Whatever Happened To Savings Accounts?

In ancient times when I was young, I was taught that checking accounts and savings accounts (which were free back then) were part of a shared bargain with your bank. You turned your money over to them and received interest on the money in your savings account. The banks used your money to provide loans for other people. The bank made money because the interest rates on the loans were higher than what they paid on savings accounts. A very simple system that worked quite well. Both sides benefited. If you had a savings account you were actually helping the bank do business.

What we now have are savings accounts that basically pay zero percent interest. What happened? My simple answer is greed on the part of the bankers, and the weirdness that is the Federal Reserve.

I am mystified by the United States Federal Reserves part in all of this. I understand that they have a part in setting interest rates for the United States Treasury. Banks and other lenders set rates based on these rates. What I don't understand is how what the Fed does and says drives the economy and the news cycle, etc. I don't think Alan Greenspan did either. In some ways I don't care what the Fed does and says. I base my equity investments on a company's earnings, basically. Yes, interest rates will have an effect on earnings, however, that effect is equal. Companies that compete against each other all face the same Fed rate changes. Life goes on. What's the big deal?

I do have one proposal. Because of inflation zero percent interest rates are actually harmful to some people, for example, anyone who needs or wants some form of short-term stable savings, someone like a retiree, I think Congress should pass a law that would place a limit on how low personal savings account interest can go. My suggestion is three percent. There could be a limit on the amount of money in the account that this applies to ($10,000.00?), although that would complicate things. I think this limit would be necessary because of the more well off. They would benefit disproportionately simply because they could put in much more money.  Basically what I am suggesting is a way for people with less money to gain some interest on their money, without the Fed having an effect on it. If what the Fed does is really so important what I'm proposing would not stop that effect. (It would simply lessen it ever so minutely.) People would have a way to save for a down payment on a home or automobile that was simple and effective. If these savings were used in this way it would benefit the individual, the bank, and the economy.

Surprise Surpise

True democracy is simply not possible when moneyed lobbyists call the shots.

From Banks with political ties got bailouts, study shows by Steve Eder:

U.S. banks that spent more money on lobbying were more likely to get government bailout money, according to a study released on Monday.

The system is broken.

Numbers

From Math Wizards Working on Spells to 'Cure' by Scott Patterson:

The financial engineers are at it again.

Critics may complain that these math wizards started the trouble in the first place by designing securities that couldn't withstand the market's turbulence. But they also may have the expertise to help fix the problem.

"Airplanes fail, too," says Peter Cotton, founder of Julius Finance, a structured-finance firm in New York. "That doesn't mean you don't fix them."

Mr. Cotton is one of many such engineers trying to solve a seemingly intractable problem before the government: how to design a system for buying up assets shunted into a massive "bad bank." The government doesn't want to pay too much and banks don't want to sell for too little.

Mr. Cotton says the models most banks and ratings firms used to price CDOs were poorly designed. "They are superficial," he says, and "often spit out prices that don't capture the underlying value of the assets."

Using those same failed models now, says Mr. Cotton, most banks are "essentially just making up numbers."

Taleb And Krugman

From U.S. must 'save capitalism' from the banks: Nassim Taleb:

And a bit like an Old Testament prophet, Mr. Taleb is angry and wants those he thinks are responsible to suffer.

“I want them poor and they deserve to be poor. You can’t have capitalism without punishment.”

Oh, and another thing, he wants Bob Rubin, who trousered millions while chairman of Citigroup, to cough up.

“I want Bob Rubin to return his $110 million dollars to the American taxpayer.”

What about Sandy Weill? What about Chuck Prince? What about Vikram Pandit?

From Bailouts for Bunglers by Paul Krugman:

Question: what happens if you lose vast amounts of other people’s money? Answer: you get a big gift from the federal government — but the president says some very harsh things about you before forking over the cash.

Am I being unfair? I hope so. But right now that’s what seems to be happening.

Just to be clear, I’m not talking about the Obama administration’s plan to support jobs and output with a large, temporary rise in federal spending, which is very much the right thing to do. I’m talking, instead, about the administration’s plans for a banking system rescue — plans that are shaping up as a classic exercise in “lemon socialism”: taxpayers bear the cost if things go wrong, but stockholders and executives get the benefits if things go right.

When I read recent remarks on financial policy by top Obama administration officials, I feel as if I’ve entered a time warp — as if it’s still 2005, Alan Greenspan is still the Maestro, and bankers are still heroes of capitalism.

