Uncle Sam's gift to the prudent saver: Less money

By Allan Sloan
Tuesday, October 20, 2009

This is a quiz. What do the record-high Wall Street bonuses have in common with the record-low yields for savers? Answer: They show yet another way that prudent people, especially those living on fixed incomes, are being cheated by the government's bailout of the imprudent.

Here's the deal. The government is spending trillions to keep interest rates down to support the economy and prop up housing prices, and those low rates have inflicted collateral damage on savers' incomes. "It's a direct wealth transfer from savers and retirees to overly indebted borrowers," says Greg McBride, senior financial analyst at Bankrate.com.

Since October 2007, when government intervention in the financial system began picking up speed, yields on the ultrasafe one-year and five-year investments that many retirees favor have tanked. Two years ago, the average yield on a five-year federally insured bank CD was 3.9 percent, according to Bankrate.com. Now it's 2.2 percent, a drop of more than 40 percent. Yields on one-year CDs have almost vanished: 0.92 percent, compared with 3.6 percent. On five-year Treasury securities, the yield is down to 2.3 percent from 4.4 percent. On one-year maturities, you get a minuscule 0.3 percent, down from more than 4 percent in 2007.

The rates on AAA-rated one- and five-year tax-exempt bonds, another safe saver haven, are down sharply, too, for bailout-related reasons that we'll get to in a bit. As for money-market mutual funds, fuggeddaboutit -- the average is about 0.06 percent (no, that's not a misprint), according to Crane Data, down from 4.6 percent two years ago.

It's become customary practice -- a wise one -- that when the U.S. economy falters, the Fed cuts very-short-term rates, the only ones it controls, to stimulate business. But this time the Fed hasn't confined its rate-suppression activities to the short-term markets.

It's been a huge buyer of Treasury securities with maturities of up to 10 years, as well as mortgage-backed securities and Lord only knows what else. This buying pressure forces up the securities' prices and thus reduces their yields. The Fed, which declined to talk to me, is the major buyer of mortgage paper, in what's clearly an attempt to hold down mortgage rates and prop up house prices. The Fed has also been a huge buyer of Treasury bills -- securities with a maturity of less than a year -- that Uncle Sam issued to help fund the federal deficit and pay for various bailout programs.

But wait, there's more. As part of the economic stimulus package, the federal government is promoting Build America Bonds, under which the Treasury pays 35 percent of the interest costs of project-related bonds issued by state and local governments. These BABs, as they're known, are taxable securities, rather than being tax-exempt as normal state and local bonds are.

The BAB program has sharply reduced the supply of new tax-exempt muni bonds. Almost $40 billion of Build America Bonds have been issued since the program began in April, according to Bloomberg. Chip Norton, a muni maven at Wasmer Schroeder, says that by reducing the supply of new munis, Build Americas have been a major factor in driving down yields on one- and five-year triple-A munis to 0.5 percent and 2.3 percent, respectively, from 3.4 percent and 3.6 percent two years ago.

One day, the federal government won't be able to keep all these interest rates artificially low. The Chinese government, our major financier, is growing restless. The dollar's sharp decline relative to other currencies is an ominous sign. If this problem accelerates, it will put pressure on the Fed to let interest rates rise to protect the dollar from a collapse.

But until rates go up, Wall Street will be chowing down on essentially free money, while fixed-income people living off their investments will have to eat into their capital, take more risk or reduce their standard of living. A nice reward from their government for a lifetime of saving. Thanks for nothing, guys.

Allan Sloan is Fortune magazine's senior editor at large.

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