patrick.net

What really gets my goat is that savers end up paying off the banks cyclical losses, bubble losses and generic recession losses because the Fed forces the short term interest rate down to less than 1%.

I hope y'all understand that the motivation for forcing short term interest rates low is all about increasing the profit margin for banks at your expense, and very little about "stimulating the economy".

The latter rationale is just Fed-speak, or lies as regular people would call it.

justme says

I hope y’all understand that the motivation for forcing short term interest rates low is all about increasing the profit margin for banks at your expense, and very little about “stimulating the economy”.

That's just complete horseshit. Yes, I'm sure the FED wants the banks to earn their way back to solvency and low rates help that happen. But it's not like this is the first time rates were lowered during a recessionary period. It happens EVERY time. It's always the first tool out of their bag.

Lower rates stimulate investment.

They're not.

Nomograph made a good point if you look at history.

Also, with economic growth at sub 2% (maybe sub 1%)...where's the extra 'wealth' to help pay for the interest going to come from? Theoretically, interest paid on deposits would be a function of inflation + growth. Right now, there's little to no growth (inflation...well, depends who you ask though the bank's explanation may be that is zero too).

True, in a deflationary environment, even 0% is an excellent return, because what you can buy with the cash is increasing as house prices decrease. Assuming you want to buy a house.

Health insurance, food, and energy are another matter altogether.

True, in a deflationary environment, even 0% is an excellent return, because what you can buy with the cash is increasing as house prices decrease. Assuming you want to buy a house.

Health insurance, food, and energy are another matter altogether.

If you think about it, this is the hallmarks of slowly becoming a lesser developed country.

If you visit Costa Rica or some random developing country, you can buy a house for cheap or get most services for cheap, whether it's taxi, local lawyer, or prostitute.

However, fuel and electronics still costs the same as in the US. This is because they're goods that can be imported/exported.

Health insurance is a whole different animal. That and education have ballooned in cost in recent years due to a variety of reasons (mainly being overly subsidized imo..except the subsidy isn't universally given so some groups get whacked worse than others ).

More money spent on the same quality education/health care is actually deflationary since it's less money that can be spent on other stuff.

IF we're growing slowly or actually seeing negative GDP growth, then I don't see why anyone would get better than 0% unless there's massive nominal inflation in wages. If health care/education/fuel, etc. just cost more but wages stay the same, that just reflects becoming a less well-off society without massive deflation in wages and other income.

I could have sworn there was a very creepy poster on here. Problem? Good to know problem solved.

Savers should be entitled to what the market will give them, no more, no less. The fact of the matter is, the 1% savers are being offered are a direct result of markets being manipulated by central banks. Absent a central bank, interest rates would have been significantly higher the entire decade.

As Vincent eluded to, "Cash" its self is the reward.
Cash is king, it buys more, and has more power to speak the loudest with direct authority.
Cash offers much more than Credit, 1% interest is just the start of what your Saved dollars earn. Where the real earning comes from, is the Value in the procurement that your capitol eventually achieves.
This is where SMART Money comes into play. You save up 100K only at 1% Rate over a decade. Then out of the blue an Investment (Property, Business, Drop ship investment you name it) drops in your lap. You'd only have 10,563.25 in earned interest in ten years. But you may have an opportunity to turn that 100K into 300K, just because you had cash on hand to risk. That 10K was just extra gravy, one might use to acquire a 1954 Stratacaster, to celebrate their 200K earnings.

Modern ecconomics is "Why conserve water when you're swimming in it?" With out considering Lakes and Riverbeds dry up eventually.

Cash and easy access to it, needs no further introduction. That's for sure.

Interest in a bank account is never negative.

Interest in a bank account is never negative.
Not yet... How much would you pay for a service that safeguards your money (versus the mattress which is susceptible to theft, fire, etc.)? Don't think we haven't seen everything yet in Deflation Nation.

Tenouncetrout says

As Vincent eluded to, “Cash” its self is the reward.

Cash is king, it buys more, and has more power to speak the loudest with direct authority.

Cash offers much more than Credit, 1% interest is just the start of what your Saved dollars earn. Where the real earning comes from, is the Value in the procurement that your capitol eventually achieves.

