Savers get burned by Fed’s zero interest rate policy

Sep. 05, 2011
Savers get burned by Fed’s zero interest rate policy
By MARK DAVIS
The Kansas City Star

Rock-bottom interest rates shored up banks, turned around the stock market and steadied the economy. They also put 82-year-old Wayne Wagner behind a lawn mower.

Wagner, a retired engineer, mows and sprays for weeds at an Independence fourplex he rents out to make ends meet. He bought the property two years ago when the interest rates on his savings dropped so low he couldn’t get by.

Instead of collecting interest, Wagner now collects rent, fills vacancies and spends more time figuring out his taxes and the other paperwork that comes from being a landlord.

“I should be fishing more,” Wagner said.

Savers of all stripes have had to make other plans since the Federal Reserve embarked on its zero interest rate policy more than two years ago. They have little tolerance for the gyrations of the stock market, choosing instead to save through federally insured bank accounts and government-backed bonds. And that has meant less and less income as rates tumbled.

Then, at its early August meeting, the Fed vowed to keep rates this low at least through mid-2013.

Two more years of scant income for those who’ve lost work and had to turn to their savings unexpectedly. Two more years of pressure to take on more risk for little reward that can be passed on to the newest generation. Two more years to worry whether gasoline or food prices will finally outstrip fixed incomes in retirement.

“It certainly is hurting anybody who was responsible, that saved. And it’s certainly hurting seniors who may be relying more on the interest to live on than me,” said Dave Wininger, a business owner who has staked his retirement plan on savings.

Pain but no gain

Savers have gotten used to seeing their interest earnings dry up periodically.

Under then-Chairman Alan Greenspan, the Federal Reserve repeatedly drove down interest rates to offset some jolt — the 1987 stock market crash, the Asian contagion, the Sept. 11 terrorist attacks.

Typically, the Fed brought rates back up quickly as conditions improved, and savers again were paid for their thrift.

That hasn’t happened the last two times the Fed slashed rates.

Greenspan’s Fed held its benchmark rate below 2 percent for two and a half years. Current Chairman Ben Bernanke’s Fed has held it near zero for just as long.

And the Fed’s vow last month to keep rates low has only added to the anxieties of just about anyone who prefers the safety of earning income from certificates of deposit, money market accounts and other safe, fixed-income investments.

And for what?

“I don’t see how it’s helping anybody with the rates down,” said Billie Wilson, a 78-year-old retired teacher hoping to leave money to a collection of great-great nieces and nephews. “Maybe I don’t know enough about the economy. All I know about is my own economy.”

Those who know plenty about economics can’t agree whether super-low interest rates should continue. Three members of the Fed’s powerful committee voted against making the promise Aug. 9 to keep rates down through mid-2013.

Tom Hoenig, president of the Federal Reserve Bank of Kansas City, has argued that capital markets don’t function well at zero percent interest rates. How, for example, can a business weigh risky expansion and hiring plans when the price it pays for capital is being artificially held down by the Fed?

Others count hundreds of billions of dollars in lost interest income that could have been plowed into the economy, or at least used to bolster consumers’ confidence about their future.

The debate could come to a head later this month. The Fed has expanded its scheduled Sept. 20 policy session into a two-day affair. Bernanke said the extra time was needed for “a fuller discussion” of the Fed’s next steps.

Raid the nest

At 51, Michael Vincent Utter tends to about 60 hens on a farm near Breckenridge, Mo. But there’s no money in eggs. And now there is less money in Utter’s nest egg.

A heart attack ended his labors in stone masonry. It didn’t help that disability struck about the same time interest rates tanked.

Just when he needed his interest income most, Utter’s savings are producing little. One of his accounts, for example, generated $4.11 in interest.

“We were sinking. We were using all of our savings up,” he said.

Utter had put his money mostly in federally insured banks. He’d rejected his father’s repeated advice to invest in stocks. Too risky.

The Federal Reserve’s policy of denying interest earnings on the safest investments, such as CDs and government securities, is intended partly to entice more money into riskier ones, such as stocks or real estate, to drive up their prices.

“That’s madness in my opinion,” Utter said. “I say that’s the problem. We have to go to the stock market to get it. We should be able to go buy a CD in a bank, save our money responsibly and make our purchases when we need to.”

