The chastisement of the American saver – Federal Reserve offers a higher interest rate to banking reserves than too big to fail banks offer American savers.

Americans are facing a banking system that is largely designed to go against their best economic interest.  Even a decade ago people were able to find a savings account or a certificate of deposit that would keep up with the rate of inflation.  Today, most typical savings accounts at too big to fail banks offer essentially a zero percent interest rate.  Mattress savings.  And the true rate of inflation on items like food, education, and fuel is far outpacing in household gains.  This is the dilemma.  If you put your money into the banking system you will surely lose because of the erosion of money thanks to our central banking policies.  The Federal Reserve has purposely created a negative interest environment to get people to spend again and restart the economy.  The unfortunate point is that banks have plenty of excess reserves thanks to trillions of dollars in bailouts yet fail to lend it out largely because the public is seeing household incomes shrink.  The last decade growth was largely debt based.  The banking system essentially is punishing the American saver with whatever little amount they try to sock away.

Money market rates trickle lower

Some of the higher yielding savings accounts come in the form of money market funds.  Yet even this category has gotten slammed in the last few years:

mma rates

The typical money market account is down over 80 percent since 2006.  It isn’t like inflation has suddenly disappeared or that our debt problems have gone away like dust in the wind.  To the contrary the economy has gotten much more mired in a stagnating funk.

Many of the bailouts were designed to fix the toxic balance sheets of the perpetually dysfunctional banking system.  The guise was always to help the middle class American but the results are rather obvious as the middle class gets more and more pushed to the side and corned into a life of debt serfdom.  Banks have plenty of money to deploy if they saw fit thanks to these bailouts:

excess reserves

These excess reserves, roughly $1.6 trillion are readily available to lend out to the American public.  So are the too big to fail reluctant to lend?  First, their balance sheets are mired with toxic loans in residential and commercial real estate.  Banks realize that they will be eating into this capital as the years go by and they realize their losses if they only followed basic accounting standards which 90 percent of Americans have to adhere to.  Also, these reserves earn banks an interest rate, even a higher rate than they pay out to their poor customers with weak savings accounts.  The incentive is largely to hoard and pursue a clandestine bailout.  While people get their attention diverted to a few million dollars here and there, the true robbery is here with trillions of dollars deployed to the financial system.

The pangs of unemployment

While talk of a recovery is largely tied to Wall Street gains, on the ground the sentiment is anything but:

median duration unemployment

The median duration of unemployment is the highest it has been since records started being kept in the 1960s.  The current median duration is twice as high as the painful recessions brought on during the early 1980s.  Much of this has to do with a disappearing middle class and the growing inequities in our system.  In previous recessions jobs were temporarily lost but many people were able to get back on track once the recovery picked up steam and momentum.  Today, most of the recovery gains have gone to the top one percent and an outsized amount has gone to the glorified gamblers on Wall Street who have turned our economy into a casino.

I stumbled upon this chart which boarders on the absurd regarding banking derivatives:

us bank derivative exposure

Source:  Htnarea

The biggest U.S. banks have some $231 trillion in derivative exposure as of December of 2010.  This market is a black hole and is like the Wild West of trading.  Global GDP is roughly $58 trillion!  These kind of absurd bets, many that do cancel each other out, largely show how out of control and leveraged our financial system has become.  When you have people on Wall Street day trading and speculating making half a million dollars a year in their twenties betting on people being foreclosed on, you need to ask yourself what is the true purpose of our banking system?  At the moment it is largely a theft on the American public.  The financial system’s main mission should be to allocate capital to areas of greatest growth in the real world economy.  Yet these derivative markets are based on non-realistic side bets.  One issue with subprime mortgages for example wasn’t necessarily the bad mortgages.  That is an easy issue to resolve.  Debt goes bad, bank takes home back.  Yet what caused systemic risk were the multiple bets on top of the principal loan amount that caused system wide problems.

People trying to save what they can

Since the recession hit people have been trying to save what they can:

personal savings rate

Yet with almost no return in regular savings accounts most people are losing value on their purchasing power as each day goes by.  So they are left with an option of spending what they have or diving into the stock market casino that lives for the day trade and high frequency action.  The market is no longer about the long-term but how quickly you can rob someone and turn a quick profit on a bet or inside information based on algorithms.  Then you wonder why so many people have a distrust of the current system.

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4 Comments on this post

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  1. NOTaREALmerican said:

    Good post.

    It’s amazing how many people still can’t connect the economic situation to the actual function of “the banks”.

    I guess too many people believe “It’s a wonderful life”.

    October 17th, 2011 at 11:52 am
  2. clarence swinney said:

    You superb check me on this one for accuracy cswinney2@triad.rr.com
    9-9-9 is 18-18-18
    Total National Inocme is 12000B
    Total Consumer Spending is 10,000B
    Total Cain Taxable 22,000

    9% is $1,980B just half our budget?????

    18 18 18 ???

    please reply cswinney2@triad.rr.com

    October 18th, 2011 at 7:06 am
  3. Paul said:

    It is really ironic that the blather from the elites is that Americans have not saved enough for retirement, etc. As the article above rightly notes, both the FEd and Treasury want the saver to go into the Wall Street Casino so they can get a return that keeps up with inflation. This is insanity for retirees and will over time decrease their existing living standards. People have estimated that the normal 3% CD rates in effect prior to FED manipulation are costing retirees about $350 billion annually in lost interest. And so it goes all in the name of saving the banks.

    October 18th, 2011 at 2:44 pm
  4. keep it simple said:

    Can anyone explain how the banks create money out of thin air? How is it that we owe substance back to them from their “thin air”?

    The dollar bill just states it is FRB legal tender piece of paper, nothing more. If it is really just a ledger entry in their big corrupt system, there is absolutely nothing to pay back.

    October 22nd, 2011 at 12:08 pm

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