Low Interest Rates -- Helping the Economy, or Just Banks?
April 28, 2010
According to a recent CNBC report, banks bought $5.7 billion worth of securities at new Treasury bond auctions in the month of March. At the same time, bank credit and lending activity dropped for the month. This suggests that something went wrong with the idea that low interest rates would provide economic stimulus.
In theory, low interest rates should encourage borrowing by making capital less expensive. With low interest rates, consumers are more willing to borrow to buy goods and houses, and business are more willing to invest in expansion and upgrades. This activity, in turn, would strengthen the economy.
However, all this is predicated on banks being willing to lend. If credit is actually tightening, and banks are putting their money safely into Treasury bonds instead, the theory breaks down.
Of course, the banks can profit under the current scenario, because of the spread between Treasury rates and bank rates. With savings account rates, money market rates, and short-term CD rates all averaging under 1%, banks can obtain capital for next to nothing, and then invest it in 10-year Treasuries at yields around 3.75%. That creates a nice, easy profit.
What it doesn't create is short-term economic stimulus. Maybe it's good in the long run to strengthen the banks. Perhaps not coincidentally, this pattern is also creating demand in the Treasury bond market, which helps support the government's debt habit. So it's a win-win -- just don't count depositors as one of those winners.
This is yet another reason to shop actively for higher rates. Banks that are aggressively seeking depositors seem bent on doing more with that capital than just investing it in Treasuries.
No Stocks 4me Kramer
2 May 2010 at 2:33 pm
Who cares anymore!, as long as “Uncle Ben” says theres “NO Inflation”, there’s NO Inflation, smirks
He and the rest of the Boooya stock boys and the PIMCO bond baby’s are all for Ben’s BS and hope he never raises the rates, no matter how high prices go for the “normal” person that has to buy food, pay for high priced gas, elec bills, and meds.
If you were a conscious individual for the past 40 years and paid ALL your bills ON TIME, saved money and lived well within your “income bracket” your the fool. I paid my fkn mortgage off even when I couldn’t ever deduct the interest. Your savings not only get less interest but it will soon be worth a lot less, so much for being the “responsible idiot”. The drug pusher snot rag headed arthritic finger talkers are the smart ones, they qualify for ALL the benefits and “entitlements” while keeping a pocket full of cash.