biggest, most irresponsible banks which caused a financial crisis and a deep recession. The big banks get multi-billion-dollar taxpayer bailouts and trillions in loans at essentially zero interest rates, while small savers get the shaft.
I am not angry at Rappahannock National Bank for this situation, because it is not the bank’s fault. The bank is simply aligning its rates with the market, which is essentially controlled by the Federal Reserve System. The Fed controls short-term interest rates and for the past year has pegged its key lending rates virtually at zero. That means banks can borrow lendable funds from the Fed at almost no cost–free money–and then turn around and lend it out at rates that produce a big, fat profit.
The effect of the Fed policy is to make banking highly profitable because it widens the spread between the rates at which they borrow money and the rates that they charge for loans. The other effect is to depress short-term interest rates for savers, sharply cutting the earnings of many retirees or working people who were prudent enough to save some of their income rather than spend it all or go deeply into debt.
It is another example of how the government punishes the responsible people while it rewards the irresponsible–from home buyers who borrowed too much to banks that got themselves in deep trouble by plunging into very risky investments that went sour.
This perverse policy is likely to continue for the foreseeable future because the Fed has made clear that it intends to adhere to its zer0-rate policy until the economy gains enough steam to produce solid growth in jobs. That point is nowhere in sight, with the unemployment rate now at 10.2% and the economy still bleeding jobs despite the so-called “recovery” that the Obama Administration keeps hailing as underway.
The return on savings is so puny now that it’s almost silly to keep money in a savings account or even a CD. With returns this low, many people are deciding to put savings back into the stock market, which has risen over 50% since hitting its lows last March. Stock prices have gotten way ahead of the economic recovery, reflecting huge flows out of cash and bonds into more speculative investments.
In this way, the Fed is feeding another asset bubble–this time stocks–just as it did with the cheap-money policies that ballooned the housing asset bubble that burst in 2007-2008. Eventually, the Fed will have to begin allowing interest rates to rise, which could burst the stock market bubble again. Apparently, nothing has been learned from the crash the nation suffered in 2008.
Which explains why the price of gold is soaring past  $1,100 an ounce. If the Fed and the Obama Administration and Congress are going to pursue policies that explode the Federal deficit and trash the international value of the dollar–which they are now–the only sane thing to do is to abandon faith in paper money and invest in a hard asset that has endured through centuries of human folly.
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