Personal Finance Blog By MoneyRates - February 2010

The abrupt resignation of Senator Evan Bayh was intended to be a wake-up call for Washington to get its act in order -- or for voters to change the cast of characters in Washington.

You don't have to be a supporter of either party to agree that the federal government needs to snap out of its current pattern. With serious fiscal issues at stake, both parties are playing "chicken" in an attempt to get the other side to propose unpopular measures first.

At stake? Just the country's economic future, the stability of the financial system, and the value of the dollar. Those affect every American to one extent or another, but bank depositors may have more at stake than most.

Already, bank depositors have paid more than their share of the burden for country's financial woes in the form of low CD rates, money market rates, and savings account rates. Don't look for bank rates to sustain a meaningful rise until the economy is on sounder footing. Meanwhile, if the banking system repeats the mistakes of the last decade, deposits may become jeopardized beyond the power of the FDIC to remedy. As for the value of the dollar, rising debt could devalue the dollar and bring inflation -- and already, inflation is higher than most bank rates.

Many experts agree that what's called for here is a prescription of spending cuts and tax increases to get the deficit under control. However, Democrats want to force Republicans to propose spending cuts so they'll look heartless. Republicans want Democrats to do the dirty work on raising taxes so they'll look profligate.

You've heard that Nero fiddled while Rome burned? The modern version is the country drowning in debt while its leaders print bumper-stickers.

Reverse mortgages have been getting some good press of late. Jack Guttentag, for instance, a.k.a. "The Mortgage Professor," has spent a couple thousand words over the past couple weeks ripping into reverse mortgage fear mongers who claim that reverse mortgages are a rip-off.

Guttentag's latest column, titled "More Bogus Arguments Against the Reverse Mortgage," includes an interesting change of perspective regarding the costs of an HECM reverse mortgage, a government-backed loan which is by far the most popular type of reverse mortgage.

Typically, excessive costs are described as the most negative thing about taking out a reverse mortgage. But Guttentag nicely reverses the thinking on that point, wondering aloud if HECM costs are not actually too low to cover the exposure of the FHA that backs this loan.

The reasoning behind this argument is that the mortgage insurance aspect of an HECM is usually about half the total closing costs of an HECM. And in some cases, for example if a senior only uses the loan for 5 years, those closing costs certainly will appear excessive.

However, for a senior that lives a long time, or for a senior whose home declines significantly in value after the HECM loan is extended, the mortgage insurance aspect of an HECM may appear cheap in retrospect because the FHA that backs this loan is now exposed to these other factors which can affect the repayment possibility of the reverse mortgage.

Seniors who are considering a reverse mortgage can maximize their chances of getting a good deal by thinking long-term, not short-term, when they think about using this product.

For the time being, the financial markets have been somewhat calmed by news that the European Union would help the nation of Greece deal with its debt crisis. However, the calm may be short-lived, as concerns about other sovereign debts, such as those of Spain and Portugal, are not far from boiling over. Indeed, one can't help but look at the mounting U.S. debt and wonder just how much borrowing the market will bear -- or, how much any one borrower can repay.

Sovereign debt is like the mortgage crisis on steroids. Low interest rates have encouraged borrowing. Exotic financial instruments have helped mask the risk as borrowing became excessive. Eventually though, a day of reckoning comes. Only this time, nations are in danger of defaulting, not individual home owners.

If you've been frustrated with low savings account rates, money market rates, or CD rates, the sovereign debt crisis may be yet another reason to curse low bank rates. Depositors have already paid a price for low bank rates in the form of lost interest, and there may be an economic price to come.

Government bailouts of failed loans create a drag on the economy going forward. Losses on loans and loan-backed investments discourage future lending, even when it is for reasonable purposes. In short, the hangover for a decade of easy borrowing may be painfully slow economic growth.

This is the paradox of low bank rates. For years, the accepted wisdom has been that low bank rates stimulate the economy. Unfortunately though, they also make it possible for expanding debt burdens to create the illusion of growth, which now threatens economic growth going forward. It's clear now that low bank rates can contribute to a climate of unsustainable growth.

Conservative investors who hold money in CDs, money market accounts, or savings accounts may feel like they're between a rock and a hard place:

They by all means want higher interest rates on those deposit accounts, but they also are worried about the poor economic conditions of the country as a whole.

The basic fear underlying these concerns is of inflation--that the value of the money held in CDs, money market accounts, and savings accounts will decline because there are simply too many dollars sloshing about the economy thanks to the Federal Reserve's "easy money" policies.

Fear of inflation is particularly acute for holders of CDs, which are locked in for a set period of time, and customarily cannot be withdrawn without a penalty. The idea of being locked into a falling investment is no one's idea of fun.

On Wednesday, Chairman of the Fed Ben Bernanke was slated to appear before Congress to explain his plan for preventing inflation. The massive snowfalls in D.C. prevented an actual visit, but Mr. Bernanke nonetheless submitted written testimony describing his plan to prevent inflation.

If you are concerned about the value of your CDs, money market accounts, and savings accounts, Bwernanke's inflation-prevention plan deserves your review and your scrutiny. Read about it here.

In many ways, the recent financial crisis has set up a conflict between borrowers and savers -- and savers have gotten the short end of the stick. Excessive debt levels put savings deposits in jeopardy and drove down the value of financial assets. The resulting recession led to government policies which lowered interest rates. In short, savers, who did nothing to contribute to the mess, were left with higher risk and lower bank rates.

Now, though, it appears borrowers may be doing something that could eventually help savers.

According to a new study by IndexCreditCards.com, Americans have been reducing their debt burdens on average. The IndexCreditCards.com study estimates that the average adult in the U.S. currently has credit card debt of $3,752, which is down 6.5% from July of 2009. IndexCreditCards.com estimates that the average U.S. household currently has $7,394 in total credit card debt, which is down 5.9% from July of 2009.

Consumer spending is the largest component of the economy, so ultimately the strength of the economic recovery depends greatly on the health of consumer finances. This, in turn, is likely to be driven by two things: improvement in the job market, and more manageable debt burdens.

The job market has been slow to come around, which isn't a total surprise -- employers tend to be wary about hiring after a recession, and the worse the recession, the more cautious they are likely to be. The figures from IndexCreditCards.com suggest that at least consumer balance sheets are getting healthier, which helps establish the foundation for a stronger economic recovery.

Where do savers come into all this? The key to higher savings account rates, money market rates, and CD rates is getting the economy off the ground. It looks as though borrowers are doing their part to help.