Savers watch their nest eggs crumble

Interest rates near zero are hurting the economy, some analysts say. Time to let rates return to normal levels.

By Kim Peterson Oct 4, 2010 1:03PM
Cash © Jonathan Kitchen/Getty ImagesAre savers getting punished? That seems to be the latest talking point as interest rates continue to hover near zero.

People who have worked their whole lives to save a decent amount can no longer live off the interest. Instead of getting rewarded for decades of smart planning, savers are watching those nest eggs slowly crumble.

Investment pioneer Charles Schwab writes in The Wall Street Journal that it's time to return interest rates to normal levels. "As a temporary fix it served its purpose," Schwab writes about the Federal Reserve's move to drop interest rates to near zero. "It was an emergency antibiotic appropriate for the illness. But continuing with the experiment is disfiguring the economy and fueling doubt."

Retirees can no longer live off the interest from their savings, Schwab adds. "As a result, savers and investors are being forced to take more risk with their money as they hunt for higher yields."

Normally, dropping interest rates like this is a page right out of Econ 101: If you lend money out for free, people will borrow lots of it, spend lots of it and stimulate the economy. But this time around, it isn't working.

People aren't spending money, and they don't want to borrow it. Banks are freaking out and holding on to their cash, Schwab writes, because regulators haven't told them what their new capital requirements will be. "So they take the most conservative path available -- they sit on their money."

So what's the answer? Schwab thinks the Fed should raise rates to a more normal level. Banks would be able to operate with more predictability. Post continues after video:
"Our economy is ready to heal," Schwab writes. "It just lacks broad-based confidence among consumers and business people. It would be a giant boost to confidence if the Fed stood aside and returned to its traditional role as defender of monetary stability."

Henry Blodget agrees, saying the zero-interest-rate policy "is hosing people who are responsible and live within their means and rewarding people and companies who don't."

The Fed essentially allows banks to borrow money from the government for nothing and then lend it back to the government at about a 3% rate, Blodget writes at The Business Insider.

"The spread on this trade continues to produce massive Wall Street profits and, with them, enormous bonuses -- without any of the risk that is normally supposed to accompany such profitability."

Blodget thinks that over the next year, the Fed should raise short-term interest rates to about 2% to 3%. "Just back to normal," he adds. "Just back to where rates would be if the Fed weren't doing everything in its power to get the country to borrow its way out of a debt problem."

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