Friday, September 16, 2011

Feds' zero interest rates burn savers

KANSAS CITY, Mo. — 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, Mo., 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.

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 have 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.

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 jolts — the 1987 stock market crash, the Asian contagion, the Sept. 11 terrorist attacks.

Typically, the Fed brought rates back up quickly as conditions improved. That didn’t happen the last two times the Fed slashed rates. Greenspan’s Fed held its benchmark rate below2 percent for 2½ years. Current Chairman Ben Bernanke’s Fed has held it near zero 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.

Some retirees are moving their bank savings into stocks.

Wilson, who taught 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 is 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.”

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, Kan., 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.

Consumers with older certificates of deposit may have decent rates, but those are maturing soon in many cases.

Now that business owner Wininger’s older CDs are coming due, he is having trouble finding 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.

Wininger is rethinking his retirement plan partly because of something he heard on a news program on TV. 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.