Bailout: The real March Madness
Bear Stearns is saved by JPMorgan Chase and the Fed keeps cutting rates to help other banks. But consumers get hurt as savings rates plunge.
NEW YORK (CNNMoney.com) -- The Federal Reserve is putting up billions of dollars and slashing interest rates to try and calm financial markets. It's getting involved in the rescue of big Wall Street banks.
But what, if anything, has this done to help most people?
Sure, interest rate cuts are supposed to lead corporations to borrow more, which drives growth and maybe jobs. And payments on credit cards and home loans should also go down.
Still, is encouraging more borrowing what the government should be hoping for? Irresponsible lending and bad investments are what got the economy and financial services firms like Bear Stearns (BSC, Fortune 500), Countrywide Financial (CFC, Fortune 500), Citigroup (C, Fortune 500) and Merrill Lynch (MER, Fortune 500) into this credit crunch in the first place.
"It seems like the Fed is running around like chickens with their heads cut off without a cohesive plan. There is this continued succession of panic-type moves. It seems like Monopoly money is being thrown about," said John Norris, managing director of Oakworth Capital Bank.
And every time the Fed has cut rates, the amount of interest that people generate from their savings accounts and CDs has gone down.
In other words, the Fed is doing a disservice to the many Americans who are paying their mortgages on time and are trying to put away more money by saving.
Many readers have already written in to say they are irritated by how far rates have fallen on their savings accounts. This is particularly a problem for retired Americans living on fixed incomes. But it's also a concern for investors that are trying to reduce their debt and increase their savings.
"The whole point of these rate cuts was to stimulate the economy. This would happen because interest rates on consumer loans like mortgages, home equity lines, credit cards, auto loans, etc. would also go down encouraging the consumer to borrow and spend. From what I've seen these rates on consumer loans have not gone down at all. However the interest rates on savings accounts has most definitely gone down. How is that good for the economy?" wrote in someone known only as Tired of It from the Midwest.
Plus, the Fed's rate cuts are also hurting consumers because they are fanning the flames of inflation.
The dollar has plunged to record lows. The price of oil, wheat and other commodities have surged, making it more expensive for consumers to fill their gas tanks, heat their homes and feed their families.
"Stop the rate cuts. Destroying the dollar will just cause people to shrink back from spending even more. What business is going to borrow money when people have little money left to spend after gas and food?" wrote in reader Ron Moskal from Wheeling, WV on our TalkBack blog last week.
My wife and I have watched with some sense of bemusement as the rate on our home equity loan has dropped like a stone in the past few months. But it's not really saving us money since we're trying to pay more than our monthly minimum.
The Federal Reserve is highly expected to cut rates again on Tuesday and it's highly likely that our HELOC rate will be lower than the rate on our 30-year fixed-rate mortgage. That is crazy. Plus, it has not been fun to watch the rates on our savings accounts whittle away to nothing.
Of course, the Fed can't do nothing as the financial markets seize up. But right now, it appears that the central bank is going above and beyond the call of duty to save Wall Street firms than it should. One could argue that banks like Bear Stearns deserve to fail if they make a bad investment. That's how free markets are supposed to work.
The Fed is supposed to make sure the entire economy, and not just the credit markets, run smoothly.
But Fed chairman Ben Bernanke risks fixing the credit crunch at the expense of inflation and the retirement accounts of many hard-working consumers that didn't go out and get some exotic adjustable-rate mortgage to buy a home that cost far more than they could afford.
Hopefully, sooner rather than later, the Fed will send a message to consumers that it remembers that its job is not to bail out the reckless few but to support sustainable growth and keep inflation in check. It's doing a terrible job on that second part of that mandate.
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