As much as everyone from our Government tell you they are keeping the interest rates to help the economic recovery it’s causing quite the opposite effect. I am in the process of writing a book on this topic and this will surely be one of the chapters. Here are some brief reasons why low interest rates are killing us.
Cash is trash: I have $10000 in an emergency savings account at the bank. Last month I got my interest statement and I earned a whopping .32 cents last month and yet i’m charged $12/month to maintain the account which means I’m earning a negative interest rate. Did you know that when you deposit money into a bank it shows up on the banks books as a liability. That is truly why banks could care less about your money. If money stored in banks can’t be loaned out at good interest rate levels they don’t want your money. Thus banks are struggling to remain profitable by jamming you with tons of fees.
Crisis of consumer confidence: Basically without earning any interest whatsoever people feel poorer and actually they are. Imagine having 1M in the bank and earning $3400 in interest annually. If people can see forward movement int heir savings they are less likely to spend money.
The Housing crisis: The single biggest issue preventing our economic recovery and the #1 cause of bank insolvency. Not many people realize that the major banks in this country are sitting on a load of foreclosed homes that they are not putting on the market. The reason for this is that banks would rather sit on a property and report the asset at taxable value rather than take the loss as to the true market value of the property. If the banks were to fush all the homes out at current market value they would go bankrupt. Thus they sit on the homes to prop the stock prices up. If interest rates we’re higher (around 5%) the bank could self finance these properties and turn a liability into a performing asset.
The Fed, Fannie May and Freddie Mack: The 3 Stooges! The Government via their Federal loan programs is hold 65% of all US held mortgages. These notes perform at such a low rate that the government has to print money just to keep these guy afloat. Nothing makes you money at 2%. Freddie and Fannie should be closed or turned private.
Medicare and Medicade: Seniors that have savings and are not earning interest are going bankrupt having to reverse mortgage their homes and get medical treatment via medicade because they can no longer afford to buy supplemental insurance. Addition burden on the economy. Print up some more money!
The solution: gradually bump interest rates 1/16 to 1/8% at a time. Let the economy adjust and do it again. Once interest rates hit 5% the economy should be pumping as lending institutions will take more risks to earn profits.