Selected Weekly Commentary From Recent Issues

Connecticut Bank Rate Recap
Friday, May 6, 2011
Volume 21: No. 18
A Weekly Survey of Deposit and Loan Rates Available at
Connecticut Banks, Savings Banks and Select Credit Union

Random Thoughts On Starting Our 21st Year.

As Connecticut Bank Rate Recap begins its twenty-first year, we couldn’t help but notice a group of headlines that managed to make their way through the “Ding Dong, Bin Laden is dead!” media frenzy. In no particular order they are as follows.

First is the major interest rate boost by the Royal Bank of India to their repurchase rate. To slow a rapidly spreading threat of inflation, the RBI tacked on another fifty basis points, bringing the benchmark rate to 7.25%. In the past twelve months that rate has risen 250 basis points. Most analysts, probably still influenced by the “incrementalism” pioneered by former
Fed Chairman Greenspan, anticipated only a twenty-five basis point increase for the most current action.

Second it appears the recent surge in commodity prices may be running up against some serious resistance. Silver prices took a ten percent hit on Monday, May 1
st as the Chicago Mercantile Exchange boosted the margin rates speculators must hold to trade contracts. Now imagine what would happen to commodity prices if the Fed were to hint that they were going to raise rates. Several analysts have noted that this is not an investors’ market but rather a traders’ market.

Other commodities that have seen large run ups in price over the past two years at the hands of speculative investment may also be coming up against the reality of lower consumption. Oil, cotton, grains, even gold could experience pull backs in the coming months if world economies slow in the face of speculation induced price increases. As many have noted, there is currently no shortage of oil or gasoline despite escalating prices that would argue the contrary.

As occurred in 2008, a drop in US gasoline consumption due to $4.00+ a gallon price would increase supply and force a decline in prices.

On another wholly different topic, nationwide banks may be running up against resistance of their own when it comes to fees and penalty interest rates. JP Morgan Chase just announced that their “market tests” of $4 and $5 ATM surcharges of non-customers in Texas and Illinois are complete. Chase decided that the old $3 surcharge will be restored in those markets. Clearly the good people of Texas and Illinois said “you’ve got to be kidding me,” and used other bank ATM’s with lower or no fees.

And finally Bank of America notified their credit card customers that a penalty APR of just under thirty percent (29.99%), triggered by a missed or late payment will now be levied on new balances. This is actually nothing new. Two other nationwide banks have already stepped into these heady realms with comparable penalty APR’s. Such loan sharking rates are only an open
invitation to more unwanted regulation. Kind of comparable to throwing rocks at a hornet’s nest. After getting stung once, you think folks would learn.

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Friday, February 4, 2011
Volume 21: No. 05

English Central Banker
Says Low Interest Rates Designed
To Discourage Savings.

Changes on this Week's Surveys:

There are several changes to note on this week's surveys. New England Bank has been added while its divisions Apple Valley Bank, Valley Bank and Enfield Federal Savings have come off the surveys.

As we look out the window at the advancing tide of ice, we decided on a re-run of a pertinent article from last October. Drive safely everyone!

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The following quote is from the Motley Fool web site and an article by Padraig O'Hannelly. It can be found on the web at:

It is so jaw dropping that we are quoting it in its entirety.

"Charles Bean, the Deputy Governor of the Bank of England, caused a stir with his comments that discouraging saving was a deliberate policy rather than a side-effect of low interest rates: 'Savers shouldn't necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit. ... Savers shouldn't see themselves as being uniquely hit by this. A lot of people are suffering during this downturn.'

'I wouldn't want to call it a side effect. I think it's important to realize that actually it's a key way that monetary policy affects the economy by affecting the incentive to save. What we're trying to do by our policy is encourage more spending, ideally we'd like to see that in the form of more business spending but part of the mechanism that might encourage that is having more household spending so in the short term we want to see households not saving more but spending more.'"

If this is the thinking that goes on inside the hallowed halls of central banks world wide, then Heaven help us. It is so fundamentally wrong it staggers the imagination. As we have said over and over, when an income investor (Bean categorizes them as "savers") has their investment income fall to zero, they don't spend their capital except when desperately necessary. Rather they hoard it. When a central bank eliminates a "saver's" income with zero percent interest rates, that "saver" stops spending just as when a worker loses their job. Whether the income is derived from labor or investing, it's still lost income and produces the same result.

What is particularly astonishing is Deputy Governor Bean's assertion that creating hardship for "savers" is a deliberate policy of the Bank of England. Should we not be questioning Bernanke and Company if the US Federal Reserve approaches monetary policy in the same fashion?

