For American savers, the mattress beckons
Banks pay microscopic interest even as they recover.
By Silvio Laccetti
The American Bankers Association's annual meeting in Chicago last month drew a surprising variety of protesters. These included unions, civic groups, political activists, and even a costumed superhero calling himself "Downsized Man."
With the bankers in the spotlight, I would like to add my perspective and that of many other American savers who are decrying the historically abysmal interest rates being paid on savings. As banks grow healthier amid economic recovery, the return on our savings just gets more anemic.
In these post-bailout days, banks are getting stronger. Look at the many reports of "soaring profits" for financial institutions in the third quarter. JPMorgan Chase and Goldman Sachs have already paid off their bailout loans.
A glance at some of the costs of doing business for banks is revealing. The federal funds rate is 0.25 percent, its lowest level in more than 50 years. The discount rate, which is what banks charge each other for overnight loans, is at 0.5 percent, also its lowest point in more than 50 years.
But statement or passbook savings pay an incredibly low 0.1 percent at most big banks. (To their credit, many community banks pay more.)
While banks can obtain money for next to nothing, they are charging interest rates of 5 percent or more on commercial mortgages, for example. Historically, those rates should be only 3 to 3.5 percentage points above the federal funds rate, commercial borrowers say. Auto loans, meanwhile, are at an average of more than 5.5 percent.
Moreover, until new rules go into effect, banks are still maximizing the interest rates on credit card balances, and they are socking it to customers with overdraft protection charges.
With such high spreads between the rates on loans and savings, it would appear that banks wish to reshape the industry for the long term.
There has been some outpouring of public outrage about this. Some of the 5,000 marchers in Chicago accused the banks of not making mortgages accessible to working families, not financing businesses that create jobs, and planning to offer huge bonuses to their executives again. Calling banks "stewards of our savings," AFL-CIO president Richard Trumka told the bankers, "You have failed."
The bankers association countered that it is composed mostly of community banks that did not fuel the financial collapse. Presumably, these somewhat resemble the "hometown" banks that supported local development in an era before investment houses and banks could merge their activities.
Today's banks could afford to offer higher rates on savings. Right now, the rates are horrendous. The national average for CDs as of last week was 0.52 percent for six months and 0.77 percent for 12 months.
The interest rates paid on more liquid investments, such as money market accounts (national average: 0.34 percent), are minuscule. The rates for statement or passbook savings are lower than they have been in 60 years. Web sites and blogs devoted to the serious pursuit of better rates tell sad tales of people chasing that extra tenth of a percentage point with all their might.
Indeed, savers would be better off with their money in a mattress. Particularly if they received instruction on arranging the wads for maximum lumbar support - at least they could wake up happier!
Still, some things could be done for savers in addition to offering better rates. On a micro level, banks could offer liquidity. Liquidity is, well, priceless; lack of it caused the financial system failures last fall. So consider the Liquid CD: During a nine- or 12-month term, money could be withdrawn at any time - presumably for higher rates or in case of emergencies. Some big banks offer these - mostly with low rates - but almost no community banks do.
On a macro level, we have to change the face of banking. Too many banks don't want to be like traditional banks anymore. They see themselves as financial institutions, as brokerage firms that derive most of their profits from trading operations. These include global equities trading, new investment vehicles (derivatives of all sorts), and currency exchange transactions.
Hence the Chicago protesters' complaint that banks - at least the big ones - don't write enough mortgages or support community development loans. The low cost of money and low interest rates for savers are simply helping them obtain capital for trading and reduce some of the risks involved.
It is time to put a wall of separation between bankers and brokers, and to get back to banking basics. This is the real key to assisting savers.
More Americans are saving more now than they ever have in the last 100 years. But they receive miserly interest rates, get ripped off with credit card and bank fees, and can't get a loan without promising a pound of flesh. Next time the bankers meet, the savers should take to the streets, too.