I opened up my bank statement this month and noticed the $0.07 interest I earned on my minimum balance of $2,500. It’s been this way for nearly two years; if you have an account at one of the big four banks, which own forty percent of all savings and checking accounts in the US, you earn close to zero percent on your money.
It is true that even if the bank paid me 10% on my balance, it would be $250 a year and hardly enough to live on. Still, it’s the psychology of the situation that gets to me. If I am earning virtually nothing on my money, but my expenses haven’t gone down, something has got to give. And the one thing I can still control to some degree are my costs.
So I go through the monthly routine of figuring out what next to cut. How much more of the food bill can be eliminated? Is that annual physical at $300 a year (out of pocket because insurance companies don’t pay for physicals) truly necessary? I really don’t need daily delivery of the newspaper because so much news is available on the internet, so out goes the NY Times. Now if only I could reduce the Comcast charge for internet, which is not so easy to do when you are dealing with a monopoly.
I sit on several charitable boards and it’s the same thing at every meeting. The treasurer reports on their investments, which are conservatively placed in bank CDs, and which also earn just pennies every month. Then the discussion turns to how many scholarships to eliminate, which free medical service to cancel, which staff member is going to be let go, and how many artists won’t be funded.
This has been happening all over the United States. People who have been doing the right thing ”“ saving money, and investing it conservatively in bank CDs or US Treasuries ”“ are being bled to death by the Fed’s Zero Interest Rate Policy. In fact, let’s be more specific: they are being bled to death by the four big banks of Citibank, Bank of America, Chase, and Wells Fargo. The reason is that these banks could pay much, much more than their piddly 0.10% deposit rates if they wanted to. They are borrowing at the Fed at close to zero percent, which is what the ZIRP is designed to do, but they are earning at least 3.5% on that money by investing in Treasury bonds. There are some smaller community banks that do pay up to 2.5% on their consumer deposits.
The big banks are paying close to zero percent to millions of savers, non-profits, and small businesses because they can get away with it. Occasionally, someone in Congress asks the Fed why rates have to be so low, and Ben Bernanke gives a mournful response of regret but points out the economic necessity of the ZIRP in times of high unemployment and deep recession.
Really? This would be true if the big banks lent money at close to zero percent to their customers, but they aren’t lending money to anybody. Loans to small business and to consumers are at much lower levels than at the peak in 2007, and the trend is down. My ten year old home equity line of credit expired last month and I talked to the local branch manager about renewing it. The amount would have been $25,000 on a home worth 30 times that at least, at a floating interest rate of over 6.0% , and with the bank continuing with its first and only mortgage lien, since I had long since paid off the original mortgage. This being a big bank, the application had to go to New York, where it was turned down. It seems the retail side of the bank is under blanket orders to reduce home equity lines of credit, not increase them.
It is very doubtful that the economy would be hurt if the Fed Funds rate were at 2.0% rather than 0.0%. The people who aren’t able to borrow today, which is most everybody, wouldn’t be able to borrow anyway, and those who can borrow are paying well beyond 2.0% for the privilege. In fact, it might actually help the economy if the banks started paying everyone at least 2.0% on their deposits.
But for this to work, we would need a vigilant Fed watching over the four big banks, ensuring that they increase their deposit rates in line with the new Fed Funds rate. Unfortunately, the only vigilance Ben Bernanke and the Federal Reserve have shown is in favor constantly of the big banks, at the expense of small community banks and all savers and borrowers in the economy.
In fact, if Bernanke were so inclined, he could jawbone the big banks into paying at least 2.0% on deposits, and he could still keep their borrowing costs at zero. The fact that he has done nothing of the sort tells us he would much rather see millions of people hurt with low savings rates than see the banks deprived of their guaranteed profits, which are flowing into the big bank income statements to the tune of $15 billion a quarter.
In the rarefied academic world that Ben Bernanke has lived in, there must be some scholarly argument that would convince him the trade-off between hurting millions of Americans while benefiting four large banks is now weighted too sharply against the millions in favor of the few. Obviously if there is such an argument he hasn’t come across it, because he persists in coddling the big banks and transferring wealth to them from ordinary savers. He must be aware, though, that ZIRP was tried by Japan and has been lingering now for ten years with no good effect.
When the Bank of Japan first instituted zero percent interest rates in the early 1990s, the average Japanese saved about 20% of their disposable income. This was a very large rainy day cushion that has been slowly whittled down as Japanese consumers have dug into their savings to make up for lost interest income.
Americans have no such luxury. The average amount of savings of those baby boomers approaching retirement is $10,000. More than half of all Americans do not have a 401k retirement account. This group of Americans is already living hand to mouth and forced to cut back in a depression. The rest who do have a savings account are now forced to do the same since their savings earn them nothing. Their only alternative is to move their savings into something speculative like the stock market, but the Flash Crash of two weeks ago has shown how these markets are manipulated for the big banks as well.