We have pointed out several times in these columns that the emphasis at the Federal Reserve is to stimulate an economic recovery by promoting debt. Big ticket items are sold with financing and rarely with cash, hence the perceived need for low interest rates. Unfortunately, subsidizing loans (which is basically what the Fed is doing) has a negative impact on investors with capital. Since no financial institution will pay private investors more than the Fed for the same capital, those investors, whether they be individual savers, non profits, municipalities or others find their incomes reduced dramatically.

Do they go out and spend their principal as Burns suggests to stimulate the economy? "I don't think so, Tim!"

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More International Turmoil Impacts Dollar, Treasury Yields.
Mortgage Rates Headed For Record Lows.
July 2, 2010 Vol. 20, No. 26

Just when you think interest rates can’t get much lower, the world economy has another bout of the jitters and more capital pours en masse into US Treasuries. As of this writing on Tuesday, labor strikes over austerity measures in Greece have that country running on three cylinders at best. Investors are watching upcoming debt offerings by France and Spain. Projected slowing economies worldwide, especially in China, have sent overseas stock prices tumbling.

And, of course, everyone is buying US treasuries. It seems investors would rather make little or no money in US government debt than lose it in foreign stocks and bonds. Our last check on the yield for the ten year treasury note was at a mind boggling 2.97%.

Once again, as in other recent uncertain times, investors are purchasing US debt not for its return. On the shorter maturities that’s almost nothing. Rather the rush to treasuries is motivated by the fear of losing capital. The uncertainties surrounding government austerity plans are hitting European economies like a sledge hammer.

What this means for the US is continued historically low interest rates. Bernanke and Geithner are both sitting in the catbird seat. This unexpected turn of economic events is allowing the US to finance its own staggering debt at essentially a zero percent interest rate. Conventional wisdom had the US facing higher interest rates as the Treasury issued huge amounts of debt to pay for the country’s stimulus spending and bailouts du jour. So much for the conventional wisdom, at least for now.

What we will find fascinating to watch is how low fixed mortgage rates will now go and how many more basis points can be squeezed out of CD’s and money market accounts. The CT averages on zero points thirty year fixed mortgages have been dropping sharply with each passing week. As of last Friday, that average slipped under 4.80%. If the yield on ten year treasuries keeps sliding, at what point do thirty year fixed mortgage rates hit a theoretical “floor” where it’s no longer profitable for a financial institution to originate the product. Will banks still be able to sell these record low yielding mortgages into the secondary market?

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Deposit Rates At Record Lows And Still Falling.
Do Zero Percent Returns Hinder Growth?
June 4, 2010, Vol. 20 - No. 22

We watch with fascination, the downward spiral of interest rates on deposit accounts. Each week financial institutions publish new rate reductions that challenge our perceptions of the miniscule. Rates on short term CD’s and liquid accounts such as savings and checking accounts are so low that the returns are often less than the cost of the gas used by the customer to drive down to the branch. Or maybe the depositor walked and stopped at the local coffee shop on the way. The cost for the “cup o’ Joe” far exceeds the annual yield for the bank investment.

Several banks have reduced the APY on their savings or MMA accounts to 0.01%! $10,000 left in a savings account paying this kind of return nets the investor all of one dollar on a one year investment. That’s a return of 8.3 cents per month. Nobody’s going to return from the mountaintop to take advantage of this kind of yield.

Long time readers of these articles know where we are going with this. Economic policy in the US is targeted specifically at growth, either speeding it up or slowing it down depending on the circumstances the Fed is trying to influence. In theory, that growth is manipulated by the cost of credit. Borrowed money is the fuel of industry. Without it, production of goods and services dries up.

In short, all economic policy is oriented towards influencing debt. Unfortunately, this presumes that government in the form of the Federal Reserve is the final source of capital which is not the case. When the Federal Reserve over steps the free market in order to peg borrowing costs at zero, they ignore the whole universe of private investment capital which during normal economic times not only fills the credit needs of much of the economy. Invested private capital also generates income for the investor, be they the lowliest CD customer or the largest bond holder.

Artificially setting interest rates at zero percent, while reducing costs to producers of goods and services, also drastically cuts investment income to those who would purchase those goods and services. Combine that with an uncertain stock market due to sovereign debt crises and you have a prescription for stagnation.

Proponents of the low cost debt strategy argue that income investors, faced with unacceptable yields will assume more risk or toss in the towel and simply spend their capital. Unfortunately, the history of Japan’s decade long recession with zero percent interest rates argues otherwise. Faced with the prospect of no safe way to earn through investing, Japanese consumers saved their capital (hoarding is a better term) holding back economic growth.