After two years of digging into savings, Utter finally qualified for Social Security disability benefits. Those checks and his wife’s job should allow the couple to get by.

“I’m not draining my savings any more,” Utter said.He doesn’t expect the Fed to raise interest rates soon because that would drive up the cost of the debt burdens on the federal government and overstretched consumers.

“We got a situation that rewards the borrower and penalizes the savers,” Utter complained.

Free money

Some retirees are moving their bank savings into stocks.

Wilson, who taught at William Chrisman High School for more than 40 years, said she’s hunting stocks because she doesn’t want to let banks use her money practically for free.

“I’m just tired of the low CD thing,” Wilson said.

Some economists blame low interest rates on banks’ apparent unwillingness to lend money to businesses and consumers. They argue that banks can get plenty of deposits at extremely low rates and make risk-free money buying safe government bonds that pay a bit more.

Wilson’s taking her money out of banks because she figures she can afford to do it. She’s targeting college expenses for her seven great-great nieces and nephews, who range from a first-grader to a high school freshman.

But Wilson’s not happy about having to shuffle out of safety to do it.

“I want to help the family in the future. It makes me, I guess, mad that I can’t get anything done for them,” Wilson said. “I don’t understand the Fed anymore.”

Inflation protection

Dennis Maloney retired with a good pension after years flying for Trans World Airlines.

By itself, the pension covered his living expenses and child support he paid at the time. Maloney wasn’t eligible for Social Security yet.

But that was 1987. What had been plenty to live on is now just enough.

“I’m spending every penny of my Social Security and my pension to live, just from everyday expenses,” the 76-year-old Prairie Village resident said.

Those include a $332 electric bill followed by a $405 electric bill, the most Maloney remembers paying in the house where he’s lived for 33 years. He’s seen higher food prices and gasoline prices.

“My cost of living went up a lot,” he said.

Maloney said he’s now counting on earnings from his savings to cover inflation in the future. And that has meant getting out of low-paying bank accounts.

Maloney’s not willing to take on stocks, real estate or even longer-term bonds that won’t mature for five years. The economy is too volatile, he said.

His answer has been to buy short-term corporate bonds but only from solid companies, and some municipal bonds. They pay higher rates but also mean he’s taking some risk that they won’t pay off.

Rethink retirement

Wininger takes risks every day running Cody Sales & Engineering Inc., where he and four others work south of Independence Square.

Since buying the company in 1993, Wininger has had to decide how much money to sink into inventory, which boilers and parts should be on hand, whether to hire more help or replace an employee who leaves.

And he’s done well, producing a good income.

Once that money comes home with Wininger, the risk-taking is over. He has avoided the stock market, relying instead on the security of banks and the interest he earns to build a retirement. That has meant years of spending less, saving more and staying away from the interest he earned.

“All my life I scrimped. I’m frugal, and I’ve saved enough that I think I can retire,” Wininger said.

Now, however, Wininger’s older CDs that pay good rates are maturing, and there’s no place to pick up good rates again. The best he’s found is 2.79 percent, “which is still pathetic,” and that requires locking up the money for five years.

CD shopping now means more than comparing interest rates. Wininger looks at how much he’ll lose if he cashes them in early, favoring those with the lowest penalty for early withdrawal.

And, for the first time, he’s thinking about buying stocks — solid names, such as Procter & Gamble, Coca Cola Co., McDonald’s.

Wininger is rethinking his retirement plan partly because of something he heard on CNBC. It was an interview with the president of the Chicago Federal Reserve, Charles Evans. His comment was that the Fed should promise to keep interest rates this low even longer.

“At least they’ve told people so that we can plan,” Wininger said.

Few good choices
Earning more invariably means taking more risk. Here are a few ideas:

•Use certificates of deposit that take longer to mature, but be ready to accept today’s low rates for longer.

•Look for lower penalties on early withdrawal, in case rates rise and you want to move out of your low-rate CDs.

•Consider corporate bonds that mature fairly quickly, but realize that companies might default.

•Invest in stocks of companies that pay dividends and profit enough to keep paying.

•Spend less and save more to make up for lost interest earnings.

Read more: http://www.kansascity.com/2011/09/05/3123186/savers-get-burned-by-feds-zero.html#ixzz1XBhauZaj