Weary

I am weary of indignant Congresspeople holding hearings where they “question” those involved in our economic problems. Congress is as much to blame as anyone. In fact, they probably deserve the most blame. They changed the regulations and rules of the money game. They allowed Wall Street to go berserk. They voted for two illegal wars that have consumed huge amounts of taxpayer money. I wish they would stop grandstanding and acting holier-than-thou. If they don’t like the way that the Wall Streeters have behaved then put some of them in jail, stop giving them more money, and shut the hell up.

From What Did the Banks Do With Your Cash? by Matthew Jaffe:

"We have a bunch of idiots on Wall Street that are kicking sand in the face of the American taxpayer," Sen. Claire McCaskill, D-Mo., recently said from the Senate floor.

"I'm mad," she said. "Everyone I work for is mad."

Congress is the problem. I’m mad at them. Congress has allowed Wall Street to kick sand in the face of the American taxpayer. Instead of reminding us of what we already know, Congress should stop the sand kicking. If they don’t have the power to do this, who the hell does?

Paying The "Best People" On Wall Street

From Pay curbs a right of ownership by David Weidner:

Maybe the biggest mistake made by the likes of Smith, Thain, Tiger Management's Julian Robertson or former New York Mayor Rudolph Giuliani, when defending bonuses, is they forget that making the rules about pay is part of the right of ownership and an essential part of capitalism and free markets.

After doling out more than $350 billion to acquire stakes in investment banks and commercial banks, the U.S. government -- you and I, as taxpayers -- definitely own the biggest banks on Main Street and Wall Street.

Put it this way: Citigroup Inc. and Bank of America Corp. each received $40 billion in cash and more than $360 billion in guarantees. Yet, Citigroup has a market value of only around $22 billion. Bank of America is valued at about $34 billion. Morgan Stanley is worth about $24 billion.

The list goes on, but you get the picture. The government either has effectively bought majority stakes in these companies or put more cash into them than they are worth. If these companies did not want the government exercising its right of ownership, then they should have not accepted the cash and prepared a bankruptcy filing.

It's true firms that haven't taken government cash will have a competitive pay advantage. That's how it should be. Firms that are run right should have an advantage. Why would we reward banks and bankers who got it wrong?

All this nonsense about Americans not understanding compensation on Wall Street is a bunch of elitist posturing. We understand it perfectly well, thank you. We know that even the most troubled of firms will look for ways around the new pay caps. We know that some people will flee for riches at smaller banks or hedge funds. We can live without the high flyers.

Bailout Money Secret

From Where'd the bailout money go? Shhhh, it's a secret by Matt Apuzzo:

It's something any bank would demand to know before handing out a loan: Where's the money going?

But after receiving billions in aid from U.S. taxpayers, the nation's largest banks say they can't track exactly how they're spending the money or they simply refuse to discuss it.

Read the rest here.

They Don't Have A Clue, Do They?

Clueless. How often can that word be applied to the Bush administration?

From Paulson changes tack on financial rescue by Greg Robb:

Treasury Secretary Henry Paulson laid out details for the next stage of the government's financial-market rescue package Wednesday, announcing that he has shelved the original plan to buy troubled mortgage assets while turning his attention to nonbank financial institutions and consumer finance.

In a broad and deep review of the controversial $700 billion effort, Paulson defended the steps taken to date, but in the same breath said that financial markets remain fragile and that the focus must remain on "recovery and repair."

Alex Merk, president of Palo Alto Calif.-based Merk Investments, a mutual-fund firm, said that market participants were frustrated with Paulson's communication skills and changing tactics.

"He's been flip-flopping on every plan and it doesn't look like he has a plan," Merk said in an interview.

According to Merk, the rescue plan is failing to get banks to lend money, and that holders of mortgage assets who had been hoping to sell to the government at a good price have now seen these hopes dashed.

Earlier Wednesday, federal bank regulators issued a joint statement jawboning banks to start lending money to consumers. But Merk said that there are many factors that are making banks hoard capital.

"They don't trust their own balance sheets, and why lend to consumers when the consumer sector is going down the drain?" he commented.

Bush can’t leave soon enough. Not only is his administration immoral and incompetent, it is totally clueless.

Too Much

From Essence of the "Rescue" Plan by Michael Shedlock:

But let's step back and ask ourselves why it is we need an office of Secretary for Financial Stability in the first place.

The answer is we have an unsound banking system based on fractional reserve lending, compounded by micromanagement of interest rates by the Fed, and runaway spending in Congress.

To date, I have not heard one single sentence from anyone important enough to matter, about what really went wrong and why. Instead we have yet another governmental body attempting to add "financial stability" while doing nothing to address the root cause of this mess.

The worst part is the Fed and the Treasury have decided the problem is that banks are not lending enough. The reality is that banks have lent too much.