Home Forums FineTunedMac Community Lounge Why don't they pay more interest to savers?

Non Computer Question.

Why don't they pay more interest to savers? I've asked around but have yet to get an answer that makes sense to me. Any economics gurus out there who can explain in simple terms in a few words?

How did financial institutions - banks, building societies etc. - get money IN to lend it OUT to borrowers? Some of it came from Savers who have spare cash to deposit somewhere. To encourage this, they used to pay interest on your savings. Then they'd get your regular spare cash or even your nest-egg, and they'd lend it out to people who want to borrow for bank loans and/or mortgages.

Now, and for the last year or so, interest rates to savers have typically been 0.01%. i.e., for every pound you put in, you get a penny back, which is risible. This pertains nearly everywhere. (Institutions offering higher rates of interest have equally risible terms and conditions, I've checked.)

There is nowhere to put spare cash unless you want to have it tied up and can't get at it!

The question is, WHY don't they pay more interest to savers, to get money IN so that they can lend it OUT?

Answers on a postcard please. In the meantime, spare cash is sitting in the current account and spread around various places in case any of them go bust.........

Depends on where you're saving I suppose. Risk and Demand drive interest rates. Traditionally things like CDs and city/government bonds have had the lowest interest rates because they are extremely safe investments. When you start getting into stocks and hedge funds etc the risks go up quite a bit, because those people need money too and they have to offer higher returns to get enough people to risk their money with them.

I bank at a credit union, and as such I have some CDs as well as money in my sharedraft. (sharedraft is the credit unions' way of getting around a rule somewhere that says you can't draw interest on a checking account - they basically let your money sit in a savings account, drawing interest, and anytime you cut a check or debit card, it causes an ovedraft, the bank auto transfers money from savings to cover it, and you don't get an overdraft fee)

Interest rates on the savings account though are very low. My CDs get a good deal more interest. I don't care to mess with investing in much of anything else requiring more of my attention.

As for the low interest rates you are musing over, we get to supply and demand. In today's "panic the sheep" economy, a LOT more people are saving now than they were before. Not because they want to specifically, but that they are just cutting back on their spending which results in savings. More people saving causes supply of savers to go up. This drives interest rates down, because the banks don't have to offer so much interest to get the number of savers they need to borrow money from. (supply goes up, demand remains constant, drives prices down) If the economy were truly bad, there wouldn't be enough people that had money to save in the first place, and we'd see higher interest rates. So, in a truly bad economy you have good rates. But in an artificial panic economy, you have low rates like now.

If you think about it, the purpose of getting interest on savings is to prevent your assets from devaluating in the bank. In other words, when a dollar buys a loaf of bread, you put a dollar in the bank. In five years, that bread costs $1.20, and you look in the bank and you now have at least $1.20, 20 cents of that from interest. At least that's the idea anyway. Savings was never meant as a way to make money. That's what more risky things like stocks are for, making money on your good judgement, or good luck.

Somewhat off-topic, that's always bugged me in the past with stamps. I buy a stamp, that will mail a letter. A year later the post office decides to raise rates. OK that makes sense. But what about that book of stamps I bought that I still have a bunch of? They devaluated. They didn't say "this mails a letter", they say "you paid 35 cents for this". (when?) Now I need a stamp plus a little more to get the same service. Technically when that happened the post office profited off me as a result of inflation because in the end I already paid (in today's terms) 42 cents a year ago, and now I have to chip in another 3 cents, that's profit for the post office for me to end up paying 45 cents (in today's money) to get 42 cents of today's service. Thankfully now we have the "F" stamp because enough people screamed.

Call me a cynic, but I suspect we have "Forever" stamps because it makes economic sense for the USPS to sell them; I don't see them ever giving us anything out of eleemosynary intent.

Virtual1, Thanks for your reply which makes sense to me.

To sum up: Banks don't pay interest to savers (at the moment) because they Don't Need To. Not many people are borrowing money (at the moment) to buy things like houses. The housing market drives the entire economy, even I know that! It used to be that putting your money into bricks+mortar was a solid investment - the value can only go up. Not any more. Not now, it seems. Well, in the short-term anyway. Right?

To the rest of your reply, it's Fear and Greed which drive interest rates/the economy, no?

What are CDs in this context?

Your paragraph 4 is really good, thanks again.

"Devaluating" which you've said twice - there is no such verb. You mean "Devaluing", the past participle from Devalue. Or maybe it's an American/British thing, examples of which are legion and most amusing too. But don't lets get into that, eh?

Regarding stamps <rolls eyes> over here, a stamp is simply marked 1st class, and it remains valid no matter how long it stays in your purse/wallet no matter how many times the postage rate goes up. Unless you're a real cheapskate and buy 2nd class stamps......<----- joke!

Thanks again for your explanation, which is great. I can put this particular conundrum to rest and start bepuzzling about other issues, like Insurance, for instance.

The ENTIRE Insurance Industry is driven by FEAR. Absolutely every single insurance policy on Earth is sold on the premise of FEAR of what might happen. This FEAR is all pervasive and affects everyone no matter how they dress it up. "You're buying peace of mind", "Look after your relatives", "Do you want them to have to shell out for your funeral" and so on.

It takes a brave person in the face of the constant preaching by thousands of worldwide insurance companies to say "Nope, I'll spend my money on other things and stop being affected by your school of Fear, thanks."

My fatherinlaw did that. He died at age 86 and never had to make a claim in his life.

I'm not going to look for the thread, but we beat up on insurance agents back in the early days of FTM.

My take on insurance: I NEVER worry about "What-ifs;" "What-ifs" make me crazy. I deal with "What-ifs" when they become "Oh, $%^&, what the &^%$ do I do nows."

Some would argue that the only "good" insurance to carry is liability. The "if you shoot craps without it you are ruined because they will sue you for everything you have and ever will have" type.