This is where SMART Money comes into play. You save up 100K only at 1% Rate over a decade. Then out of the blue an Investment (Property, Business, Drop ship investment you name it) drops in your lap. You’d only have 10,563.25 in earned interest in ten years. But you may have an opportunity to turn that 100K into 300K, just because you had cash on hand to risk. That 10K was just extra gravy, one might use to acquire a 1954 Stratacaster, to celebrate their 200K earnings.
Modern ecconomics is “Why conserve water when you’re swimming in it?” With out considering Lakes and Riverbeds dry up eventually.
Cash and easy access to it, needs no further introduction. That’s for sure.
Interest in a bank account is never negative.

Exactly. Sometime ago I tried to buy shoelaces for $2.19 using credit card. But the credit card machine was broken. So I paid $2.00 cash instead.

tatupu70 says

That’s just complete horseshit.

This thread just woke up from the dead, and I saw some horseshit.

tatupu70 says

Yes, I’m sure the FED wants the banks to earn their way back to solvency and low rates help that happen.

Ok, so we agree on that one.

tatupu70 says

But it’s not like this is the first time rates were lowered during a recessionary period. It happens EVERY time. It’s always the first tool out of their bag.

I agree, it happens EVERY time. That's what I said, too (every time there is a cyclical loss banks are allowed to earn themself out of the hole more quickly at the expense of savers, by means of the Fed lowering the depositor interest rate).

tatupu70 says

Lower rates stimulate investment.

How is that working for you? From what I can see, banks are currently afraid to lend out money and people are afraid to borrow. There is a credit contraction.

For the most part, reducing the deposit interest rate has not stimulated anything. All it has done is to increase the profit margin for banks, and not just on those sparse new loans, either.

Nearly all the real stimulus has come from public spending coupled with QE1 and QE2. The later is where the Fed takes the steps that individual banks dare not do, and for good reasons.

So, yeah, I stand by my claim the forcing down depositor interest rates is done for the benefit of the banks more than the benefit of the people and the economy. You don't have to agree, but keep in mind that as in so many aspects of political life, the stated reason is not the same as the REAL reason something is done.

Oh, yeah. "The Free market". Quite a choice the savers have there, is it not.

tatupu70 says

Lower rates stimulate investment.

Artificially lower rates stimulate bad investment. They encourage people to take risks they wouldn't normally take. If low rates were such a good thing, we would have lowered them to zero in 1933 and kept them there forever.

justme says

How is that working for you? From what I can see, banks are currently afraid to lend out money and people are afraid to borrow

Investment isn't mortgages... The goal is to make borrowing cheaper for companies so they can increase capital budgets, etc.

justme says

So, yeah, I stand by my claim the forcing down depositor interest rates is done for the benefit of the banks more than the benefit of the people and the economy. You don’t have to agree, but keep in mind that as in so many aspects of political life, the stated reason is not the same as the REAL reason something is done.

Fair enough. I tend not to believe conspiracy theories and still don't see how banks really gain from low rates. Theoretically they make the same spread whether the rate is 1% or 10%. Does anyone have data showing that banks make more when rates are low?

theoakman says

Artificially lower rates stimulate bad investment. They encourage people to take risks they wouldn’t normally take. If low rates were such a good thing, we would have lowered them to zero in 1933 and kept them there forever.

Wrong. Lower interest rates stimulate more investment. Some will be good, some will be bad. The bar is lowered so some riskier projects will be started, no doubt.

The FED has a goal of low inflation (2-3%/year I believe). If rates were always low, then we'd have inflation at levels higher than the FED wants.

tatupu70 says

theoakman says

Artificially lower rates stimulate bad investment. They encourage people to take risks they wouldn’t normally take. If low rates were such a good thing, we would have lowered them to zero in 1933 and kept them there forever.

Wrong. Lower interest rates stimulate more investment. Some will be good, some will be bad. The bar is lowered so some riskier projects will be started, no doubt.
The FED has a goal of low inflation (2-3%/year I believe). If rates were always low, then we’d have inflation at levels higher than the FED wants.

The Fed has a goal of low inflation? That's a good one. The Fed's goal is to keep housing prices at values 100% above fair market value. Just because they say it, doesn't mean they are telling the truth.

theoakman says

tatupu70 says

theoakman says

Artificially lower rates stimulate bad investment. They encourage people to take risks they wouldn’t normally take. If low rates were such a good thing, we would have lowered them to zero in 1933 and kept them there forever.

