MoneyRates Blog

Just about everybody except bank executives with a vested interest agrees that some legislative changes need to be made in the wake of last year’s banking crisis. However, legislating in the wake of a crisis is not without risk — sometimes an overreaction can exacerbate a crisis.

In a subtle way, one has to look no farther than the low level of today’s low savings account interest rates, CD rates, and other bank rates to see an example. The government has made an all-out effort to push interest rates lower as a stimulative measure in the wake of last year’s difficulties. The unintended consequence is that low bank rates make it more difficult for banks to attract depositors — and thus this limits an important source of capital to banks that are trying to rebuild their capital reserves.

More famously, the U.S. government responded to the onset of the Great Depression by passing the protectionist Smoot-Hawley act in 1930 — and by thus isolating the U.S. economy only deepened its difficulties.

Now, House Financial Services Committe Chairman Barney Frank is advocating legislation creating extraordinary power for the government over large banks should they be in danger of failing. Some of the associated proposals — such as wiping out the property rights of equity holders under such circumstances — seem little more than vengeful. Worse, they could have the unintended consequence of making it impossible for banks to attract investment capital just when they need it the most.

Some anger at the banking community after last year’s debacle is understandable. However, rather than taking a pound of flesh, Congress should be looking at how to structure the industry so as to reduce the likelihood of failures in the first place.

According to Money-Rates’ list of the best CD rates available today, a 6 month CD at 1.5 percent interest is a good deal. At the one year mark, anything near 2 percent is a good deal. Conservative investors who vividly remember CD returns of 3-5 percent are understandably questioning how good of a deal today’s best rates CDs really are.

Meanwhile, the stock market has been up approximately 50 percent since March.

Nevertheless, certificates of deposit offer one of the only government-guaranteed ways to earn money without risking the loss of any money. Therefore, when it comes right down to it, conservative investors are likely to continue buying CDs so long as they pay something more than zero percent.

Being able to sleep at night is a return on investment in its own right.

A CD Laddering Strategy Can Spice Up Your Investing Life

Few people believe that interest rates will remain this low forever. Eventually, CD rates will go up.

Problem is, many conservative investors are very, very bored in the meantime.

Laddering CDs can spice up your investing life. Laddering CDs, of course, entails buying CDs with staggered maturity dates. The mathematical benefits of laddering CDs are strong, but don’t underestimate the psychological benefit.

When you have a CD coming due every other month, like clockwork, you have new money to invest every other month. Over time, even your “stock market guru” friends may become jealous of that fact.

When a recent poll by MoneyRates.com and GetRichSlowly.org showed that 52% of respondents felt their retirement savings were not on track, it wasn’t a complete surprise. This has been a challenging environment. A weak job market has caused many household incomes to take a hit. The stock market has been little help to investors for a decade now. Meanwhile, low savings account interest rates and other bank rates make it difficult for conservative depositors as well.

For all the difficulties, though, the most important thing now is to plan for how you will save for retirement. Even taking into account any setbacks to date and the low level of current bank rates, it’s time to come up with a revised plan.

That plan may involve a more modest retirement than you had originally envisioned. Or, it might require more sacrifices in your current budget. Either way, when times are tough, it is an especially bad idea just to let things drift.

Time can be both the friend and the enemy of retirement savers. The sooner you start saving, the better the ratio you’ll have of  years spent saving to years spent living off those savings in retirement. On top of that, of course, is the power  of compounding. Once you start saving, the interest you earn starts contributing alongside your future savings, and that contribution from compounding snowballs with each passing year.

In short, given recent conditions, it’s understandable if you’ve fallen a little behind on your retirement plan. However, that simply means you need to get started on a plan to catch up.

Pay for top executives at bailed-out banks and financial institutions, including Bank of America, Citigroup, and GMAC, has been cut in half by the Treasury’s compensation regulator, Kenneth Feinberg.

Banks that have already paid back bail-out funds, including JPMorgan and Goldman Sachs, will not be affected by the Treasury’s orders.

Headline Not the Whole Story Here

How to restructure the banking system so that nothing like what happened in September of 2008 ever happens again is an ongoing debate. Frequently, the discussion is more political than practical.

This is unfortunate because the best outcome for everyone, especially individuals holding money in conservative investments such as money market accounts and CDs, is that safe deposit accounts are actually safe.

Within Feinberg’s orders, and to that point, is the idea that top bank executive pay should be linked to long-term performance.

For example, new AIG CEO Robert Benmosche would be allowed to receive up to $7 million in yearly pay, but $3 million of that would be stock that could not be sold within five years.

The Best Bank Rates and the Best Banks

The next few years, it seems, will see considerable separation between banks who can compete in this new, government-intensive, public relations-dependent environment, and those who can’t.

If you’re looking for the best CD rates and the best money market rates, then, you are wise to stick with banks that unequivocally value the trust (and the money) you put in them.

It’s understandable that last year’s banking crisis should spark a renewed drive for financial regulation. It’s unfortunate that the legislative responses so far seem to be barking up the wrong tree.

As promised (or threatened, depending on how you look at it) Senator Christopher Dodd introduced legislation designed to limit banks’ ability to charge overdraft fees. It seems a piece of well-meaning legislation — no one wants to pay a $30 fee for overdrafting an account by a few dollars. However, trying to micromanage a business via legislation can have unintended consequences.

Right now, customers have a clear choice if they don’t like overdraft fees — they can avoid overdrafting their accounts. This is not a Herculean feat — it just requires responsible recordkeeping and spending. Just about everyone overdrafts their account at some point, but most recognize this for what it usually is — their own mistake. They can learn from the experience and avoid repeating it.

However, if you reduce the penalty for overdrafts, will some customers be encouraged to act irresponsibly? Overdrafts cost banks money. If they can’t recoup that cost via overdraft fees, they will make it up somewhere else. They may have to offer lower bank rates, such as savings account interest rates and CD rates.

Alternatively, they could be pushed further away from making their fundamental banking businesses profitable, and resort to relying more on speculative investments. We’ve seen that movie before — trading profits look great when everything is going well, but they are fundamentally unstable. As last year demonstrated, they significantly leverage up the risk level of the banking system.

Consumers have choices that can reduce or even eliminate overdraft fees. Better to make them responsible for exercising those choices than to incur the unintended consequences of micromanaging via legislation.