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.

Ben Bernanke

From Anatomy of a Meltdown by John Cassidy:

The most serious charge against Bernanke and Paulson is that their response to the crisis has been ad hoc and contradictory: they rescued Bear Stearns but allowed Lehman Brothers to fail; for months, they dismissed the danger from the subprime crisis and then suddenly announced that it was grave enough to justify a huge bailout; they said they needed seven hundred billion dollars to buy up distressed mortgage securities and then, in October, used the money to purchase stock in banks instead. Summing up the widespread frustration with Bernanke, Dean Baker, the co-director of the Center for Economic and Policy Research, a liberal think tank in Washington, told me, “He was behind the curve at every stage of the story. He didn’t see the housing bubble until after it burst. Until as late as this summer, he downplayed all the risks involved. In terms of policy, he has not presented a clear view. On a number of occasions, he has pointed in one direction and then turned around and acted differently.

Incredibly Rich People Need More Money

Dean Baker writes about taxpayer dollars bailing out big financial institutions in Beat The Press and how the media is ignoring the story.

Can’t the media find any economists who don’t think that handing hundreds of billions of taxpayer dollars to the big banks and the incredibly rich people who own and manage them is a good idea? Apparently not, given the coverage so far to the Fed’s proposal to lend $200 billion to the banks using mortgage backed securities as collateral.

Can The Almighty Fed Really Save Us?

Rich people on Wall Street sure do like to complain about the Federal Reserve. How it doesn’t do enough, and it isn’t fast enough to save them from themselves. Maybe the Fed isn’t all-knowing, all-seeing, and all-powerful. From a Fortune article entitled The darker side of interest rate cuts:

Compelling as it may be, a rate-cutting policy may not always have the desired salutary effect; after all, Japan effectively had interest rates of near-zero percent for years without emerging from its economic gloom. And it carries its own costs. Lower rates boost the economy by making big purchases such as houses more affordable. They can also help banks rebuild their balance sheets, by enabling them to borrow at lower rates and lend at higher ones. But lower rates also tend to reduce the value of the dollar, which has already fallen sharply in recent years amid a surge in U.S. consumption funded by overseas borrowing. Further declines in the dollar raise the risk of boosting inflation, which hurts consumers by reducing their purchasing power.