Wrong. Lower interest rates stimulate more investment. Some will be good, some will be bad. The bar is lowered so some riskier projects will be started, no doubt.
The FED has a goal of low inflation (2-3%/year I believe). If rates were always low, then we’d have inflation at levels higher than the FED wants.

The Fed has a goal of low inflation? That’s a good one. The Fed’s goal is to keep housing prices at values 100% above fair market value. Just because they say it, doesn’t mean they are telling the truth.

Ah, another vast conspiracy theory. Maybe Mulder and Scully should audit the Fed.

tatupu,

Calling something a conspiracy theory because you want to discredit it is a cheap rhetorical trick.

The Fed exists for the benefit of the banking system, not for the benefit of the people. The sooner you realize this, the better off you will be.

justme says

tatupu,
Calling something a conspiracy theory because you want to discredit it is a cheap rhetorical trick.
The Fed exists for the benefit of the banking system, not for the benefit of the people. The sooner you realize this, the better off you will be.

OK--I don't think you're going to change my mind and I don't think I'm going to change yours. Can we agree to disagree on this one?

Nomograph says

Yep. Stocks, bonds, real estate, precious metals, etc. Those are free-market saving vehicles

I have to say that considering these investment objects to be "free market" is pure balderdash.
I'm surprised someone would even think of making such a claim.

Have you not noticed that Alan Greenspan and Ben Bernanke have spent the better part of the last 30 years manipulating the prices first in the stock market, then real-estate, then Bonds and bank stocks, and more recently commodities such as oil, metals and grains? By manipulating the interest rate in such a way that the asset prices go up, until the bubble becomes so big that it cannot be sustained?

I'm dumbfounded that anyone has any faith that there is a free market in ANYTHING, after having observed the last several years of Fed machinations.

tatupu70 says

Ah, another vast conspiracy theory. Maybe Mulder and Scully should audit the Fed.

Vast? It's pretty simple and straight forward. And it's not a conspiracy theory. Bernanke and Obama are on record dozens of times saying their goal is to stop housing prices from falling at all costs.

theoakman says

tatupu70 says

Ah, another vast conspiracy theory. Maybe Mulder and Scully should audit the Fed.

Vast? It’s pretty simple and straight forward. And it’s not a conspiracy theory. Bernanke and Obama are on record dozens of times saying their goal is to stop housing prices from falling at all costs.

First off, that's a lot different than saying their goal is to keep housing prices 100% above fair market value. Second, do you have a source for all those dozens of quotes?

tatupu70 says

theoakman says

tatupu70 says

Ah, another vast conspiracy theory. Maybe Mulder and Scully should audit the Fed.

Vast? It’s pretty simple and straight forward. And it’s not a conspiracy theory. Bernanke and Obama are on record dozens of times saying their goal is to stop housing prices from falling at all costs.

First off, that’s a lot different than saying their goal is to keep housing prices 100% above fair market value. Second, do you have a source for all those dozens of quotes?

No, it's really not any different. Second, don't be so lazy. Google it yourself.

theoakman says

No, it’s really not any different. Second, don’t be so lazy. Google it yourself

So, in other words, you don't have any sources and you were talking out of your ass. Glad we cleared that up.

tatupu70 says

theoakman says

No, it’s really not any different. Second, don’t be so lazy. Google it yourself

So, in other words, you don’t have any sources and you were talking out of your ass. Glad we cleared that up.

no, in other words you're just really lazy. Here's a hint. Go look up Obama's speech for the "2009 Homeowner Affordability and Stability Plan"

Nomograph says

theoakman says

Bernanke and Obama are on record dozens of times saying their goal is to stop housing prices from falling at all costs.

Incorrect.
They have stated that they want to stabilize the housing market, which is a *hugely* important goal for economic recovery.
They have *never* stated that they want to “stop prices from falling at all costs”, or “keep prices 100% above market value”, or other such nonsense.
Theo is just making crap up as usual. It gives him something to be angry about and someone to blame for his own shortfalls. He even blamed Jon Corzine for “destroying the pharmaceutical industry” when he wasn’t able to get a job. Grow up.

