Savings and Deposits and the Zero Percent Bank Account – Punishing the Saver for a Nation Fueled by Debt Consumption.
The current financial system is designed to punish savers. The Federal Reserve by cutting the Fed funds rate to virtually zero has made it a disincentive for people to store any of their wealth and get any acceptable return. If we look at savings account rates you will find that many banks are offering from 0 to 1 percent for these accounts. At the same time these banks are turning around and offering credit cards with rates of 24.99 percent or mortgages at 6 percent. The spread banks are getting is enormous because they are borrowing at rates that are near zero so any margin is profit. I pause when I see the current structure because it sets up a system where those trying to save have few avenues for any real return. Sure, they can put their money into Wall Street but this has now become a large casino where companies that should fail are rewarded and prudent companies that run efficient businesses are punished for not taking outrageous risks.
I wanted to look at some rates offered during the last time rates were generous in the early 1980s just to get a sense of what was occurring during that time since we are so removed from anything sensible at this point:
“(TIME – 1980) The inflation outlook has grown bleaker, and the Carter Administration has prepared a budget-swelling 5.4% rise, above and beyond inflation, in defense spending for the fiscal year beginning in October. Largely because investors expect more inflation, Wall Street’s trillion-dollar corporate and Government bond market last week took its biggest pummeling in years. Investors buy bonds to collect interest, but when the inflation rate is higher than the interest rate, the resale value of the bonds goes down. During the week, bond prices plunged through the floor, and interest rates rose to an unprecedented level of nearly 12% for U.S. Treasury bonds and more than 13% for Triple-A issues; many of those securities do not expire until well into the 21st century. The bond slump hurt not only substantial investors but also millions of members of pension plans and profit-sharing funds that hold bonds or other debt-related investments.”
Good luck trying to find any double-digit savings accounts especially in U.S. Treasuries. You’d be lucky to find an account offering you 3 percent. This has to do with the Federal Reserve flooding the banking system with easy money:
Is it any wonder why we are now having the deep financial issues in our banking system? People borrowed money they didn’t have to spend on things they could not afford. We mortgaged our future decades ago and the bill is coming due. Anyone understands that building wealth means spending less than you earn and spending wisely. Yet the current system is making saving any money pointless because of the abysmal returns. So people are left with the option of spending their money today or funneling it into the stock market hoping to get better returns. Yet the middle of the road option has been taken out. That is why the savings rate since the 1970s has collapsed:
Now people might be asking, why did the savings rate spike up recently? That is actually a reflection of the fear in the current financial system. People started saving money because they feared the actions in the stock market and they just wanted to make sure their money wasn’t lost. This has nothing to do with market rates or competitive savings account rates. If you doubt this, just take a look at what JP Morgan Chase is offering as their savings rate:
You are basically paying for the privilege of keeping your money in their bank. That is it. You will get no returns at these abysmal rates. And keep in mind these are the banks that got bailed out and are now charging 24.99 percent rates on credit cards. So if you are prudent and only want a 5 percent return, where can you turn? You don’t have many places actually because of the way the current system is setup.
I’m reminded of what happened in Venezuela with the current devaluation of their currency:
“CARACAS (Dow Jones)–President Hugo Chavez bowed to economic reality and after nearly five years of standing firm devalued the Venezuelan bolivar in hopes of safeguarding the government’s depleted oil income and curing some of the symptoms of stagflation in the economy.”
After the devaluation it was reported that people were lined up in lines at stores trying to spend their money because as one shopper stated, “why save money when it is falling in value every year?” Now mind you we are in a different market but keep in mind that the U.S. dollar has been declining for years and this is supposedly the path of choice for many.
Savings are incredibly important. Many people are now saving merely because of the economic tough times and want to have an emergency fund to help them out if the economy hits a rough patch. Yet what use is it if you have a banking system that at its core, has a desire to destroy the actual currency? It would be easy to increase the savings rate. Increase the Fed funds rate. But this would also increase mortgage rates which depend on this rate and right now the banking industry is governing policy even though it is counter to what is good for the overall economy. It should be obvious. Not saving money is bad. Any wealthy person can tell you this. After all, if you spend more than you earn then you would not be wealthy or even financially secure. Yet this is somehow the desirable path forward.
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FDIC and Rewarding the Risky Banks. How a Safety Net Hides the Risk in Banking. When Your Bank is Failing or is Emerging from Failure Offer Good CD Rates.
