Why are savings / investment interest rates so abysmal in comparison to the past?

May 30, 2004 4:47 PM

My parents used to tell me fantastic tales, that back in the day (being the 1950s), banks offered interest rates on savings accounts upwards of 10%, with almost no fees and charges. In comparison, my current bank (in Australia) offers me 0.5% interest, which is completely countered by about the first hour's worth of monthly charges. This is despite the bank being more efficient, having fewer employees, and having greater access to global capital. Can anyone tell me, if the global economy is really doing so great these days, why are savings / investment interest rates so abysmal in comparison to the past? Will this ever turn around again in the future?
posted by Jimbob to Work & Money (15 answers total)

What they forgot to mention was the interest rate they were paying on their mortgage or that they had to have all their savings with that particular bank for a looong time, make insane promises to the bank manager and generally prove that they didn't need the money before the bank would even think about considering the possibility of letting them apply for a mortgage. The deregulation of the banking industry in Australia put an end to all that and, as far as I know, to the relatively high interest rates paid on savings.

This situation will turn around just as soon as pigs sprout wings and fly, or when the government re-regulates the banking industry, whichever comes sooner (my bet is on the pigs).

0.5%? You need to change banks.
posted by dg at 5:06 PM on May 30, 2004

Response by poster: Some of those banks you've linked to appear to offer 0.00% interest on the amount I have in my day-to-day account! Others look better, but require rather large opening balances. I guess I should look around and try to find the optimum, though. Failing that, I'll do my banking under my matress...
posted by Jimbob at 5:13 PM on May 30, 2004

Interest rates were not particularly "high" in the fifites, it was more the seventies and early eighties. This chart is the U.S. prime rate, but the general trend will have been true worldwide (among developed nations).

High interest rates are not free money. To be devastatingly simplistic, interest rates are set by investors' (usually correct) expectations of future inflation rates. Therefore, high inflation and high interest rates generally go hand in hand. If you want a return to the golden days of the 16% money market fund (early eighties), you'll have to put up with prices rising so fast your head will spin, horrendous shortages of essential goods, massive layoffs, etc. Not a fun thing.

Low interest rates, while not great for investors, are very good for others -- people can afford more home (and, more important, a first home), businesses can borrow capital at more affordable rates, and so are more able to hire and grow, etc.
posted by stupidsexyFlanders at 5:18 PM on May 30, 2004

Investigate your local credit union. There are many other kinds of financial institution than banks.

You're only going to see 10% if inflation rises significantly.
posted by i_am_joe's_spleen at 5:20 PM on May 30, 2004

I recall working at a working at credit union in the mid-80s, and we paid 7.5% on many accounts. Of course, this was just before interest rates that people PAID dropped significantly -- until then, there was no such thing as "0% financing" and "1.9% financing!" on new cars.
posted by davidmsc at 5:27 PM on May 30, 2004

Response by poster: My current account is with a credit union, which is what depressed me so. Even they seem to suck at the moment, although some are better than others.
posted by Jimbob at 6:13 PM on May 30, 2004

In addition to the comments already made, I think it was simply much more common for our grandparents' generation to simply put their money in the bank as opposed to investing it here, there and everywhere. Banks probably got more play, made better margins, and could offer more.

Consumers now have many more investment avenues available to them much more conveniently. At a loss to compete with all of these for better returns, banks have chosen to take the role of money services institutions, charging for convenience features (like online banking and ATMs) instead of serving as investment institutions and paying interest on savings.

Our grandparents never had the convenience features, that today's bank typically offers. Convenience features are the big banks' main business, now, and they charge for it (fees). You can really get screwed on the monthly fees if you're not careful, and the interest rates suck unless you carry a high balance or are willing to sacrifice liquidity.

In other words, banks are no longer places to invest money, but places to carry a financial account and enjoy certain services and conveniences.

Interest rates suck right now, incidentally, but if you want to beat .5%, talk to a broker, not a banker.
posted by scarabic at 6:16 PM on May 30, 2004

I remember big, juicy interest rates in the late 70s and early 80s. Big, juicy inflation rates, too.
posted by gimonca at 7:13 PM on May 30, 2004

I remember big interest rates in the '80s too - my mother had to sell her house when the interest rate on the mortgage climbed to 18%. Don't expect me to wish for those times back now that I have a mortgage of my own.

Another factor in the lower interest rates is the proliferation of banks, finance companies/brokers and credit unions since deregulation - back when your parents were your age, they probably only had four banks to choose from, so each bank got a much larger share of the investment pie.

banks are ... places to ... enjoy certain services and conveniences.
Sorry, but I can't parse that - banks, services and conveniences all in the same sentence with no negative modifier?
posted by dg at 7:37 PM on May 30, 2004

A high interest economy is a sight to behold, at least as twisted as the current state of lending.

I recall all matter of strange TV telemarketed crap, all sold with a 60 day money back guarrantee.

The goal wasn't to sell units, it was to gather a big temporary pile of cash from consumers, (interest free) and keep it for a moth or two so it could earn you interest.
posted by Fupped Duck at 8:07 PM on May 30, 2004

I note that bank profits in Canada have hit new records, beating old ones by about 50%. Bastards.
posted by five fresh fish at 9:12 PM on May 30, 2004

but if you want to beat .5%, talk to a broker, not a banker.

Just don't forget that those money market accounts are NOT FDIC insured (for those of you in the US who care about that sort of thing.)
posted by gen at 10:12 PM on May 30, 2004

When I lived in Australia I used the internet-only ING. Their interest rates were consistently better than any of the (shockingly bad) Australian banks, with no fees or gotchas to speak of. They currently offer 5.25% pa variable interest on savings accounts. I recommend them without reservation.
posted by stavrosthewonderchicken at 11:23 PM on May 30, 2004

Here's an appended question: as one's savings account balance grows from zero upwards, at what point is it reasonable for one to decide that one has enough money that it would now be better invested somewhere other than a bank? My bank has variable interest rates for balances over $1,000. Is that a rip-off compared to, say, a CD or mutual funds?
posted by bingo at 10:27 AM on May 31, 2004

at what point is it reasonable for one to decide that one has enough money that it would now be better invested somewhere other than a bank?

6-12 months of living expenses, typically, depending on your comfort level.
posted by kindall at 11:50 PM on May 31, 2004