My own shortfalls? Do we need to bring up how I turned 40k into a home in 2 years again? I can pay off my mortgage in cash tomorrow if I want to. When this crisis started, circa 2007, I was a poor graduate student living below the poverty level. Now I'm 30, married, and already have my housing situation settled for good. I believe I've done pretty well for myself.

And, FYI, you seem to be the one making things up. I blamed Corzine for the budgetary and economic woes of the state of New Jersey, not my employment status. Furthermore, I have job and I love it to death. Judging from your post, you're the angry one. Not me. Grow up.

Btw, do you recommend I take profit on gold at $1400 now or should I wait for it to go to $2000?

Nomograph says

theoakman says

My own shortfalls?

Yep.
You couldn’t handle grad school, couldn’t handle a post-doc, couldn’t get a pharma job, and now teach high school (which is an honorable profession, but only requires a B.S. degree).
Now you foster conspiracy theories to explain your situation rather than face some unpleasant truths about yourself. Grow up, Theo.

Haha, I could handle a post-doc just fine. I saw an opportunity to make 3 times as much money and I took it. It paid off. You really are grasping at straws to try to make me somehow feel bad about myself. I have no difficulties in life. Life is pretty easy when you dump all your money into mining stocks and watch them soar 700%. And FYI, I'm working out a post-doc position for the summer of 2011. I'd really hate to be your child. You seem overly abusive.

OK Oak--

Since you are too lazy to back up your own words, here is the text of the speech to which you refer. Please show me the quotes you mean...

http://www.nytimes.com/2009/02/18/us/politics/18text-obama.html?_r=1&pagewanted=2

justme says

I have to say that considering these investment objects to be “free market” is pure balderdash.
I’m surprised someone would even think of making such a claim.

Have you not noticed that Alan Greenspan and Ben Bernanke have spent the better part of the last 30 years manipulating the prices first in the stock market, then real-estate, then Bonds and bank stocks, and more recently commodities such as oil, metals and grains? By manipulating the interest rate in such a way that the asset prices go up, until the bubble becomes so big that it cannot be sustained?

I’m dumbfounded that anyone has any faith that there is a free market in ANYTHING, after having observed the last several years of Fed machinations.

Sniff, Our Baby is all grown up. :(

I've been trying to explain this over the Holiday to different groups of people at various functions. They all just woosh their hand over their head, and look confused. I just say "How about that GM stock?" and walk away.

tatupu70 says

OK Oak–
Since you are too lazy to back up your own words, here is the text of the speech to which you refer. Please show me the quotes you mean…
http://www.nytimes.com/2009/02/18/us/politics/18text-obama.html?_r=1&pagewanted=2

Rofl, did you read it? If you don't draw the conclusion that his goal was to stop home prices from falling, there's no helping you.

theoakman says

Rofl, did you read it? If you don’t draw the conclusion that his goal was to stop home prices from falling, there’s no helping you.

OK--get up off the floor and follow with me. Here's what you said:

theoakman says

The Fed’s goal is to keep housing prices at values 100% above fair market value

Then you backpedaled to say:

theoakman says

Bernanke and Obama are on record dozens of times saying their goal is to stop housing prices from falling at all costs.

When asked to provide a source, you say that you are too lazy to find it but instruct me to look up a speech Obama made. When I do the work for you and post it, you still refuse to find ONE quote. Come on. You said there are DOZENS out there. You can't be troubled to fine a single ONE???

I don't understand you conspiracy theorists. Have you ever considered that maybe the right course of action to heal the US economy might coincidentally help the US banking industry?? That someone who hated the banksters might have had to swallow hard and help them because it was the only way to fix the economy?? Of course Obama wants to try to stop housing prices from falling. Does that surprise you?

I know it's much easier to sit back in your recliner and talk about a vast conspiracy, but try to think it through...

Savings is essentially investing into a bank. If banks make lots of money with it, shouldn't they return some of it?

ChrisLosAngeles says

Savings is essentially investing into a bank. If banks make lots of money with it, shouldn’t they return some of it?

Exactly. They should return at least half of it, if you ask me. The problem is that banks do not compete properly.
Or rather, there are no properly insured alternatives to banks.

