Fed Continues to Discourage Regular Joe Americans from Saving

While paging through the local paper yesterday, I spotted a bank ad touting a 48 month Certificate of Deposit for 3.5% APY. The barely legible print at the bottom of the ad said that the CD requires a $10,000 minimum of new money to the bank. Wow, I bet people will be standing in line for the bank to open this morning.

What was featured much more prominently in the ad is that this bank is a proud sponsor of "America Saves Week." According to its website, "America Saves is a national campaign involving more than 1,000 non-profit, government and corporate groups that encourages individuals and families to save and build personal wealth." The organization's National Advisory Committee consists of government agencies that do their best to discourage and erode savings: the Federal Reserve Board, Internal Revenue Service [IRS], and the Department of the Treasury.

The IRS and the Treasury are directed to carry out their duties through acts of Congress. It is the tax code that has turned the U.S. into a primarily consumer driven economy that encourages borrowing and spending rather than saving. Interest income is taxed because the government has brainwashed the public that only "the rich" have interest income. Tell that to millions of senior citizens and every other person who wants to save. (The least the government could do would be to only tax interest income on individuals whose income is at least $100,000 a year.) Instead of spending money on sorely needed infrastructure projects that create jobs and help state and local economies, the government's solution was to pass a $168 billion stimulus package, encouraging the public to spend their forthcoming rebate check on consumer discretionary items.

The Federal Reserve's monetary policy has done everything possible to discourage saving. First it was through keeping interest rates too low for too long. Besides causing the housing and credit bubbles, it encouraged people and institutions such as insurance companies and pension funds, to invest in risky securities to obtain a higher yield. The dual mandate enacted by Congress in 1978 has done nothing to increase the Fed's focus on savings. The only group helped by the FOMC's accommodative policy is the banks; low rates widen the yield spread between the interest banks pay to savers and the rate banks charge borrowers. As financial companies have tightened their lending standards, borrowers are not benefiting from lower interest rates.

The FOMC has chosen to ignore ever rising inflation that not only makes saving harder, but further erodes it. When people have to pay so much for the necessities of daily living (including taxes of all stripes), all the education in the world will not turn the national savings rate around.

Comments

[Henri in Sc...:]

If one considers the real inflation, (not the phony value you hear in the news but the one that reflects the huge increases to heat you home, fuel your car, and feed your family) and the tax the IRS puts on the interest you get That wonderful CD is actually loosing money. Far better to go out and spend and stock up on what you don't need now but will in the future when prices will be higer because of these policies and this type of rational (for you) policy.

2008 Feb 26 11:44 AM

[Stevo:]

Here here!! It is such a shame that working people have supported
the Republican agenda to their own detriment...It is time to give
regular people some perks...ie no income tax on interest if you
make less than 100k.

2008 Feb 26 11:49 AM

[BxCap:]

Imagine actually spending the $168 Billion on infrastructure? You would re-vitalize American construction, equipment, and engineering companies, provide jobs for people that invested great sums of money in their own education, and employment for those that work the trades. They would all share an interesting characteristic. They would all be, gulp, American.

Instead, as you pointed out, we are encouraged to buy foreign made consumables, vice save, in order to stimulate a financial system that should be allowed collapse under the weight of the pyramid of CDO's, CDS, ABS, and (insert favorite acronym here).

2008 Feb 26 11:54 AM

[2020:]

This author has nailed it exactly.

2008 Feb 26 12:52 PM

[User 156255:]

It's a very sad commentary.
Imagine if instead of squandering one trilloin dollars in a mistaken war, we built up our infrastructure. We could again lead the world.

2008 Feb 26 12:56 PM

[User 142738:]

So, you based your opinion on savings rates by looking at one CD rate from one bank you found in the paper?

Wow. You really did your homework.

2008 Feb 26 01:36 PM

[slickchit:]

But they Might have found water on Mars, This means will have pleanty
of water to Drink Soon!!!

2008 Feb 26 02:14 PM

[Peacemongerer:]

The perpetual war-welfare state that is America is starting to crumble. Instead of investing in our infrastructure, we invest in war.

Oil is the lifeblood of the American economy and our reliance on cars and trucks will be threatened by its depletion. The inflationary policies of Congress and and the Fed will drive costs ever-higher.

What do you buy after you've (tried to) fulfill the American dream?

The consumer is dead.

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
Thomas Jefferson

2008 Feb 26 02:33 PM

[vodka_tonic:]

excellent article. infrastructure spending is key. it's so sad, i immigrated from india and it's booming, maybe i will have to de-immigrate (is that a word?).
lol.

2008 Feb 26 06:03 PM

[citetez:]

The truth is that the whole system is staked against savings. We hear that the US at all levels has to increase its savings rate, then we have an "estate tax" which penalizes you for saving. Proponents say it hits only the "rich", but unfortunately that is untrue. The rich know how to struture thier holdings in Trusts, family LPs and the like to legally avoid most of the estate tax bite. THe ones who get hit are the small farm and business owners, or those who, between their homes appreciation and life insurance proceeds never realized that they were "rich" enough to need tax planning. The rich escape the tax; middle to upper middle class taxpayers get crunched.

2008 Feb 27 12:15 AM