Tue October 2, 2012
Can Saving Money Cost Money?
Originally published on Wed October 3, 2012 8:55 am
CELESTE HEADLEE, HOST:
I'm Celeste Headlee and this is TELL ME MORE from NPR News. Coming up, style maven Stacy London tells us about the psychology of fashion and what messages you're sending with your choice of clothing. That's in a few minutes.
But first, I'm sure that, at some point in your life, someone advised you to save money for a rainy day. Well, it turns out, that's not great advice, at least if your money is stashed in a savings account. In his recent article, "A Lost Decade For Savers," Roben Farzad lays out why America's historically low interest rates are eating away at the wealth of millions of Americans. And Roben Farzad joins us now to tell us more about it. Welcome.
ROBEN FARZAD: Pleasure to be with you.
HEADLEE: And I'm told you actually got the inspiration for this article because of your own personal experience. What happened?
FARZAD: Yes. When we came to this country 33 years ago, I just remember, as a young kid, my father always aspiring to open up a savings account for me, and he was so proud. I think I was in the first grade when he finally gave me my little passbook savings book. And the lesson was to save money, to put it away, to aspire to have money for college, to be self-sufficient, to not take on debt, to not be profligate.
And, three decades later, I'm a financial journalist and I always hear from my parents, who are approaching retirement, about how little they get from their savings accounts. And, Roben, what's wrong? What did we do wrong? And it kind of turns the lesson on its head and I figured I have to pen something on it.
HEADLEE: And, in fact, you say some people are actually losing money at this point by putting it in these savings accounts. It seems counterintuitive, but how does it work?
FARZAD: Think about it. If you are walking down the street and you see a CitiBank poster and it says something to the effect of, you know, a two, three year CD at a half a percent, they think they're doing you a favor, but in fact, after taxes and inflation, which is running at something closer to one and a half or two, two and a half percent, you're losing money on a half a percent because the Federal Reserve - let's not forget - since December of 2008, has been at zero interest rate policy and, with that not being enough by itself, when they realized they were kind of pushing on a string, the Bernanke Fed has gone out and bought trillions of bonds in order to press down rates even further.
So they're beneficiaries and they're obviously losers - those who are sitting on cash and seeing trickle of money coming in every month.
HEADLEE: If you're just joining us, this is TELL ME MORE from NPR News. I'm speaking with Roben Farzad. We're talking about his recent article for Bloomberg Businessweek called "A Lost Decade For Savers."
You know, Roben, we've all heard economists say that Americans weren't saving enough money in the early 2000s and then the low savings versus debt ratio helped contribute to the economic collapse, so what kind of danger is there now if we're discouraging people from saving?
FARZAD: Well, it's kind of a Janus-faced message from the financial system. If you were to talk to Timothy Geithner at Treasury, if you were to talk to Ben Bernanke, of course, they would extol the merits of saving and, of course, they'd say we had many subprime lessons to learn, that it wasn't right to overextend yourself. It wasn't right to lie on your mortgage application, but at the same time, the system - the federal government is overwhelmingly invested in low interest rates. You see it with Ben Bernanke and what was called QE3 a couple of weeks ago, when he's coming out...
HEADLEE: Quantitative Easing. Right?
FARZAD: Quantitative Easing, Part Three, where...
FARZAD: It's kind of a third helping of pushing down rates even more and you have to wonder. I just wish a congressman or senator, the next time he testifies, would come out and say, what about - Mr. Bernanke, would you shed a tear for people who are being asked, I guess, in reverse Robin Hood fashion to take less on their savings so the banks can have more, so mortgage owners can have more, so corporations can lend money at lower rates? It's kind of perverse.
HEADLEE: So you're saying that the Fed Reserve should stop suppressing interest rates. Is that what you're saying?
FARZAD: There is an argument out there and, you know, you have to take it at face value that the Fed should keep rates at some sort of premium of inflation right now. They're well below the rate of inflation, so if you're sitting on cash, you're losing money in real terms. But the obverse of that - the flipside of that is, if you're someone who's eligible for a 30-year mortgage at three and a half percent - gosh, have at it. If you're a corporation that can loan money over 30 years at less than two percent, have at it.
If you're Uncle Sam himself and you have a net interest rate today of 2.1 percent, whereas in previous decades, it was closer to 7 or 8 percent, I mean, you're loving life right now because it covers your sins. But let's not forget about the tens of millions of Americans who are being asked to kind of shoulder this cost to pick up this tab.
HEADLEE: Well, let's talk about those tens of millions of Americans. I'm not Ben Bernanke. I can't do anything about the interest rates. I'm also not the CEO of Bank of America, last I checked. So, if I want somewhere to put my money, what do I do with it?
FARZAD: You have very few options right now if you want principle protection. There's been a huge run in - a huge rally in bonds, even after we had our credit rating downgraded last year. When the world is scared, it pours money into American U.S. Treasury bonds and that pushes the rate down, further hurting savers.
You could have been lucky at the beginning of this crisis and decided that this was a time to allocate money strategically to stocks and to bonds; to take money out of savings and position it somewhere. But, if you're someone who couldn't have afforded to do that, if you're kind of day-to-day, if you're trying to bridge the gap two or three years to retirement or two or three years to college spending, you're kind of out of luck.
HEADLEE: But you're not saying that our best alternative is to stow it in our mattresses?
FARZAD: No. But you're really not really getting all that much more in keeping it in a bank. In true inflation adjusted terms, you're losing money. If you don't pay attention to inflation, of course, the balance that you see in the bank - you're thinking about return of capital, not return on capital.
But the longer this persists - and let's not forget, this has been going on for the better part of five years and the Federal Reserve has promised to keep rates this low at least until 2015 - you take a long-term hit when you calculate how many hundreds - how many thousands of dollars you've lost over the course of a decade.
HEADLEE: But our lesson as a nation from all of this, Roben?
FARZAD: Savers, unfortunately, are not first class or first priority in the eyes of the Federal Reserve and in the eyes of the Treasury. The favor right now is overwhelmingly being given to spenders, overwhelmingly being given to those who could participate in the stock market, which has doubled in three and a half years. Overwhelmingly to homeowners, to corporations. And that's just the nature of the beast and it just teaches you that it doesn't pay - ultimately, Dad, I'm sorry to tell you this - to keep all of your money in cash in the bank.
HEADLEE: It also teaches me that every time I talk to a financial journalist, I feel more depressed and, when the conversation's over, than when I started it. Nothing against you personally, though, Roben.
FARZAD: I'm so sorry. Next time, I will bring...
HEADLEE: Next time, let's talk about sports.
FARZAD: I will - I'll treat you to the Zoloft. Thank you.
HEADLEE: Roben Farzad, contributing writer for Bloomberg Businessweek. He joined us from member station WCBE in Richmond, Virginia. Thanks for joining us, Roben.
FARZAD: My pleasure. Thank you.
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