Personal Finance Blog By MoneyRates - December 2009

In the weak economy of the past year or so, mortgage borrowers have been the clear winner, as mortgage rates have been down to record lows. The flip side of that is that depositors have been the losers, as savings account rates, money market rates, and CD rates all shrunk to microscopic levels. Economies tend to run in cycles of action and reaction, however, so it's possible to see how today's low mortgage rates could lead to higher bank rates down the road. Yesterday's report on existing home sales provides a clue to how that sequence of events might play out.

According to the National Association of Realtors, sales of existing homes grew by 7.4% in November, and were up 44% compared with one year earlier. This brought existing home sales to their highest level since February of 2007.

One reason for the surge was the original expiration date (since extended) for the new home buyer tax credit. However, November's jump in existing home sales was a continuation of a recent trend, which also owes something to low mortgage rates. This is where the cyclical nature of economics comes into play.

Low interest rates have been a key component of the government's effort to stimulate the economy and stabilize the banking sector. If this succeeds in reviving the housing market, it will raise lending demand. A more profitable lending business will enable banks to pay more to attract capital from depositors -- and that's how savings account rates, money market rates, and CD rates could ultimately benefit.

That may be a long way off, but for depositors in today's low-rate environment, a light at the end of the tunnel is better than no light at all.

It's easy to assume that a "gotcha" story like this one from Bloomberg, about the FDIC seizing bank assets, should undermine the credibility of the U.S. banking system. The story describes how a rapper's tour bus, reeking of marijuana, was taken by the FDIC and sold after the failure of an unnamed Atlanta bank.

The Bloomberg story goes on to describe other odd seizures of property related to FDIC bank liquidations, such as ATM machines, microwave ovens, and ash trays.

Ironically, seemingly demeaning stories like this one may actually help to build confidence in the U.S. banking system. Certainly, public shaming rituals like this have been a part of human history during crisis healing periods. The urge to see bad behavior punished has been an abiding part of civilization for a long time now.

Meanwhile, prominent other banks, such as JPMorgan and Goldman Sachs, have increased profitability as these other banks have gone under (and as Bank of America and Citigroup have become wards of the state). The calling of attention to the total dissolution of failed banks thus draws attention to the staying power of profitable banks.

If you are concerned that CDs, money market accounts, and savings accounts remain as safe as possible, you may want to consider news of FDIC bank seizures good news overall.

Time Magazine recently named Federal Reserve Chairman Ben Bernanke as its Man of the Year for 2009. It's unlikely that depositors who are fed up with low bank rates would have voted for him.

Time Magazine recognized Bernanke for his role in preventing the financial crisis from getting worse than it did. It's a controversial choice. First of all, it's not clear whether Bernanke was more a leader or a follower in his handling of the problem. There were certainly others, including President Obama and Treasury Secretary Tim Geithner, who had a strong hand in averting a meltdown of the banking system. The second issue is that Bernanke was Fed Chairman while the housing bubble peaked and banks ramped up their risk levels. While he probably doesn't deserve some of the more severe criticism he's received for being asleep at the switch while these problems grew, it is hard to assign him no responsibility for things that happened on his watch.

Bank to the subject of bank rates though -- where depositors may have an issue with Bernanke is in his policy of driving interest rates down to minimal levels. This helps stimulate the economy and improve bank finances, but that's cold comfort to depositors who have seen their bank rates shrink over the past year. Concern about low interest rates is more than just self-interest on the part of depositors who would like higher bank rates. Keeping interest rates artificially low is not without consequences. It can fuel financial speculation, and can also encourage inflation.

All-in-all, Bernanke's winning Man of the Year seems a little like President Obama winning the Nobel Prize -- it just seems too early. It will take another year or two before the full impact of Bernanke's actions over the past year becomes known.

What an interesting time it is to be writing about banks. The latest:

Citigroup, the stock, will be officially revalued at the close of the stock market on Friday for the purposes of the S&P Index.

Longtime bank analyst Dick Bove sees this as further indication that certain major banks will become, in short order, more akin to public utility companies than the brave traders they once saw themselves as.

The stock market operators have essentially given up on Citigroup's ability to regain significant and abiding profitability. Bove sees in this development yet another sign that a "shadow banking system" is emerging.

Bove argues that as the big banks are restricted by the government from using deposits obtained through CDs, savings accounts, and money market accounts to fund bank trading operations, the real action for traders will still continue--but under different, separate companies.

Citigroup and Bank of America, for example, could still maintain some interests in the trading houses, but there would be harsher or looser controls on what relationship could exist legally.

For conservative depositors who want to know that the money they place in CDs, savings accounts, and money market accounts is safer than any other investment, the rise of the shadow banking system can be considered a positive.

If you want to work with a bank that isn't doing that stuff (that much), you should be able to find one, if the government has any say in it.

Meanwhile, here is a video that attacks Dick Bove's track record.

Like the villain in one of Hollywood's franchise horror movies, inflation has returned. You knew all along it couldn't really be dead.

For eight consecutive months, and ten of the last eleven months, the year-over-year change in the Consumer Price Index was actually negative. This meant negative inflation, or deflation -- a very rare state of affairs. Nobody was really celebrating, because this was a symptom of profound economic weakness, but it was at least a silver lining to depositors who were having to make do with microscopic bank rates. In fact, at some points during the past year, when deflation was factored in, those bank rates actually represented a fairly attractive increase in purchasing power on deposits.

This is no longer the case. The Bureau of Labor Statistics has reported a 1.9% increase in inflation for the twelve months ending November 30, 2009. Inflation is officially back. Again, it shouldn't be much of a surprise. Not only is moderate inflation a normal state of affairs, but the trailing year-over-year inflation numbers have been skewed heavily downward by a steep bout of deflation in late 2008. The last negative month for inflation was actually March of 2009.

A 1.9% inflation rate certainly puts bank rates in a less attractive light. As of today, the average savings account rate was 1.22%, the average money market rate was 1.15%, and the average 1-year CD rate was 1.51% -- all lower than the prevailing inflation rate. Using Money-Rates.com to shop for a better rate has never been more crucial. As things stand now, settling for an average rate is unacceptable, and sticking with a below-average rate is unthinkable.