Interest Rates and the 'Neutral Rate'

[Bobbygun]

The bank I'm looking at still has 5%, but it's for 2 months. I was looking at the 12 month. I actually use 3 banks. One is "too big to fail," and the other 2 are regional.

It's all about the CD "Specials". My credit union is only offering 1.75% for a 12-month CD, but 5.00% for 11 months. I worked in banking for nearly 30 years. They were notorious for offering great "specials", then hoping you weren't paying attention at maturity so they could roll you into a much lower rate CD for the same term. The credit unions may do something similar but I'm always shopping around when my CDs mature. I did find a bank with a money market "special" for 4.40%. I suppose the individual banks and credit unions have certain needs to address their individual interest rate risk profiles, thus the wildly different offerings. While trying to locate a decent CD rate, I found several institutions that seemed like they didn't care if they ever opened a CD for a customer.

 

[Kcee]

The length of the CDs really tells a story. Being the bank I looked at only offers 5% for a 2 month tells me they don't have much confidence interest rates will hold up very long, whereas at the beginning of the year they did, and offered higher rates that went all the way into 2025.

You also want to be really careful about smaller regional banks that offer interest rates that sound too good to be true, because it's a sign that they are just about to fail, and they are trying to rake in as much cash as they can before they close their doors. This happened to me back in the 1980s, and I was stuck without being able to access my money until the FDIC came in and cut me a check.

 

[Bobbygun]

The length of the CDs really tells a story. Being the bank I looked at only offers 5% for a 2 month tells me they don't have much confidence interest rates will hold up very long, whereas at the beginning of the year they did, and offered higher rates that went all the way into 2025.

It really only tells the story for that particular bank. They all have different strategies. Just a few weeks ago the sentiment was that inflation was getting under control and thus rates would be going back down. A few bad reports later and that sentiment cooled a bit. Rates are awfully hard to predict.

 

[Bobbygun]

You also want to be really careful about smaller regional banks that offer interest rates that sound too good to be true, because it's a sign that they are just about to fail, and they are trying to rake in as much cash as they can before they close their doors. This happened to me back in the 1980s, and I was stuck without being able to access my money until the FDIC came in and cut me a check.

A good reason to use multiple institutions. I worked for a savings and loan that got shut down back in the 80's. The depositors had access to their money the following week. Not that big of a deal. Oftentimes the FDIC will do an assisted takeover by another bank and the disruption is even less.

 

[Provincial]

We use a smaller regional bank. They are very conservative, and are not offering investment-worthy interest rates. I talked to one of the senior managers, who said that they were not willing to borrow at the current rates their competitors were offering because they felt that would be too risky. He didn't elaborate why it was risky, but I believe they expect a squeeze on reserve requirements like happened in 2008.

The reserve requirement squeeze was used by the Federal Reserve to drive regional banks to merge with larger banks or close. It rescued large banks by printing large quantities of dollars, which it loaned to the big banks at almost no interest. This money was used as reserve capital to meet the legal requirements, but was not loaned out, since that would have triggered inflation. Lowering the reserve requirements outright would have caused lack of confidence in the banking industry, and essentially triggered a run by depositors to withdraw their savings. Worse yet, it would have caused foreigners to dump dollars and buy more stable currencies. That would have destabilized the dollar in foreign trade.

In other words, favorable treatment. Picking winners and losers.

 

[Certaindeaf]

The bank I'm looking at still has 5%, but it's for 2 months. I was looking at the 12 month. I actually use 3 banks. One is "too big to fail," and the other 2 are regional.

It has been my impression of the nature of time that two months, two seconds etc follow the preceding two months, two seconds etc. and on and on forever.
If the rate changed instantly by the second and was/ is 5% now the rate of return would be 5%, it doesn't matter what the price of tea in china is or when that rate stops being 5%.

 

[Provincial]

A good reason to use multiple institutions. I worked for a savings and loan that got shut down back in the 80's. The depositors had access to their money the following week. Not that big of a deal. Oftentimes the FDIC will do an assisted takeover by another bank and the disruption is even less.

My father was on the Board of Directors of a small S&L. The "Crisis" of the 1980's was caused by actions of the Federal government, from deregulation, bad monetary policy, outright bribery ("campaign donations"), and worst of all, criminalization of normal business decisions after the fact by persecuting S&L managers and board members so the politicians could posture and avoid responsibility.

Show trials just like Communist China, punishing people for doing their job in order to deflect blame from those actually responsible.

In the case I know about, the Feds refused to let the S&L close out when it became obvious survival was impossible, signing a consent agreement to hold the managers and board members harmless for following their orders. Much later, Congress passed legislation that voided those agreements, and the Federal Home Loan Bank essentially gave the assets of this S&L to another S&L to avoid it's sale to a regular bank. The feds then tried to recover the difference from the managers and directors so they could claim bad management.

 

[Kcee]

It has been my impression of the nature of time that two months, two seconds etc follow the preceding two months, two seconds etc. and on and on forever.
If the rate changed instantly by the second and was/ is 5% now the rate of return would be 5%, it doesn't matter what the price of tea in china is or when that rate stops being 5%.

It's all about the writing on the wall.

You'd better be invested in land, because the odds that there will be blood in the streets after November...