We can only wonder what motivates the Fed to continue with a policy that benefits virtually no one. Some economists argue that with money supply falling, the Fed doesn’t dare move interest rates up for fear deflation will take hold. But if everyday Americans are forced to cut expenses month after month because they have no interest income, their jobs are in jeopardy, their salary has been cut, and their benefits reduced, deflation is already here. Maybe the Fed has been so thoroughly captured by the big banks that the Fed thinks the banks are their only meaningful constituency. Perhaps they are. The way the banking reform act has been chopped up to preserve Too Big To Fail, it is obvious that Congress isn’t going to press the Fed to get tough on the banks.
Assuming the Fed is a rational actor not entirely beholden to the whims and dictates of four large banks, the only other theory that makes sense is that these four banks are in desperate need of capital because they are insolvent. On this basis, the Fed must think it is worth starving the economy of interest income if these banks can be recapitalized, however long that takes.
If this is true ”“ if these big banks are bankrupt ”“ wouldn’t it have been better to have forced them into insolvency rather than go through this charade? We can again turn to Japan for precedent: their zombie banks were kept afloat for ten years, slowly building up capital to reach solvency, and all the while starving the economy of loans. We seem to be following the Japanese step by step in their long march through deflation.
I could just close out the account at this big bank and find some local bank that offers higher interest. I’ve already shut down my accounts at two other of the big banks, but I’ve held on to this one due to the nuisance factor. All my automated billing is set up with this bank, and there are IRA and other investment accounts that would have to be transferred. In fact it is more than a nuisance changing all this to another bank ”“ it’s a real pain in the rear. Many studies show that consumers maintain their accounts at the big banks because of the trouble of changing them, even if the service is lousy, the fees are ridiculously high, and the interest paid is zero.
The scales are beginning to weigh against keeping any account at this bank, especially if the only thing I can conclude is that the bank is just pretending to be solvent when in fact its liabilities exceed its assets, especially if the FDIC was forced to liquidate it. The FDIC guarantees all deposits up to $250,000, which sounds very generous until you realize it doesn’t have enough reserves to cover a failure of any of the big banks. Why should I keep my money in one of these banks which is too big to fail, but too big to bail out without another of those painful political battles?
The Fed keeps talking about how they are working to provide liquidity to the economy through the banks. But what really is happening, quietly and behind the scenes and with much more importance, is that the Fed is providing capital to the banks, especially the big four which must have a solvency issue, not just a liquidity need. The Fed may be able to print money but it cannot create capital out of thin air, which is a permanent and irrevocable injection of liquidity. To do that the Fed has to buy the bad assets of the banks and bloat up its own balance sheet for the next 20 years, and it has to transfer money from savers to desperate debtors like the banks.
Nor are these four walking wounded banks alone. The government has been injecting over $10 billion quarterly into Fannie Mae and Freddie Mac, the FDIC suggests it will need a capital injection from the Treasury the way things are going, AIG has been running out of assets to sell and still has not extricated itself from government protection, California, Illinois and perhaps a dozen other states are out of cash, the Fed is sitting on $2 trillion of highly questionable assets but only has $50 billion of capital, and even the US Treasury is only able to borrow $2 trillion a year because so far the bond markets view all other sovereign risk as worse.
It is hard to say which of these zombie institutions is worst off. Fannie and Freddie appear to be facing gargantuan losses for the indeterminate future. They may be joined by HUD, which has been issuing mortgages even as recently as this year with only 3.5% down payment required, and which is now surprised to discover default rates creeping up. Some of our largest states have stopped paying vendors and are now unable to pay tax refunds due their citizens. Everyone thinks the Fed is mighty and powerful, but its tiny sliver of capital against a massive balance sheet of risky mortgage securities looks exactly like the situation Fannie Mae faced before it went bankrupt. No wonder the Fed is fighting Congress tooth and nail over an audit of what it owns. As for the United States Treasury, it should take a cold hard look at Greece to see how fickle the bond market can be in its affections.
The walking wounded are everywhere in our economy, but most especially among our largest and most important financial institutions, including those of the government. Which institutions do you think link them all together in a web of systemic risk? How about Citigroup, Bank of America, Wells Fargo, and JP Morgan Chase. Their balance sheets are full of government bonds and Fannie and Freddie securities, not to mention the municipal securities of so many stressed states, cities, and other taxing bodies. Ever since the federal government decided two years ago to backstop the banks and bring into its fold the insolvent government agencies like Fannie and Freddie, the web of systemic risk has gotten wider and more fragile. The collapse of any of these institutions could bring down the others.
Do I really want to be a part of this for only 7 cents interest a month?