A fresh jolt for consumers
Banks cut interest rates on deposits as cash flows in, and some borrowing costs are expected to rise.
This post comes from Suzanne Kapner, Robin Sidel and Dan Fitzpatrick at partner site The Wall Street Journal.
Consumers have already been struggling with high unemployment and elevated levels of personal debt incurred during a pre-recession spending binge. Now they are grappling with shrinking retirement accounts, as major stock indexes nose-dive and yields on U.S Treasurys touch new lows amid the market turmoil.
"People are going to feel less rich and that will make them hold back on spending, which would be a further blow to the economy," said Beth Ann Bovino, a senior U.S. economist at Standard & Poor's. On Friday, the firm lowered its rating of government debt one notch to AA-plus, the first time the U.S. has lost its top-ranked standing.
Flooded with cash
Consumers are already earning less on the money in their checking, savings and money market funds as well as on certificates of deposit, because banks, flooded with cash in the market upheaval, continue to reduce rates as they have trouble finding profitable ways of investing the cash and are faced with higher regulatory costs.
Some consumers said they were already changing their spending and investing habits as a result of the debt downgrade and the continued uncertainty over the economy. Post continues after video.
"My wife and I decided over the weekend that we've got to go on another high-alert spending freeze, because we don't know what the future holds," said Warren Hershkowitz, 39, who owns a real-estate consulting firm in Manhattan.
Ryan Zagata, a 37-year-old software sales executive who lives in Brooklyn, N.Y., said he was reconsidering the amount of money he invests in mutual funds. "My wife and I talked about moving more of our money to cash. We are not there yet, but we will definitely slow down the amount we are investing each month."
Banks across the U.S. cut rates Friday on four- and five-year certificates of deposits, pushing them to historic lows, according to Market Rates Insight. Bank of America Corp., the nation's largest bank as measured by assets, lowered rates on four-year CDs by as much as 0.45 of a percentage point in certain states. JPMorgan Chase & Co. cut its long-term rates by a quarter percentage point earlier in the week.
Rates for savings accounts fall
The average deposit rate is 0.79%, compared with a high of 4.53% last seen in September 2006, Market Rates Insight said. Deposit rates are expected to fall further as the flight to the safety of federally insured bank accounts continues.
Since December 2007, domestic deposits have increased by $1.1 trillion and now total about $8.1 trillion. The larger a bank's deposits, the larger the total amount of interest it has to pay out and the greater the payments it has to make to regulators in order to insure those funds.
Bank of New York Mellon Corp. became the first financial firm last week to charge corporate clients a fee for holding large amounts of cash. Analysts said they don't expect it to be the last.
"It's only a matter of time before banks lower rates even further or start charging to hold deposits," said Dan Geller, executive vice president of Market Rates Insight.
The higher deposit costs are especially painful to banks, because they are unable to offset them by making more loans. Both the volume of lending and the rates that banks charge borrowers have remained anemic since the recession, curtailing a major source of revenue.
Geller said the combination of higher deposit costs and lower loan revenue was unsustainable for banks and could lead to increased borrowing costs for consumers as financial firms try to boost revenue.
Auto loan rates rise
Auto loan rates, which had been falling since the beginning of the year, have started to edge up in recent weeks, according to Bankrate.com. The average five-year loan for a new car now carries a rate of 5.6%, up from 5.43% in June.
Credit card rates have largely remained unchanged since new rules took effect last year that restrict the fees and interest rates issuers can charge. The rules require issuers to give customers 45 days' notice of any rate increase and only apply the increase to future purchases.
Mortgage rates, which tend to trade in tandem with yields on 10-year government bonds, declined slightly on Monday as prices of U.S. Treasurys rallied, and remain near all-time lows.
But analysts said they expected financial firms to review their borrowing terms and potentially raise rates for the least creditworthy borrowers in coming months.
Mike Moebs, who provides consulting services to banks, said he expected consumer borrowing costs to increase by a quarter to a half percentage point over the next six months.
"If Uncle Sam is riskier, so is everyone else," Greg McBride, a senior analyst with Bankrate, said.
More on The Wall Street Journal and MSN Money:
With the Fed keeping interest rates low, the poor sucker who tries to save money in banks is getting screwed. Hard to believe that having $100,000 in the bank will generate around $30 interest for one month and $360 a year. Inflation eats the interest earned and then the government taxes the interest earned.
The Fed should be raising interest rates because the banks are borrowing from the Fed at zero interest and then buying US treasuries while not loaning anyone money. This policy is counter productive. The Japanese tried the low to zero interest rates and it did nothing for the economy for ten long hard years.
I'll admit that I'm as ignorant as they come when people start talking economics, investments, etc. But I do understand one thing: I see no return on keeping my money in the bank. I don't have a lot. In fact, the amount is so paltry -- around $11,000 -- it's almost laughable. But it is more than I have ever been able to save. It used to be that I could never keep more than a few hundred in savings, but with the economy the way it has been over the last two years or so, I have been more frugal -- spending less and saving more. But you have to ask: What's the point? Isn't it ironic that cutting my spending habits has allowed me to save more, while at the same time, saving more isn't really getting me anywhere? I think last month my interest payment was around $1.89. Yep, that's right. A whole dollar and eighty-nine cents. How is it that the bank can take my money, invest it, make millions, but return to me practically nothing for the use of my money? And if they aren't investing it, then why do they want people to save? It's all too confusing to me. Can someone explain it more simply in layperson terms?
You're already getting less than 1%, AND that 1% is taxable.
IMMEDIATELY put those funds in either credit unions, or offshore banks.
It IS time to fight back.
Get ready folks. As the big handout nations in Europe collapse under the weight of their nanny state, many of our largest banks will also collapse.
All it takes is a Spain or Italy to start the chain reaction. If Italy goes, so goes Spain, Ireland, Portugal, and of course Greece.
The "P.I.I.G.S." collapse, the EU collapses.
And they will take many international banks and insurers with them.
You won't have to be first in line to get your money out, the US will print enough to cover deposits. But of course that will lead to unimaginable inflation. With no interest payments, the mattress will be a competitive depository.
At least we will all be together - in our misery.
Credit unions are better, being that they do offer lower interest rates on loans and mortgages, as well as offering higher interest rates on checking accounts, and savings accounts. Offshore accounts are a good idea if you have in excess of $1,000,000 to save. Otherwise credit unions are the way to go. Also the bigger the credit union the better the benefits.
All I gotta say is what goes around comes around. And so far the banks are screw'n people guess what banks are about to get screwed by the people. Might not help the economy but heh the worker has been **** on enough these days time to fight back!
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