Are the Fed and Financial Institutions are Screwing Over Poor Americans’ Savings? Bank on It.

pooramericansavings

The poorest Americans amongst us, who need to save and grow their money the most, are systematically screwed over by both the banks and a U.S. Treasury recovering from a thirty years of disastrous decisions, both political and economical.

This is the kind of bank robbery that the FBI doesn’t investigate, because the banks and the Federal Reserve are the ones telling the working poor to reach for the sky.

The richest Americans have money all over the place: In brokerages, mutual funds, real estate investments, etc. Many middle class Americans join them in brokerage and mutual fund accounts.

The upper and middle classes are great savers. 90.4 million Americans have money in a mutual fund. $100B in brokerage accounts in 2011 [1]. $13T in mutual, closed-end, and other funds. $17.9T in retirement savings accounts. [2]

So the myth that we are told time and again that we’re not a nation of savers is a class lie. If you have it, you save it.[2] If you don’t have it, you are screwed.

Bank on it.

In our minimally regulated free-market banking system, where lower-middle and lower income Americans try to keep their money safe and FDIC snug, banks take huge advantage of savers’ money.

They amass trillions of cash in checking, savings, and certificates of deposit on small amounts of cash of a few hundreds to a few thousands. Yet they provide their depositors so little interest in return on their cash that their “savings” aren’t keeping up with the rate of inflation.

Saving your money in a bank is a losing proposition because inflation eats away at it like acid dissolves metal.

Inflation is the drop in the worth of your dollar, its buying power. The dollar you made a year or two ago is worth less as inflation eats away at it. A 1970’s McDonald’s $1.00 meal of a cheeseburger,Coke and small fries is about $3.99 today.

Currently the rate of inflation is 1.5%.[3] It was 2.1% last year [4]. Over the last decade, it’s been as high as 4.1% in 2008, and as low as 0.1% in the middle of 2008-2009..[3]

Banks’ highest yielding interest-bearing accounts are generally Certificates of Deposit (CDs). CDs lock up your money in a “safe” FDIC insured account with the bank. You agree to let them borrow the money for a fixed term of a few months to a few years, and in exchange they agree to pay you interest on it.

What do they pay? The current rates fluctuate, but CD interest rates were a paltry 1.2% to a dreadful .025% when we checked them out. [2]

So, if you put your money into the highest-paying accounts at your local or national bank, you’d be losing .3% to 1.25% of that money’s actual worth just by investing it with that bank. If you have a regular passbook savings account, or interest-earning checking account, it’s even worse.

There was a time when banks paid 5% or more on savings accounts. More on Certificates of Deposit. Why do they pay so little now?

First blame the Federal Reserve. They can borrow temporarily from the Federal Reserve, at the Fed funds rate, the amount at which the Fed loans large banks money.

Right now, the Fed is flooding the banks with cheap money to keep the gears of the great U.S. financial system well lubricated in trying times. Fed money costs only . 75% [4]

Technically speaking, the banks shouldn’t pay less than the Fed Funds Rate, but many do. Why?

Your money is cheaper. Once upon a time, when Banks and Brokerages were separate creatures, banks had to court depositors to have enough money to lend out, the one thing that they did to make money.

Today, they don’t need you. Thanks to Reagan and the Bushes, and even a little help from Bill Clinton, banks have been deregulated to allow them to sell brokerage services, and create all kinds of “creative” investment vehicles that make them far more profit.

They have lost all incentive to treat small depositors well, even though the small depositors have, collectively, a bundle of money with the banks.

“Banks and thrifts hold over a trillion dollars in retail certiﬁcates of deposit,” say Raymond M. Johnson, David R. Lange, and Joseph A. Newman of the Auburn University Montgomery, School of Business.[5]

30% of CDs are owned by people 75 years of age or older, out of the 76.20% of Certificates of Deposit that are owned by people 55+. [6] Most fear the market, can’t invest long-term, and often are living off of pensions that are rapidly shrinking as the money sits in banks.

The Fed’s cheap money provides nothing for the working poor and seniors, except for one senior: Uncle Sam. Low interest rates mean that Treasury can buy back its more expensive debt obligations of the past, T-Bills and the like, with much cheaper money, and refinance the government paper with lower-interest rate new issues.

It’s the only debt reduction we do, and it mostly disadvantages the working poor, who carry the majority of that burden.

The callousness of the Fed and the Treasury are largely a vestige of where the people who run them both come from: Most of the titans of government finance come from Wall Street firms that favor higher-yield brokerage services and those toxic derivatives to the grungy, un-sexy, low-paying grist-mill of bank savings.

There was a time, before deregulation, that the powerhouses of American financial might, banks and brokerages, used to be armed camps of enemies firing salvos across Wall Street at one another.

That healthy competition kept the factions of the financial services industry more competitive. CDs were decent investment vehicles, highly secure for seniors and other more vulnerable people who couldn’t lose the money speculating on Wall Street.

Today, thanks to the merger gifts of our government that created the Godzilla bank-brokerage titans, these firms are an incestuous conglomerate of corporations who game average citizens from all sides.

President Obama called for a rise in the minimum wage during his State of the Union. If he wants to do something meaningful for the working poor and the elderly, the White House should get behind an effort to compel the Fed to keep their Funds policy at rates above the rate of inflation, and to establish practices at the Fed and the Department of Treasury that don’t rob from the piggy banks of the poor.

The White House fought to get the Consumer Financial Protection Bureau (CFPB) started. What greater thing could it achieve than some justice for the nation’s poor and elderly savers?

The banks and credit unions need to be split off from financial services (brokerage) and insurance again. One-stop shopping only helps the rich.

Time for our useless Attorney General, Mr. Holder, to make a career statement and investigate not only the financial services industry, but possibly even the Federal Reserve for collusive practices that undermine a big chunk of our national savings.

It’s a corrupt, broken system that will need something that major to shake it out of complacency.

Tell them now. File a complaint about sub-prime and sub-Consumer Price Index certificates of deposit, interest checking, and savings rates against institutions selling them: http://www.consumerfinance.gov/complaint/

My shiny two.

About Brian Ross

Brian Ross is a writer, screenwriter, political satirist, documentarian, filmmaker and chef. Ad hoc, ad loc, quid pro quo... so little time. So much to know!

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