All The Banks Deserve Are Crocodile Tears

It’s official. Lending institutions are having a tough time making loans.

Don’t get me wrong, they still make money the old fashioned way: by borrowing from us through deposits on which they pay almost no interest, and then lending it long term to anyone that qualifies. But they’ve had to jack up their other fees because the traditional business plan just isn’t cutting it.

You and I are still keeping tidy sums at the bank, even though they pay us about half the rate of inflation, guaranteeing a loss of purchasing power. But few people, and even fewer businesses, want to take out loans.

Compounding the issue, the Federal Reserve keeps bumping up short-term interest rates, forcing banks to begrudgingly increase the pennies they throw at depositors, while long-term interest rates remain steady or even drop a bit.

As short rates rise and long rates fall, there’s not much in the middle left for lenders.

Excuse me, I think I’m getting choked up. I might even cry crocodile tears.

After the financial crisis, the Federal Reserve guaranteed bank profits by first lending them enough of our money to ensure their survival, and then pushing short-term rates to zero. Depositors were lucky to earn 0.10% on their money, while loans still cost 3.5% to 4.0%.

To make matters worse, the Fed printed gobs of money and paid the banks interest to hold the extra funds on their books in the form of Interest on Excess Reserves, or IOER. This allowed banks to earn extra cash without doing business with other banks that might make questionable loans.

Essentially, banks made something for nothing, while you and I got nothing (no interest) for something (our deposits).

This went on for years as banks in the U.S. cleaned up their balance sheets. Eventually, the Fed started raising rates ever so slightly. Over three years, rates have inched up to a mere 1.50%. You won’t get that on your deposit account, of course, but you might eek out 1% or so.