ChrisLosAngeles says

Savings is essentially investing into a bank. If banks make lots of money with it, shouldn’t they return some of it?

They do--the investors are the shareholders not the depositors. And it's called a dividend

I'm a 25 year old investment neophyte and stand in awe of everyone's prowess on these forums. I'm in a particular financial situation and would be grateful for any advice.

I've inherited a Los Angeles house (that I do not want to live in) that I could sell for about $750k (or hold onto and rent for about $3100/month)...there's only about $200k left on the loan (I've already paid the massive tax bill on the asset, via the probate process and inheritance situation) so I'm guessing it's safe to say I could get about $500k out of it. I'm dumbfounded and really don't know what to do with the money. According to Patrick's buy/rent calculator, there's virtually no "green" houses in desirable Los Angeles neighborhoods...so I feel dissuaded from trying to invest in a triplex that I'd want to live and play landlord in. Should I buy an apartment building in Phoenix or a "poor" area of Los Angeles? Should I stay out of real-estate (avoiding what Patrick thinks will be a continuing downfall in real estate prices) and play the market? I'm not interested in short-term deals...I want to invest LONG-term.

"Our favourite holding period is forever." -W. Buffet

coop says

Should I stay out of real-estate (avoiding what Patrick thinks will be a continuing downfall in real estate prices) and play the market? I’m not interested in short-term deals…I want to invest LONG-term.
“Our favourite holding period is forever.” -W. Buffet

You've answered your own question. Put the proceeds in BRK, which is a somewhat undervalued cash-spewing behemoth, and get Warren's management for close to free ($100K/year). For heaven's sake don't "play the market", only your broker wins when you do that.

tatupu70 says

ChrisLosAngeles says

Savings is essentially investing into a bank. If banks make lots of money with it, shouldn’t they return some of it?

They do–the investors are the shareholders not the depositors. And it’s called a dividend

Given that the depositors == taxpayers end up being the ones that pay for the banks losses, either through taxpayer-funded bailouts, FDIC or Fed-engineered inflation, I think the depositors should be treated as real investors, yeah.

justme says

tatupu70 says

ChrisLosAngeles says
Savings is essentially investing into a bank. If banks make lots of money with it, shouldn’t they return some of it?
They do–the investors are the shareholders not the depositors. And it’s called a dividend

Given that the depositors == taxpayers end up being the ones that pay for the banks losses, either through taxpayer-funded bailouts, FDIC or Fed-engineered inflation, I think the depositors should be treated as real investors, yeah.

Well, the FDIC is self funded. And taxpayers did become investors in the banks as a result of the bailouts. They/we own/owned a significant portion of many large banks and AIG and as they started making money, the government made money.

tatupu70 says

Well, the FDIC is self funded. And taxpayers did become investors in the banks as a result of the bailouts. They/we own/owned a significant portion of many large banks and AIG and as they started making money, the government made money.

Wrong.

FDIC is bankrupt, just like many banks are, they could not possibly liquidate without losses at current market value.

The taxpayer ownership of banks was an enormous sweetheart deal for the banks, the taxpayer got nothing near the risk premium that they should have gotten when they bought the preferred stock and warrants. The deal was hugely crooked, thanks to Bush, Paulson and Geithner.

The government may break even on behalf of the taxpayer. MAYBE. What kind of return is that compared to the overpaid banksters that lost all the money in the first place?

Come on tatapu70, you know better than this. I know your motivation. You want bank deposits to be such as bad investment that you can lure all the suckers into buying into another real-estate bubble. Just admit it.

justme says

FDIC is bankrupt, just like many banks are, they could not possibly liquidate without losses at current market value

That's why they've upped the fees on banks.justme says

The taxpayer ownership of banks was an enormous sweetheart deal for the banks, the taxpayer got nothing near the risk premium that they should have gotten when they bought the preferred stock and warrants. The deal was hugely crooked, thanks to Bush, Paulson and Geithner.

I don't necessarily disagree with that statement--for the most part. But I don't think it disputes my point. Government did receive ownership in the bailout. They probably could have negotiated a tougher deal with the banks, I agree.

justme says

Come on tatapu70, you know better than this. I know your motivation. You want bank deposits to be such as bad investment that you can lure all the suckers into buying into another real-estate bubble. Just admit it.

I hope you are just kidding.