It has always been our contention that both Greenspan and Bernanke cut rates too far. A 2.00% fed funds rate is plenty stimulative without completely cutting off investment income. After all, a business that is so weak it requires free money to survive will most likely fail when rates begin climbing once more to levels more in line with historic norms.

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Federal Reserve Zero Percent
Interest Rates To Continue.
Income Investors Seek Better Yields.
March 26, 2010, Vol. 20 - No. 12

Every week as we tally the CD, savings and money market highs and lows, we marvel at the levels to which deposit rates have fallen. We also continue to be amazed how banks week after week still manage to wring a couple of extra basis points out of deposit rates we thought could go no lower. The few newspaper ads promoting CD’s in particular have caught our attention. Headlines proclaim APY’s of 1.25% on two year money as if this were a return depositors should be stampeding to the branches for.

Financial institutions have traditionally looked to depositors for the bulk of their lendable funds. In normal times, banks would turn those funds around into loans with a decent spread, picking up enough net interest income on the difference to earn a profit.

But these are far from normal times. For almost two years, the Federal Reserve has maintained an extraordinarily accommodative monetary policy which allows banks to borrow money at rates which in effect are pegged at zero percent. It’s a policy plucked right out of the Greenspan play book from 2001-2004. Will it have similar unforeseen results?

The Bernanke Fed’s actions, a boon to borrowers, is a bane for income investors and could be a major contributor to the next bubble, what some analysts have identified as the bond market. For years, fixed income investors have had a choice of products paying respectable if not stellar returns to choose from. Those selections included US Treasuries and bank CD’s for the most conservative, followed by state and muni bonds for those with a little higher risk tolerance. Bringing up the rear were corporate bonds and dividend paying stocks.

Two years of Fed induced zero percent interest rates have eliminated bank CD’s as a serious alternative. Small investors have chosen other options because of the miniscule yields, and larger safety conscious investors have turned away because of the very real possibility of loss of principle due to bank failures.

Confronted with anemic yields designed to subsidize borrowing, income investors have been moving massive amounts of capital to bond mutual funds, treasuries and to a lesser extent dividend paying stocks for income and perceived safety. You notice we have used the adjective “perceived.” The huge demand has created a bull market in bonds where the market valuations have soared as credit market rates have fallen. The problem will come when rates turn higher in the face of an economic recovery.

Income investors who thought their bonds were safe will see a decline in valuations as rates climb from zero percent back towards returns closer to historic norms. After all, who’s going to want a ten year treasury at 3.66% when new ones are coming to market at 4.50% or even (horrors!) 5.00%. As interest rates climb, prices on existing fixed rate investments will fall. We have said before that extreme measures always produce extreme results, usually unforeseen and almost always delayed.

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Fed Chairman Blames Lending Practices,
Not Fed Monetary Policy, For Housing Collapse.

January 8, 2010, Vol. 20 - No. 1

Last weekend, Federal Reserve Chairman Ben Bernanke tried to brush off critics who claimed that the central bank’s monetary policies from 2002-2006 were largely responsible for creating the over heated housing market. Instead, the Fed Chief blamed lax lending standards and creative new adjustable rate products for allowing unqualified buyers to take on mortgages they couldn’t afford.

We differ with Mr. Bernanke’s assessment. Adjustable rate mortgages have been around in various incarnations for the past quarter century. It wasn’t until the cost of money reached then historic lows in the aftermath of 9/11 and the 2001-2003 slowdown that adjustable rate mortgages and new low down payment variations came into their own. The Fed’s accommodative monetary stance at that time provided the environment, indeed the fuel, to stimulate a boom in housing and a runaway inflation in housing prices.

We must remember that adjustable rate mortgages were not the only mortgages being originated at the time. Fixed rate mortgages with multi decade low rates were extremely popular especially for re-fi’s. These loans not only pumped additional stimulating dollars into the economy, they also contributed dramatically to the run away valuations for housing. As we said before, cheap money was the fuel.

The Fed may have seen itself as justified by then current economic conditions for the artificially low interest rates. However that short term vision blinded the central bankers to the consequences of monetary policy far below historic norms. It’s a set of blinders the Bernanke Fed still has not shed.

The contention here is not that the Fed must raise interest rates to ward off inflation. Rather, the Federal Reserve post 9/11 and post 2008 has cut interest rates too low, making a return to a stable economy with rates more in keeping with historic norms nearly impossible. Those low interest rates stimulate the more speculative portions of the investment economy producing an unintended and uncontrollable surge in prices.

