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A Rarely Mentioned Downside to the Financial Bailouts

Last yearCongress decided to rescue the banks and other financial companies by cutting interest rates to near zero. Making the cost of funds ridiculously low certainly ensured that lending institutions could make good interest spreads to regain profitability.
 
While this helped the banks enormously it has had a detrimental effect on the underappreciated ‘savers and investors’ of America. The conservative bank CD and Treasury- Bill buyers that felt good to have side-stepped Wall Street’s debacle have been fiscally raped regardless.
 
If Grandma and Grandpa had $1,000,000 in 5-year CDs paying 6% they were getting $60,000 in annual [simple] interest income – enough for a reasonable lifestyle. Now that their old CDs are maturing they face some horrible choices.
 
All the stimulus money and deficit spending lead logically to the expectation of much higher inflation in the years ahead. That means there is big risk in locking in long-term fixed income rates right now.
 
Even if these conservative investors are willing to bear the substantial inflation risk of a 5-year term their annual interest income will be cut by 44.33% [from $60M to $33.4M]. If they want to avoid the risk involved in locking in for 5-years and chose instead to take the safer 1-year CD they will see a 67% reduction in their annual interest income.
 
Term
Rate*
 Annual Int. on $1MM
 
3 months
1.24%
             $12,400
 
6 months
1.64%
             $16,400
 
9 months
1.59%
             $15,900
 
12 months
1.98%
             $19,800
 
18 months
2.03%
             $20,300
 
2 years
2.32%
             $23,200
 
3 years
2.71%
             $27,100
 
4 years
2.91%
             $29,100
 
5 years
3.34%
            $33,400
 
 
 
* Oct. 2, 2009 Rates from Ally Bank (a high payer by today’s standards)
Ally Bank is the new name for the bailed-out GMAC bank.
 
Keeping interest rates artificially low is severely punishing the very savers and investors we claim to want as the backbone of America.