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Low Rates Good for Banks, but Pity the Saver

Aren’t low short-term interest rates wonderful?

If you are a bank, the answer is yes, particularly because the low rates are accompanied by somewhat higher longer-term rates.

If you are a saver, however, your view might be very different.

This month some interest rate spreads have reached record levels. The difference between what the Treasury pays on a one-year bill — less than half a percentage point — and what it pays on 10-year bonds — a little below 4 percent — expanded to the largest on record this month. In banking jargon, that is a very steep yield curve.

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For banks, that is a license to make money with very little risk, particularly since they can get people to open savings accounts that pay close to nothing.

This week I checked the Web sites of the four largest banks in the country — Bank of America, JPMorgan Chase, Citigroup and Wells Fargo — to see what they were offering on an ordinary savings account, say, one with $5,000 in it.

Chase, the retail operation of JPMorgan Chase, and Wells Fargo were offering 0.05 percent. That $5,000 would produce monthly interest of almost 21 cents. If you left such an account untouched for 20 years, and rates stayed where they are, the glories of compound interest would lead to a profit of $50. Before taxes, of course.

At that rate, if you wanted to put away enough to produce a retirement income of $50,000 a year, without touching the principal, you would need $100 million on deposit.

To be sure, you could get a better rate with that kind of money. But not that much better. JPMorgan Chase’s overall cost of funds in the first quarter of this year was only 0.83 percent.

Largely thanks to that, the bank reported an interest rate spread — the difference between what it charges for money and what it pays for it — of 3.24 percentage points in the first quarter. That is the highest for any quarter in at least five years. (Despite that spread, JPMorgan Chase reported losses on its consumer business, caused by bad loans made and credit cards issued while the credit party was going on.)

The other two banks were a little more generous to savers. Bank of America was offering 0.10 percent, and Citi was willing to pay a relatively high 0.25 percent.

If you open an account like those, be careful. If you make too many withdrawals or let the balance slip too low, some banks will charge fees. You don’t need a lot of fees to wipe out a rate of 0.05 percent. On the other hand, if you sign up for other services, the banks may offer slightly higher rates.

The lowest rate I found was from Chase. On an interest-bearing checking account, it offers 0.01 percent. With a $5,000 constant balance, by the end of the year you could accumulate 50 cents in interest.

Rates are low because the Federal Reserve wants them there, to help clean up the financial mess and stimulate the economy. All that makes sense, but it also feels unfair.

A large part of the blame for the mess should be laid on bankers, who made the bad loans and invented all those strange securities that blew up. But many banks were bailed out, and all that survived are now in a position to profit from such low short-term rates.

Some of the blame should go to individuals who lived beyond their means, buying houses they could not afford with funny mortgages. Some of those people are now getting government-subsidized adjustments to their mortgage payments, and they may even be forgiven part of their loan, although the banks are greeting that proposal with a distinct lack of enthusiasm.

Meanwhile, with little public attention, those consumers who acted responsibly, the ones who refrained from buying houses they could not afford and did not take out home equity loans to finance consumption, but instead saved their money for a rainy day, must feel like losers. If they put those savings into the stock market, they see share prices about where they were 11 years ago, and profits over the last year were probably not enough to offset losses in the previous 12 months.

And if they kept the money in cash, seeking to avoid all risk, this is their reward: 0.05 percent.

Now does that sound fair? Of course not.

That said, the current spread between Treasury rates does offer encouragement that things will get better for the economy, and for savers. The last two times the spread between the one-year and 10-year Treasuries approached this level were in 1992 and 2003. In each case, that happened as slow recoveries after recessions were finally about to accelerate.

That such a large spread has come this soon after the 2007-9 recession is another indication that this economic recovery is likely to be much stronger than many anticipate.

After America’s previous banking crisis, in the early 1990s, a steep yield curve helped banks to earn good profits at low risk. They could borrow from the public at very low rates, and charge much better rates on loans. If they saw few attractive loans, they could still earn good profits just by buying Treasury securities. That yield curve literally saved some banks, among them Citibank.

It did that at the cost of discouraging lending, since there were risk-free profits to be made while the banks cleaned up from the mess their all-too-risky previous lending had produced.

That could be happening again.

Much of the talk about whether the Fed should keep rates low focuses on the risk of higher inflation if it does so, or the risk of a new recession if the Fed allows rate to rise to anything close to normal levels. Perhaps the toll on savers should also get some attention.