How Retirees Saved the Banks

How Retirees Saved The Banks

Originally Posted At nytimes.com
January 18, 2010

If you’re a retiree who relies on interest income, you know that the tap is running dry. In fact, many investors in certificates of deposits, savings accounts and money market accounts are losing money once taxes and inflation are subtracted from today’s extremely low yields.

Less well known is that measly savings yields are central to the government effort to buy time for the banks to earn their way back to health. It is important to rebuild the banks. But more attention must be paid to the collateral damage from that effort.

Here’s what’s happening: By lowering the short-term interest rate it controls to virtually zero and creating lending programs, the Federal Reserve has enabled banks to borrow cheaply. The banks re-lend that cheap money, but not necessarily to consumers and businesses. They can, for example, lend it to back to the federal government by buying Treasury securities, and earn a nice spread between their cost of funds and Treasury yields.

At the same time, banks are awash in deposits, much of it from investors who have pulled their money out of riskier investments. With money rolling in, big banks don’t need to compete with one another for savers, which further depresses the interest on offer.

The result is presumably healthier banks and certainly poorer savers. Or, as William Gross, the legendary bond investor told The Times’s Stephanie Strom: “It’s capitalism, I guess, but it’s not to be applauded.”

The situation is especially tough on retirees who depend on interest income to supplement their Social Security. Some will have to spend their capital to make ends meet. Some will probably take on more risk by investing in stocks or bonds, or will have to live on less. Some, as Ms. Strom reported, have taken out reverse mortgages to increase their income — another example of how Americans’ wealth is being sapped. Reverse mortgages allow people who are 62 and older to convert the equity in their homes into cash, with the loans usually repaid by selling the house after the owner dies.

Regulators have put safeguards in place to combat abusive lending on government-insured reverse mortgages, about 90 percent of the market. (They include prohibitions on cross-selling, whereby a lender urges borrowers to use the money from the mortgage to buy other investments from the lender.) Given the nation’s recent experiences — and the vulnerability of many elderly people — regulators will have to be vigilant.

The effect of the financial crisis on retirees — and planning for retirement — has been largely overlooked. It deserves a high place on policy makers’ agendas.

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