Headline: RATE CUTS COST $20B IN INTEREST INCOME

Source: John Crudele, New York Post, 24 July 2001

URL: http://www.nypostonline.com/business/35776.htm

Interest-rate cuts are hurting the economy more than helping.

Because of six cuts in rates that Alan Greenspan pushed on the economy in the last seven months, Americans have lost at least $20 billion in interest income. And the benefits of the rate cuts are minor, since companies aren't in the mood to borrow money while their corporate profits are down.

And that $20 billion loss in income to savers will just get a lot worse in the months ahead as higher-yielding certificates of deposit mature, and savers are forced to accept the lower rates that Greenspan has imposed.

These figures are hard to come by, so even Greenspan's Federal Reserve may not have a good handle on the downside of the cuts. But the government's Bureau of Economic Analysis says interest income had been running at a $1.05 trillion annual rate in December and was at only a $1.03 trillion rate in May. The reason is obvious to those who know what to look for.

Greenspan and the Fed can only tinker with short-term interest rates, which have an immediate impact on the interest rates that banks pay to customers who park their money in savings accounts, certificates of deposits and money market funds - in other words, anyone who doesn't want to take a flier in the stock market.

Bank profits, of course, are helped when they pay lower rates to customers. But they are probably the only ones helped.

As I've explained before, the Fed's rate cuts don't have a big effect on most loans. This is especially true for long-term borrowing, which is the kind that homeowners and businesses would need for major expansions.

And this time around, there has actually been a perverse effect on loan costs.

Take a look at some of the numbers. Banks are now paying an average of just 1.75 percent on money market accounts. Those rates had been 2.11 percent when the rate cuts started. One-year CDs are now paying just 3.64 percent, compared with 5.33 percent last Jan. 1. And five-year certificates of deposit are paying customers an average of just 4.68 percent now, down nearly a full percentage point.

The impact on interest income has been enormous. In fact, as the year goes on, and more and more CDs mature and are rolled over at the lower rates, the effect could be enough to negate the benefits of much of this year's tax refund.

So far, the loss of income is about $20 billion, with the second half of the year still to be counted.

Washington will be delivering $40 billion in refunds in the next 10 weeks. But the Fed's interest-rate cuts are not putting money in the average citizen's pocket.

The net effect? Each interest rate cut is probably hurting the economy more than helping it.

Worse, the loss of $20 billion in interest income is coming on top of the harmful effects of the stock market's slide. Both the interest-rate drop and puncturing of the stock bubble are making Americans feel a lot less wealthy.

The tax refund will help. But surveys show that half of all Americans will use the refund to pay off existing bills, not to buy new stuff. In that case, Americans' personal balance sheets will improve, but the impact on the economy will be muffled.

-- Andre Weltman (aweltman@state.pa.us), July 24, 2001

Answers

Shocks of shocks....two months ago my money market interest rate was 4.87. When I opened my last statement last week I almost fell out of my chair....it was down to 3.40. This is having an enormous effect on me.

-- R2D2 (r2d2@earthend.net), July 24, 2001.

Now I feel a lot better. Mine was a whopping 3.69.

-- Martin Thompson (mthom1927@aol.com), July 24, 2001.

This is a good post. It gives you an entirely new way of looking at things. I am suffering from the ravages of short-term interest rate decay too. A month ago my statement read 4.12. The new statement I received today was down to 3.52, quite a difference. This sort of thing can only suffocate buying power all the way around.

-- Loner (loner@bigfoot.com), July 24, 2001.

Its a double edged sword. Most everybody that has refinanced has done so. Mortgage rates have not dropped and they were at there ebb last winter. So only the financial institutions are profiting from the lower interest rates at this point. It sort of helps them with all the defaults on the junk bonds and the growing number of bankruptcies. Lower interest rates help keep the major financial institutions healthy but it does little for the average consumer.

-- Guy Daley (guydaley1@netzero.net), July 24, 2001.

Lower interest rates help keep the major financial institutions healthy but it does little for the average consumer.

Considering that my little regional bank got gobbled up by the big fish wachovia then gulped by the monster first onion....who cares about their profits.

The free 'now' accounts are now fee'd thing. And then if someone bounces a check on you was $5 is now over $10 [~$12]. Fee, Fees, Flea, Fleas - nibbling away at you nest egg in every direction.

I'm getting a whopping 2.55%, time to find another bank.

-- (perry@ofuzzy1.com), July 24, 2001.

John Crudele writes some very interesting stuff -- and this in a major New York City daily, no less. I was quite surprised to see such "gloom and doom" material in the Post the first time I encountered his byline.

Another one to look for is Christopher Byron on MSNBC.COM.

"Reality: it's not just from us paranoid doomers."

-- Andre Weltman (aweltman@state.pa.us), July 25, 2001.

Some (alledged) expert "moron" on MSNBC yesterday was saying that Greenspan should next make one large cut to show the markets that he has "confidence" in them. The banks will clean up on this, while the little guy (especially retirees) will get killed if this happens. Mortgage and credit card rates will not fall.

-- K (infosurf@yahoo.com), July 25, 2001.