Earlier in the decade, it was housing. Today we watch nervously as hedge funds, fueled by cheap money, dabble in commodities, in particular energy. Credit market rates today leave investors with little or no options for income returns. With bonds and treasuries producing real negative yields after inflation, investors have little choice but to opt for speculative alternatives.

The Federal Reserve, in its need to produce economic relief quickly, has abandoned the principle that extremes of action produce extremes of response. Just as raising rates too high produces economic dislocations, so, too, pushing rates too low triggers unintended and unforeseen consequences. Twenty/twenty hindsight is perfect but if the Fed hadn’t dropped the fed funds rate to 1.00% in 2003 would they now have the need for a 0% rate today? If you can’t make money borrowing at 2.00%, are you going to make it at 0%? And what happens to those same borrowers when rates must climb once more?

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Thoughts On The Source
Of The Housing Bubble
And The "Annual Core Rate Of Inflation."

November 27, 2009, Vol. 19 - No. 48

One quick note at the start. Farmington Savings Bank has streamlined their name, removing the “Savings.” The bank now appears in the surveys as Farmington Bank. This being a shortened week with the Thursday Thanksgiving holiday, we felt it appropriate to delve into the Recap archives for some of our favorite quips and quotes.
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From the May 9, 2008 Recap:

"We tend to meet any new situation by reorganizing, and what a wonderful method it can be for creating the illusion of progress while producing confusion, inefficiency, and demoralization."
Attributed to Gaius Petronius, Roman governor under the Emperor Nero, 1st Century A.D.

“For close to seven years the US economy benefitted from economic policies that pumped money into the system from a variety of sources. This flood of cheap cash produced the now infamous housing boom and the impression that a home was more than just a place to live. In addition, it was a source of ready cash for vacations, new appliances, and money to invest in the stock market.

With prices always rising, owners need only borrow against an ever increasing pool of equity to quickly achieve their piece of the American dream. No one had to do what previous generations of home buyers had suffered with, that is waiting 10 years to accumulate sufficient equity. Home prices rising at between ten and twenty percent per year provided a quick injection of wealth into peoples’ pockets and a significant artificial stimulus for the economy.

How many of us read about the savvy homeowners who, two years after buying their home, “refi’ed” not only to get a lower interest rate but also to pick up extra cash. Some did it two or three times in a row.

Every rate reduction by the Fed brought on a new wave of refinancings. It was a trend that Wall Street pundits quickly picked up on as the reason for the “new economy” and an activity that could make the economy appear recession proof.”

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From the January 20, 2006 Recap:
On the “Core Rate” of Inflation.

“The purpose of factoring out food and energy monthly is to provide a less volatile picture of inflation minus the monthly spikes and valleys. However, to generate a “core rate” for the annual year end inflation numbers makes the utterly wrong headed presumption that we don’t include food and energy when calculating consumer or producer price inflation . . . ever.

An annual core rate of inflation presumes that people don’t eat, don’t drive to work, that factories don’t use energy to power their machines, that trucks don’t use diesel to bring goods to market, that people don’t heat or cool their homes.

The whole concept of an annual “core rate” of inflation would be laughable if it weren’t so widely accepted and inherently dangerous to the economy. This is a figure that the Federal Reserve watches closely.

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July 2010 Survey of Deposit Account Fees And
Service Charge Survey Now Available .

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From July 1 through August 1, 2010 Connecticut Bank Rate Recap surveyed deposit account fees and charges at 50+ Connecticut banks and 50 of the state’s major credit unions. Now financial institutions can review their own fee schedules without going through the difficult and time consuming process of collecting and “shopping” the competition’s service charges.

What Does the Report Contain?
  1. Personal Checking Fees
  2. Savings Account Fees
  3. Commercial Checking, NOW (Interest Checking) and Money Market Account (MMA) Fees
  4. Miscellaneous Fees
  5. Credit Union Fees - A special section dedicated exclusively to service charges at Connecticut credit unions.

What Does It Cost?
The Connecticut Bank Rate Recap Survey of Service Charges and Fees is available as follows:
Subscribers - $155.00
Non-subscribers - $165.00
Credit Unions - $155.00

Call us today at 860-669-4116 to order or e-mail/fax the convenient order form on the
Service Charge Survey Page to 860-669-1130.

Deposit Account Service Charge and Fee Surveys are available in Excel spreadsheet format you can download to your PC or MAC!