Some Children’s Games are Not for Children

Low interest rates benefit those who can borrow – mostly big companies and people who benefit from government loan guarantees (homeowners whose loans fall within Freddy Mac and Fannie Mae programs, car-buyers where the government has subsidized car lenders, etc.). The government benefits as it places its deficit in the marketplace as well. It certainly is great for big banks with trading arms that can borrow fed funds at near zero percent interest and invest in their programmed trading structures that react to stock market changes in milliseconds. It most certainly doesn’t benefit anyone who thought that they could invest conservatively and live off the interest.

As interest rates in general have fallen, the yields on Treasuries, bonds, interest-bearing savings accounts have plunged to rates that often are below 1%. And for those who invested in commercial bonds and even some municipal tax-free bonds, the prospects of losing the underlying principal in a trashed economy loom large as institutions and even governmental units consider or actually file for protection under bankruptcy laws… or worse, simply slide out of business altogether. Underfunded pension plans, pummeled by stock losses and now yielding next-to-nothing on conservative debt investments, are seriously undermining the ability of many retirees to survive.

The December 26^th New York Times offers some examples: “‘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.)… ‘They’re advertising it in the papers as if they’re actually proud of that,’ said Steven Weisman, a title insurance consultant in New York. ‘It’s a joke.’

“The advertised rate for the Savings Plus account has expired, according to the bank’s Web site; as of Friday, the account paid an interest rate of 0.5 percent. The bank’s highest-yield savings account, the Ultimate, was paying 1.01 percent… The best deal Mr. Weisman has found is 2 percent on a one-year certificate of deposit offered by ING Direct, an online bank that has become a bit of a darling among the fixed-income crowd... Interest on one- and two-year Treasury notes was just 0.40 percent and 0.89 percent, as of Monday. Bank of America offers 0.35 percent on a standard money market account with $10,000 to $25,000, and Wells Fargo will pay 0.05 percent on a basic savings account.

“Indeed, after fees are subtracted, inflation is accounted for and taxes are paid, many investors in C.D.’s, government bonds and savings and money market accounts are losing money. In fact, Northern Trust waived some $8 million in fees on money market accounts because they would have wiped out all interest, and then some.” So folks on fixed incomes are living with vast reductions in their available cash flow or worse, invading their principal just to survive now, but are destroying their future safety nets.

Meanwhile, expecting a rash of governmental regulation, credit card companies are jacking up their rates, well north of 20%, some evening hitting 30%, making life infinitely more difficult for those already pounded by the new financial realities. Medicare premiums are also rising. A few retirees have found solace in reverse mortgages, tricky and often treacherous structures, but their estates are eroded and these structures don’t offer much to people who are just renters or whose equity has collapsed under the recent fall in home values.

Policy-making can create a series of domino-effects that can ripple for many years. We may not want higher interest rates for any number of reasons, but pressures from the buyers of our national-debt-generated bonds and the needs of those on fixed incomes create countervailing forces that suggest that there are values or even necessities to those rate increases. It may, however, take years for interest rates to mirror those upon which retirement plans were originally built. There is no such thing as “fixing the economy,” and we are dealing with lots of games most of us really don’t want to play anymore: seesaws and dominoes are not for the faint of heart. Help one sector, and there is bound to be pain somewhere else.

I’m Peter Dekom, and I approve this message.