Uncommon Cents

As you may be able to tell, interest rates (including mortgage rates) have really come down. My Capital One Direct account is now paying well under 2% interest, which makes me wonder just how low my mother’s non-high yield savings account at a local bank is paying.

How are these low rates supposed to help the economy when it seems to savers that all that’s happening is they’re getting a lot less interest than they used to?

Lower interest rates help the economy by encouraging spending over saving as well as encouraging lending (and therefore, spending). When I look at my savings account and see 1.25% (or whatever really low rate I have right now), I think to myself, “Why bother?” I have some alternatives, of course–try other investments that may involve more risk or at least lock up my money for longer periods of time, or spend the money, which is really what would help the economy the most. When I see 4.25% interest rates on home mortgages, I think, “Now would be a great time to buy a house.” And the hope of the government is that not only would that help current homeowners with troubled mortgages, it would help encourage new homeowners as well. And for other kinds of loans, like car or personal loans, it makes things much more attractive than they were a few months back–and that money, the government hopes, gets spent and put back into the economy.

For the smart money person, minimizing debt is always a priority, so they are far less likely to borrow even with attractive rates. They will, however, take advantage of lower rates by refinancing existing debt to take advantage of them, or maybe making a big purchase that requires debt (home mortgage, anyone?). But it does frustrate them when they look at their short term and emergency funds and see such miniscule rates.

For the consumer who is less in tune with their money, they may see the lower rates as a way to buy things they always wanted–say, a large flat screen television or a new computer or a new car–that hurts them in the pocketbook less than it would with higher rates. This does help the consumer a little and the economy a little more–but in the long term, debt tends not to do a lot to actually help the consumer! Still, this post isn’t about how lower interest rates are supposed to help the consumer–we did touch on that–but really, how they’re supposed to help the economy–and we’ve seen that too.

For me, I’ve been both helped by the lower rates (by refinancing the mortgage) and hurt as well (by looking at the rates in my short term and emergency savings). How about you?

Tags: Banking, Debt, Interest, Social aspects

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