Interest Rates

“Something terrible happened to depositors during the past year: interest rates on savings accounts fell through the floor. Even certificates of deposit dropped to depressingly low rates.” These words were written in Consumer Action News, based in San Francisco, about a month before the Bank of America dropped its passbook savings rate to 2.75% in early July!

Tens of millions of people, including elderly Americans, are feeling the squeeze on passbook income that they rely on to get them through the month. Not since the Depression have savings rates been this low.

The squeeze gets worse when you consider what these savers face when they become borrowers. According to Bank Rate Monitor, consumer loan rates such as credit cards, automobile loans and unsecured personal loans have barely changed.

For example, the same financial institutions that are paying you under 3% to use your money turn around and charge you over 16% for unsecured personal loans and over 18% on your credit card balance. Automobile loans remain between 8% and 9% along with other retail loan rates that are not declining very much.

This is not entirely the working of the free market. You see, the banks have a powerful ally on their side. It is called the Federal Reserve or what passes for our nation’s central banking authority. The Federal Reserve is technically a governmental institution. In reality its budget comes from fees it assesses banks and its most influential rulers are the large private banks around the country.

From this indentured position, the Federal Reserve makes monetary policy. The commercial banks, especially the large ones like Citicorp, Chase Manhattan and Bank of America have generated enough imprudent loans and management over the past fifteen years to get themselves in trouble. But they are too big to be allowed to fail. Consequently, the Federal Reserve has been driving down interest rates to help them out.

As interest rates paid to savers fall further behind the interest charged to borrowers, the banks make more profit and improve their balance sheets. Consequently, bank shares have boomed in the past fifteen months, far outpacing the stock market as a whole.

The Federal Reserve has a number of ways to help banks make money. By easing its bank reserve requirements, it can add immediately hundreds of millions of dollars in annual revenues and profits to the banks. By lowering interest rates, the Federal Reserve can generate new fees for banks when customers rush to refinance.

All these and other actions are justified on the basis that the economy will be stimulated, jobs will be created and the banks will pass the savings from lower interest rates to borrowers. But the trouble with the economy is inadequate loan demand on the banks — interest rate reductions over the past year have not stimulated loan demand.

Loan demands by business usually increases if business thinks consumers are going to buy the products of expanded business. But since consumers who save are getting very low interest payments and since consumer borrowing rates are not declining anywhere near as much as savings interest has declined, the banks may be laughing all the way to the banks, but consumers are being squeezed on both ends.

Even home mortgage rates, which have declined appreciably, do not seem to be perking up the housing market.

A much more vigorous debate needs to be generated nationally about how the Federal Reserve is, in effect, bailing out many commercial banks by making it possible for banks to take it out of the hide of millions of consumer savers and borrowers.

This series of events further bolsters the argument for a federal law to establish financial consumer associations and require the banks to insert invitations periodically in bank statements that ask bank customers to join together for action. With several million bank customers joined together in 50 statewide financial consumers associations having their own full time staff, the voiceless consumer savers and borrowers will have knowledge, power and action to defend their interests and deter any future bank recklessness and mismanagement.

Readers who wish to obtain a copy of such financial consumer association legislation should write to Cong. Joseph Kennedy, House of Representatives, Washington, DC 20515.