on interest rates: are low rates designed to discourage saving and encourage investing?

[yurbud]

If people could make a modest return on their savings, it occurs to me that a lot of us would just save instead of messing with the market where a middle class person's chances of getting screwed are near 100% unless they buy and hold some blue chip stocks.

I wonder if low interest rates that make saving in a bank not much more profitable than burying your money in the backyard are intended to drive people to make riskier investments.

[Warpy]

1. They're intended to make people go into debt

over things like cars and refrigerators, not that the banks are giving consumers much of a break these days. The lower interest rate to banks, near zero now, is to encourage them to write mortgages under 5% and car/consumer loans under 10%. It's also supposed to make them more eager to write commercial loans, something they're not doing at all.

The reason they want John Q. Citizen to take on more debt is that debt is the only thing holding the consumer economy together.

It's not working because, while John Q realizes it's a better deal to get something cheaper today than it is to save his money and lose out because the interest rate is so much lower than inflation, he's not totally stupid and realizes his job could disappear at any time.

In other words, he's finally caught onto the fact that income comes and goes but debt is forever, and while savings might lose purchasing power instead of gain it, he's going to need it if his job goes tits up.

That isn't stopping the Fed from trying, though, and that's why interest rates are so low.

[eridani]

2. Probably. But no way in hell am I biting on that bit of bait

I'll keep my savings in the First National Bank of Sealy Posturpedic before I mess with the market again.

[chatnoir]

3. Our savings acct rate is 0.01% at Chase

Which is ridiculous. Might as well sew it up in the mattress.

[FrenchieCat]

4. I think its a give and take......

kind of like taxes....

You want your income low for the purpose of paying taxes,
but when you are going to the bank for a loan,
you want your earnings high.


Same with saving and lending....

IF the saving interest rate of return was high,
then the lending interest rate would also go up.
Since more folks live on credit,
to increase the interest rate now would be
catastrophic except to those who have money saved sitting doing nothing.
And who are those people?
Those with money to save?
Cause it ain't average Americans.
So the low interest favors average Americans, IMO.

[Hannah Bell]

9. bzzt. false.

"IF the saving interest rate of return was high,
then the lending interest rate would also go up."

the spread between savings & lending rates, currently ~5 points, historically 3-3.5 points.

There's no automatic link between saving % & lending rates to consumers.

Savings rates are being *held* low to benefit the banksters.

My local credit union (which doesn't get no-interest money from the feds) is paying more on savings than Citi.

Some bank credit cards are charging over 33%. Citi is 22%. Unheard of in the FDR to 70s - except by Mafia loan sharks.

[mmonk]

5. It's one reason. Another is that high interest rates dampen

an economy as lending becomes reduced. Of course, what we have now is really a situation where there is no safe place to put money with any decent enough of a return to park it. That is because since we have gone solely on Reaganomics (voo doo) the last few decades and we have bubble economies that burst as a result. I hope one day we can have a more true two party system again.

[TreasonousBastard]

6. Designed more to increase spending and get us out of recession...

although moving money from savings accounts to stocks and such is a side effect. Unfortunately, the larger banks aren't lending enough to spur the economy and are using the "free" money on deposit for more lucrative ventures than boring old lending.

The Japanese went through this years ago when savings rates were sky high and nobody was spending money. I'm not sure how it works when savings rates are low and nobody's spending money.

[johnaries]

7. The interest rates set by the Fed only affect business to business

loans. Although martgagae rates often follow. They do not affect savings interest rates.

However, Keynes did believe that "excessive saving, i.e. saving beyond planned investment, was a serious problem, encouraging recession or even depression. Excessive saving results if investment falls, perhaps due to falling consumer demand, over-investment in earlier years, or pessimistic business expectations, and if saving does not immediately fall in step, the economy would decline."

http://en.wikipedia.org/wiki/Keynesian_economics#Excessive_saving

[andym]

8. To encourage banks to lend money to business

to support expansion etc.

[dkf]

10. In order to keep up with inflation you need

A return at least equal to it. If you are receiving less interest than inflation you actually lose value by putting it in the bank. If you are expecting a certain return above inflation in order to reach such goals as retirement you need to increase your expected return probably by increasing risk or you need to increase the amount you save.