There is a fascinating phenomenon that occurs in the banking system when capital is running short. At least, this was the case before the government decided to be the ultimate financial backup for the entire banking structure of our country. Places like Washington Mutual or Countrywide were offering stellar rates on various savings vehicles only days before their demise. How can this be? How can it be that a bank with a horrible balance sheet flooded with overpriced assets that have lost most of their value be offering above market interest rates? Well for one, banks are allowed to chase public capital and realize that the public will put money into a bank so long as the FDIC backs up the bank. As a saver, what do you care if the bank is insolvent so long as you don’t put more money over the insured deposit maximum which currently stands at $250,000 per account?
And this is the crux of the issue. Only a tiny fraction of Americans even have $250,000 in savings but putting this implicit guarantee on banks even those that are failing creates the incentive for banks to offer higher rates even if their balance sheet isn’t so sound. Let us look at some current examples:
Source: Bankrate.com
I sorted out a list of high 5-year CD rates at current institutions. Those that rise to the top have had their issues to say the least. OneWest Bank is the new name of former toxic mortgage lender IndyMac that failed miserably during the crisis. This bank ended up costing the FDIC billions yet here they are offering one of the highest CD rates. What about Lone Star Bank in Texas? Let us look at their track record:
“WASHINGTON – It would seem hard for a bank to falter in Houston, a city where jobs and purchasing power rose in recent years as energy prices spiked and construction boomed.
But Lone Star Bank, which opened in 2006, has rung up losses in every quarter since it started making loans. Now the U.S. government is an investor, having put $3 million into the bank last month through its $700 billion bailout fund known as TARP.
Lone Star’s chief executive acknowledges the bank got off to “a bad start” but insists it could turn a profit this year if Houston’s economy escapes the worst of the national recession. Without the public money, Lone Star might have lost some of its best customers as it pulled back to preserve capital.
The bailout “provides us the ability at a minimum to grow with our customers who are currently growing,” chief executive Bill Wilcock said. “To me, that is still loan growth in the TARP sense. But it does not mean we are going to go out to beat the bushes for as-yet-unknown customers.”
Now this is my question. Do we even want these kind of banks to grow? Clearly there are many other banks around the country that made prudent and intelligent bets on the economy and yet they are the banks with no bailout money. The FDIC is rewarding failure by continuing to back up insolvent banks. Of course, the biggest failures are the giants like Bank of America, JP Morgan, Wells Fargo, and Citi that just announced a $7.6 billion loss. But what does the stock do?
The stock manages to pull off a 3.5 percent gain even with the horrible news. Why? Because the market is already factoring in that the government will do whatever it takes to keep the bank from failing. It is a one sided bet. If the company fails, the stock only costs $3.54 a share. But if goes up? The upside is enormous. The government has effectively created the biggest call option on the banking sector. And to be even more detailed about the issue the bondholders have yet to face any major haircuts.
Now in the next two years $134 billion in option ARMs will recast and will lead to additional foreclosures and banking losses. You would think that this would put a damper into how things are going but instead, the market keeps moving forward disconnecting from reality on the street. The reward system is unfortunately not serving the people. If for example people knew that banks weren’t going to get bailed out, they would be more cautious as to where they put their money. Instead, the message they get from Wall Street and the government is put your money in the biggest banks that actually created the crisis and forego some of your local banks that might have been diligent over the decades. You might even get a solid interest rate.
Now I understand that we need some basic amount of insurance in banks. That is understandable. After all, the FDIC came about during the Great Depression when people feared all banks and would rather keep money in their mattress. Yet to simply say this for all banks regardless of their behavior is simply an invitation for more bailouts. The FDIC insured banks carry roughly $13 trillion in assets yet the FDIC reserve fund is insolvent. Now how are they planning to back up all that money if banks have additional problems? They are essentially strapping onto the Federal government and any issues that may come about will be paid out by taxpayers. That is why Citi went up in a day it announced billions in losses. We already backup over $300 billion in questionable assets in this bank.
So what is the ultimate cost? At the end of this all is the banks are going to slowly crush the dollar with their improper handling of the economy. More and more money is required to bail out banks with their bad bets. The bad bets are still there. They just don’t disappear. The fact that the FDIC is backing up $13 trillion in assets with nothing should tell you everything you need to know about where we are heading.
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How the Banking Industry has Created a Bubble in the Student Loan Market and Inflated Prices in Education by 500 Percent since the 1980s. The $500 Billion Student Loan Market.
The dream of going to college is deeply ingrained in our society. Education is usually a political win in any campaign and few will ever argue with this topic when it is brought up. As with many things in our current financial system creating a market where banks can enter into the fold has hyper inflated the price of higher education. Think of housing, autos, and every other banking activity and prices are likely to bubble up and burst if they are allowed to finance the activity. Yet educational costs remain high and defaults in the $500+ billion student loan market are now showing cracks like many areas of our economy. Is there a bubble in higher education?
