"Experts say risk-averse investors are effectively financing a second bailout of banks.."

[girl gone mad]

This is an issue I believe warrants more attention and debate. Is it good policy to pass much of the costs of recapitalizing our "too big to fail" zombie banks onto seniors, many of whom can least afford the loss of income? Is it smart for the government to be promoting speculative investment strategies via ZIRP? This looks to be another case of voodoo economics in play.

From the New York Times, http://www.nytimes.com/2009/12/26/your-money/26rates.html?_r=1">At Tiny Rates, Saving Money Costs Investors:

Millions of Americans are paying a high price for a safe place to put their money: extremely low interest rates on savings accounts and certificates of deposit.

The elderly and others on fixed incomes have been especially hard hit. Many have seen returns on savings, C.D.’s and government bonds drop to niggling amounts recently, often costing them money once inflation, fees and taxes are considered.

(snip)

Indeed, after fees are subtracted, inflation is accounted for and taxes are paid, many investors in C.D.’s, government bonds and savings and money market accounts are losing money. In fact, Northern Trust waived some $8 million in fees on money market accounts because they would have wiped out all interest, and then some.

“The unemployment situation and the general downturn in the economy had an impact, but what’s going to happen now as C.D.’s mature is that retirees and the elderly are going to take anywhere from a half to three-quarters of a percent cut in their incomes,” said Joe Parks, a retired accountant in Houston on the advisory board of Better Investing, an organization that works to help people become savvier investors. “It’s a real problem.”

Experts say risk-averse investors are effectively financing a second bailout of financial institutions, many of which have also raised fees and interest rates on credit cards.

“What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco. “It’s capitalism, I guess, but it’s not to be applauded.”

Many think the Federal Reserve is fueling a stock market bubble by keeping rates so low that investors decide to bet on stocks instead. Mr. Parks of Better Investing moved more money into the stock market early this year, when C.D.’s he held began maturing and he could not nearly recover the income they had generated by rolling them over.

[aquart]

1. When do we get OUR bonuses?

[Goldstein1984]

2. Divest from banks people!!

Pull your money out of banks and move it to credit unions!

[dkf]

3. Is the NYT trying to influence these people to go into the stock market NOW?

They could have written this article ages ago. I'm suspicious on the timing.

[pa28]

4. The fed can't make a public service announcement telling people to get out of cash.

It seems like they've done everything short of it though. Bernanke, as we've seen, is a Taylor rule adherent which would mean he'd like to see discount rates in negative territory. Since negative rates or actual taxes on cash is not an option for him he would like to make to make it as difficult as possible on savers and force them to get their cash working.

Whoever chronicles this mess in the end will likely say Bernanke's strategy worked and we really did have negative rates in practice. Those who sat on cash will lose but they did their charitable duty by helping re-capitalize banks . . . a job the government was doing anyway by any means available both under and over the table.

[wuvuj]

5. Inflation...not deflation?

No CD gains...and no COLA?

.......................................

http://www.uncommonwisdomdaily.com/some-pretty-amazing-stats-4-7996


In the 24 month period since then, a time when deflation was supposedly striking everywhere …

Food and beverage prices increased an average of 5.6%

Cereal and bakery prices jumped 11.5%

Sugar and sweets prices, up 11.8%

Cooking oils, up 11.6%

Meanwhile …

The cost of medical care increased an average of 6.7%

Medical care services, up 7.1%

Hospital services, up 14.0%

The cost of education (tuition) at private schools jumped 10.7%

Educational books and supplies, up 14.9%

About the only sector of the economy where prices either fell or rose modestly is, not surprisingly, housing, where the overall cost of providing shelter for a family rose a meager 2.4%. But even that is a far cry from the deflation everyone is talking about in housing.

The seeds of inflation have not only been sown, they've been sprouting since the financial crisis began.

The seeds of inflation have not only been sown, they’ve been sprouting since the financial crisis began.

So what does all this mean? As I said earlier, considering that these figures cover a 24-month period where deflation was supposedly striking every sector of the economy, it means inflation is not dead. In fact, it’s not even close to dead.

It’s merely hibernating for a bit, waiting to bust wide open.

I believe 2010 will be the year where most are shocked at how much inflation takes off.

[snot]

6. As one who was about to retire but lost 25% in last fall's crash,

I assure you I'm only too aware of the damage inflation's doing and will do to my savings.

What I still had in stocks, I got out as soon as the market had reached 1/3 of its recovery to date. Obviously, that was too soon; but I remain convinced that the stock market is in a bubble and could easily crash again. I certainly don't want to buy in NOW.

I've worked hard all my life, stayed out of debt, saved, never taken a dime in unemployment, etc., and I now face old age in much-reduced circumstances.

I feel looted and kicked to the curb.

[OllieLotte]

7. I don't think the real pain has started. Inflation hasn't really started.

In my lifetime, quality bonds have always been the safest play. In fact, during this latest meltdown, I was kicking myself for owning too much in stocks. However, the landscape has changed. The government is running up huge deficits and printing too much money. In the past where I thought that bonds were the safe play, I no longer feel that way and am attempting to find other areas to fill the the void.

[wuvuj]

9. There are a few consistant lower volatility...

...managed bond and other type funds out there...just need to look real hard.

[truedelphi]

11. I think your thinking is sound.

But since our Federal Government always promotes bubbles, the thing to do is to figure out when this current bubble will burst.

Could be this year, or several years from now...

That is the problem in a nutshell.

[wuvuj]

8. Who's getting shafted here?

http://www.informationclearinghouse.info/article24295.htm


Quantitative easing (QE) is another Fed boondoggle. The program has been hyped as a way to get the banks to increase lending to businesses and consumers by creating over $1 trillion of excess bank reserves. But instead of increasing lending, QE does the exact opposite; it creates generous incentives for not lending. The banks who qualify have been taking the Fed's zero-rate reserves and exchanging them for safe, 10-year Treasury bonds which yield 3.5%. What a deal! Fed chairman Ben Bernanke has promised to maintain this policy for "an extended period" which means the banks will continue to reap the benefits of this stealth bailout for the foreseeable future.

This is the real reason the banks aren't lending, because the Fed is paying them not to. It's not a matter of creditworthy applicants. It's a matter of hopelessly mangled monetary policy. The ongoing credit contraction can be blamed on one man alone; Ben Bernanke.

[sendero]

10. I would rather put my cash...

.. in a mattress than put it in this phony, rigged and doomed to crash stock market.

I'm getting screwed out of interest, yes - but I don't have to worry about when the puppetmasters decide that they have milked every last dollar out of the 401K rubes' pockets and time to short and let it crash.