Zero rates do not promote saving

The New York Times points out that zero percent interest rates are not designed for savers. They are a tax on savers, especially the elderly living on a fixed income.

Millions of Americans are paying a high price for a safe place to put their money: extremely low interest rates on savings accounts and certificates of deposit.

The elderly and others on fixed incomes have been especially hard hit. Many have seen returns on savings, C.D.’s and government bonds drop to niggling amounts recently, often costing them money once inflation, fees and taxes are considered.

“Open a Savings Plus Account today and get a great rate,” read an advertisement in the Dec. 16 Newsday for Citibank, which was then offering 1.2 percent for an account. (As low as it was, the offer was good only for accounts of $25,000 and up.)

This is laughable. Banks can easily invest the money in those savings accounts in Treasury bonds and see a profit without taking any risk – no lending required.  If you want to know why Treasury rates won’t rise, this as a major reason.

Clearly the Fed is more concerned with bailing out the banks who lent recklessly and depleted their capital than grandma living off her Social Security check.  But, of course, this policy is not going to induce any deleveraging. Ultimately, at the next sign of economic distress, the day of reckoning will come; and the problem will be even worse.