First, I started to question the massive surge in college cost when I saw a report from one of the too big to fail banks, Wells Fargo, showing that by 2027 the cost to attend a private four-year college will cost nearly $400,000:
Source: Wells Fargo
Now the above embedded inflation assumes that we will have inflation at a consistent pace. As we have seen in the last year, it is possible to have periods of deflation in massive bubbles. Home prices have fallen and so have wages so it would be interesting to see how college costs can rise all the while people having less money to finance their education.
Now some would argue that everything goes up in price so the rise in college prices is merely a reflection of this. This is not true. The premium to go to college is outstripping virtually every other category of consumer prices:
Since the early 1980s college tuition and fees have surged nearly 500 percent while the median family income has gone up by approximately 150 percent. Now anyone that has experience with the current college system understands how expensive things have gotten. One of the primary push to higher prices is the involvement of securitization and the banking industry pushing out loans.
The student loan market is enormous. With over $500 billion in loans this is a large market that few even consider. The biggest chunk of this market is the FFEL program which is the Federal Family Education Loan Program. In the past, there was little to fear from this market since student loan defaults were relatively tiny. Yet just like Fannie Mae and Freddie Mac propping up the entire housing market in the U.S., the FFEL program props up the entire student loan market. This program provides lenders a guarantee from the U.S. government of 97% and a fix yield on the student loan. No wonder why this is such an enormous money pit for banks. Of course, you see above that the corporatocracy is also involved in this market. But just like the housing market, Wall Street and the government have worked together to inflated the cost of education just like it did with housing.
How does the banking sector inflate the cost with the government? Simple. Think of the down payment with housing. When most lenders required 20 percent down, home prices were actually more sensitive to actual incomes in the economy because people had to save some money to actually purchase a home. As down payments dwindled down to nothing, anyone with the mere desire to buy a home did and thus pushed housing prices to astronomical levels. Of course, once the bust hit the taxpayers were left dealing with the mess. With education the same thing may occur. In fact, for many students going to college is a zero down proposition:
Now the government will back a good portion of the debt but for the remainder, the private market is more than happy to step in to give you that money. Since education is such a vital tool for future professional growth, few will question the actual cost especially if they don’t see it on the front end. Plus, the big banking giants love any other loan class that they can bundle into asset backed securities:
Now it would be one thing if banks were lending their own money but here they are dishing out billions of dollars and collecting additional fees just like they do with mortgages even though the Federal government backs most of the loans. So why not cut out the middleman with both? Because the corporatocracy owns the government. With such easy access to loans, 75 percent of universities participate in FFEL which amounts to 4,000 schools, many students have access to easy debt. And schools are happy to increase their prices especially the for profit institutions. Nothing wrong with earning a profit but subsidized at the taxpayer’s dime? Many of these paper-mill institutions have heavy sales staff and have strong financial aid specialist to make sure they get their government loans for you (not that you see the money).
The rise in college cost seems exponential:
For one, there is a bubble in higher education costs. One simple rule of thumb is you should never pay more for your college education than you expect to earn your first year out. Now like any fast rule, this is a generalization but if you plan on getting a degree in a liberal arts school and go into debt for over $100,000 and earn $30,000 a year something is wrong. But the banking system and government are more than happy to finance your education but you are on the hook for that debt. But with this economy, more and more students are unable to pay their debts:
Just looking at the chart from Wells Fargo showing private education going to $400,000 is like seeing some of the housing charts a few years ago showing perfect growth in housing prices for multiple decades. The likelihood of that is not realistic unless we hit strong inflation over the next decade. This might happen given the massive amounts of debt we are pumping into the system. Yet that is merely a prediction and not a fact. Do you think analyst back in 1999 expected a lost decade? Of course not. For the past year, we have seen prices collapse in many consumer categories reflecting weaker earning potential. And even a college degree won’t protect everyone in a challenging recession:
Clearly you are better off with a college degree. Yet prospective students need to be smart about what schools they choose and what fields they pursue. The banking system backed by the government is willing to allow you to get into whatever amount of debt for whatever field you want to go after. But like with the housing mess, just because you can get a loan for something doesn’t mean you should. I understand that argument. So why not shut that spigot off? Why have this implicit guarantee like we had with Fannie Mae and Freddie Mac? We all know most of this is backed by the U.S. government (that is the public) so any bubble burst will be borne out by society. When we look at the cost, something will have to give.
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