About ten years ago, my savings account basically stopped paying interest. The rate of about two percent fell to something like one-tenth of one percent in 2002. Over the last ten years, people just seemed to forget the way things used to work – banks are supposed to pay you for placing your money into a bank account.
Well, as you may have known, Bank of America has raised an uproar by announcing their intent to charge a $5.00 per month fee for their customers who use debit cards to make purchases. Other banks are expected to follow suit. This uproar has taken the tone of anti-corporate class warfare: the â€œBigsâ€ vs. the Common Man; Banks vs. The People – whatever. The furor is missing the real point.
In the past, people deposited their money into bank accounts, and earned interest on these deposits. Or in other words, the bank paid their depositors for the privilege – THE PRIVILEGE – of having access to this capital accumulated by their depositors so that the bank could use it to issue loans. Fees were then charged based on the added services the customer wanted, from check writing to ATM cards. Free checking accounts were offered as well, free because they usually didnâ€™t pay interest.
For centuries, bank accounts were seen as safe investments – a low-risk way to accumulate money and earn a modest but reasonable rate of return. Then it was all undone, and it is not a coincidence that savings account interest dropped to negligible rates right before the economy went stark, raving mad.
Enter the Federal Reserve, with centrally-set interest rates. Interest rates are the price of money, and like all prices they are determined by supply and demand; unless a central authority fixes the price artificially – which is what the Fed did. Price controls cause shortages, and the same is true for capital.
Then there were the politicians, declaring that credit was basically a human right, and they were armed with all sorts of government mechanisms to expand credit – Fannie Mae, Freddie Mac, the FHA, and in recent years, the Department of Energy. Over the years, more and more of the capital in our economy (capital is the aggregate savings of everybody) was diverted to government-sponsored lending vehicles, providing credit for home mortgages or sweetheart loans to politically popular recipients.
The high-minded rhetoric of ownership societies and helping the poor achieve the American Dream were, in actuality, little more than government-sponsored gamblers lending to people and businesses who would have been too risky for credit in a capital market free of manipulation.
Why should a bank pay 3% interest to its depositors when the Federal Reserve Funds rate is less than .25% and the Discount window rate is at .75%? Why should banks properly screen their borrowers when they intend to sell the mortgage to government-created Fannie Mae?
In a free-market, capitalist economy people who are willing to restrain their spending are supposed to be rewarded with a reasonable rate of return. Their savings – the money they didnâ€™t spend – formed the basis of the capital market. This money was made available by the banks to fund sound business ventures. This is how our economy grew in the first place; bankers paid 3% interest, issued loans at 6%, and hit the golf course by 3:00PM, the 3-6-3 Rule of Banking, as the old joke goes.
But we are not a free-market economy. We are neck-deep in an economy of Keynesian stimulus – a semi-socialist, centrally-controlled monetary system where borrowing money is a social and economic right, where interest rates are set by the central bank, and where governmentâ€™s role is to expand credit to people who canâ€™t pay back loans, followed by bailouts for the investment banks who got caught holding bad investments. The interesting thing is that we adopted this unsustainable model of political economy in the years between 2001 and 2003.
Thatâ€™s right, this one isnâ€™t Barack Obamaâ€™s fault. First Alan Greenspan cut rates to 1% (and my savings account started earning dust for interest), and then George W. Bush pushed mortgage indebtedness under the guise of home ownership, all the while running huge deficits.
Iâ€™m not letting Obama or Ben Bernanke off the hook here – if you dump gasoline on a fire you are still an arsonist even if you didnâ€™t strike the match yourself. After the housing bubble burst the solutions offered by our new duumvirate of destruction were just larger, more egregious versions of the bad policies offered by Bush and Greenspan: Even lower interest rates, even larger deficits, even more expensive medical reforms (Bushâ€™s Medicare drugs program and then Obamacare)â€¦ Obama even got us into another war in the Middle East.
Now, after so much of our aggregate capital has been wasted on mortgages that went bad, after a decade of negative savings rates, and after a decade of interest-free (and thus reward-free) bank accounts, we are told that the services of Bank of America are so valuable that we must be willing to pay up.
I think that depositing money into a bank is a service so valuable that I deserve to get paid for doing so. Instead I was charged a five dollar inactive account fee at my bank on my old savings account that was earning less than five dollars in interest per year – the accounts manager actually had the gall to lecture me about compound interest when I went to close the account.
The free market would never have set interest rates this low; in America today few people have saved, and many people want to borrow. Low supply and high demand – interest rates should actually be rather high.
Since the days of the moneylenders on the Florentine benches (the word â€œbankâ€ comes from the Italian word for â€œbenchâ€) savers have been rewarded with reasonable interest. Under-consumption created savings and capital, and it was considered a virtue. With a pedigree that long, perhaps old-fashioned interest rates are worth a second look. Until then, I think I will just skip the debit card and make my purchases with cash.