Savings vs. borrowing rates

[mastein]

It seems a bit odd to me that the amount paid on savings accounts (i.e., the cost of banks to get their money) has held steady while the interest rates they charge for their loans has gone up over the last month or so. Therefore, I put for the following theories forth to debate and discuss:

1) The large regional banks who now control a large portion of the money are acting in concert to keep their spreads high thereby forcing the American people to move toward riskier investments.

or

2) Rates were SO low and in some cases were essentially 0, that there is no room yet for them to come off the floor.

[Another Bill C.]

1. 50 years ago

The banks operated on a differential between loan and savings interest of 1%. The loan interest was 6% and the savings interest was 5%. The banker was the richest man in town and the employees were just about where they are now on the economic scale. The accounting was all done manually.

[On the Road]

2. Good Point

There is an awfully wide spread. I assume the difference is in the higher risk of default these days. Banks are eager to lend as much as possible and charge the extra risk to all customers in the form of higher rates.

[Frodo]

3. That just isn't so.

Banks USED to get bascially ALL of their income from the interest rate spread. These days, that spread is MUCH tighter than it used to be and banks have moved to getting significant portions of their profits from fees (in some cases as much as half).

The interest rate spread varies from bank to bank, but historically was in the 4-5% range. That's the average gap between all maturities of loans and deposits combined - today, lots of banks are under 3%. Certainly, if you take the rate on a variable loan (like a Home Equity Line) today and compare it to the rate on a long term CD you will find that there is STILL only about a 1% gap. But compare similar points of the A/L ladder and you will find a larger gap - and look back 20-30 years or more and the gap will be even larger.


There are two reasons why savings rates have not recovered as quickly as loan rates are going up:

1) Just like gasoline prices - the system is not as elastic in both directions. Gas will go up as soon as crude goes up (in anticipation of higher costs) while it doesn't drop nearly as quickly when crude goes down (because the gas in the pipeline cost too much).

2) Savings rates basically hit bottom a couple years ago while loans continued to fall. When you're paying .2% on savings and .15% on NOW accounts you can't go much lower when your prime rate falls a quarter point. Loan rates will have to rise a tad before savigns rates move much. But if you look at reasonable length CD terms you will find things starting to improve.

[mastein]

4. So that is a vote for #2?

[Frodo]

5. Oh... right....

...if I had read all the way down to the SECOND paragraph of the first post instead of jumping the other guy...I...


OK "yes".

:)

[rapier]

6. notes

While long rates have shot up in the last month those rates have not filtered thru to the consumer except in mortgages, where the rate is directly and instantly related to the long bond.

Best Buy and the local furniture superstore, etc. etc. etc is still offering no interest for one year deals.

Simple pass book savings are based upon very short term interest rates and they have hardly budged. Those are the rates which the Fed has a lot of control over. The likelyhood of them rising much any time soon is zero. The Fed HAS to keep short rates low, and will. There is NO alternative. Among other things they certainly want to deter savings.

"What", you say. The Fed wants to discourage savings? Of course. That is the root of Greenspans and the governments and most of all Wall Streets agenda. The ultra low interest rate policy has as its FIRST goal to discourage savings. In fact to punnish savers so that they are FORCED to speculate in stocks and other assets. This is the ROOT of Greenspans policy.

But is not saving the prudent thing for citizens to do? Are not savings the pool from which loans are made. Not any more people. Saving is bad bad bad. It is now an evil we can ill afford. Better to borrow to the max and buy stocks and real estate which is guaranteed to inflate to get rich.

Is Adam Smith spinning in his grave? Are the old fashioned bedrock conservative Republicans of the last 100 years spinning in their graves? No, the dead don't spin.