 

[wired]

Lowering your expenses to live as cheaply as possible, will help you get by easier in just about any economic scenario. The homeless have this figured out already.

You can save lots of money but if inflation continues to gobble it up, it won't do you much good. If you lose employment and or income you will be glad to have very low expenses.

I prefer making more money

 

[arakboss]

I prefer making more money

Nothing wrong with making more money and lowering expenses simultaneously.

Edit: Warren Buffet still enjoys McDonalds for lunch.


Edit 2: Many people increase expenses as their income rises. Nicer home, nicer cars, etc. When the music stops they could be in worse shape compared to the person who kept expenses close to the bone.

 

[Kcee]

I prefer making more money

And investing in guns and ammo.

 

[Provincial]

It is quite common for people to live a lifestyle that matches their monthly payments to their monthly income. Because of recent inflation, many now have payments that exceed their income.

Any lengthy interruption of their income will put them out on the street, no matter how big the paycheck.

 

[Bobbygun]

My father was on the Board of Directors of a small S&L. The "Crisis" of the 1980's was caused by actions of the Federal government, from deregulation, bad monetary policy, outright bribery ("campaign donations"), and worst of all, criminalization of normal business decisions after the fact by persecuting S&L managers and board members so the politicians could posture and avoid responsibility.

Show trials just like Communist China, punishing people for doing their job in order to deflect blame from those actually responsible.

In the case I know about, the Feds refused to let the S&L close out when it became obvious survival was impossible, signing a consent agreement to hold the managers and board members harmless for following their orders. Much later, Congress passed legislation that voided those agreements, and the Federal Home Loan Bank essentially gave the assets of this S&L to another S&L to avoid it's sale to a regular bank. The feds then tried to recover the difference from the managers and directors so they could claim bad management.

The S&L I was with was a fairly small shop. It had a negative net worth when I started there fresh out of college. Paying 12% on your deposits while earning 8% on your loans was not a recipe for success. It was one of the few times the FSLIC didn't even sell the deposits. Folks just lined up at the door and checks were issued. I don't think there was any serious pursuit of our managers or directors for recovery. The biggest mistakes made were really out of desperation. Senior management participated in some loans with other larger institutions where they relied far too much on the other institutions' due diligence. In other words - in over their heads.

 

[JRMadrid]

 

[nwslopoke]

The length of the CDs really tells a story. Being the bank I looked at only offers 5% for a 2 month tells me they don't have much confidence interest rates will hold up very long, whereas at the beginning of the year they did, and offered higher rates that went all the way into 2025.

Not looking for free internet banking advice, but asking those knowledgeable, are aware if European or Asian banks pay higher returns.

 

[Flopsweat]

It is quite common for people to live a lifestyle that matches their monthly payments to their monthly income. Because of recent inflation, many now have payments that exceed their income.

Any lengthy interruption of their income will put them out on the street, no matter how big the paycheck.

It's been quite common for people to live a lifestyle that exceeds their monthly income too. It's wise to live one greatly below your income.

When I bought my current home a few decades ago, I chose one that I could afford. Fortunately, I could afford a pretty nice one. My real estate agent was all excited about adjustable rate mortgages. Everyone was doing it. I could get an even nicer house for the same payment. I asked her if it wasn't just as possible for rates to go up as down in the future. Wasn't that what they did - go up and down. Well yes but you'll be making more money by then. Planning to be better able to handle a stupid decision didn't sound like a smart decision to me. A few years later when people with ARMs were getting foreclosed all across the country, I was still steadily paying my easily affordable mortgage, driving my very nice but 10 year old car and paying cash for everything I bought, with no concern for making this month's budget because I was putting hundreds of dollars of leftover cash into savings each month, along with a large set amount that went into my 401K and ROTH IRA. It seems so simple now, probably because it was.

 

[wired]

And investing in guns and ammo.

In my case they are investments. And lucrative ones at that

 

[Provincial]

The biggest mistakes made were really out of desperation. Senior management participated in some loans with other larger institutions where they relied far too much on the other institutions' due diligence. In other words - in over their heads.

Same here, except the Federal Home Loan Bank signed on with it!

The first contact with the Resolution Trust Corporation (the agency Congress formed to shift blame from themselves) was to demand a financial statement from the officers and directors. None of the officers had had any financial dealings with the institution beyond regular salaries, and no directors had even had compensation, but they all were sued.

 

[Nick Burkhardt]

Unfortunately, it's not just Biden's deficit spending. Trump and Bush before him were also big spenders. Don't forget to throw in Obummer into that mix. That makes almost twenty-four years of deficit spending.

Hate to say it, but Clinton had a surplus. Basically we've been deficit spending for over sixty years.

Clinton had a surplus because of the Dot Com stock market boom.

 

[Bobbygun]

It has been my impression of the nature of time that two months, two seconds etc follow the preceding two months, two seconds etc. and on and on forever.
If the rate changed instantly by the second and was/ is 5% now the rate of return would be 5%, it doesn't matter what the price of tea in china is or when that rate stops being 5%.

You did that on purpose! I haven't the foggiest idea what you're talking about and there is no way to Google it. Is it because ice cream doesn't have any bones?