Falling interest rates

Have they cut lending rates simultaneously?

Probably no lending cut in real terms.I have 2 Isas,1 at 0.6% which is easy acces and 1 at 2%.For the 2% I had to lock the money away for 5 years.That 2% rate was taken over a year and a half ago.You won't get that now on the high street.

If the rates you mention are going to be the norm for the preseable future take your money and buy premium bonds.You ain't got nothing to lose.

Apologies for a straight cut and paste, but the following was posted by DR MARK, of this parish, last month, a pretty fair summing up of the banking system which explains that it's not quite as simple as the margin between interest paid on deposits and interest charged on loans.

What are banks for? (Or, fractional reserve banking explained - DrM)

'Punch' Magazine - 3rd April 1957

Q: What are banks for?

A: To make money.

Q: For the customers?

A: For the banks.

Q: Why doesn't bank advertising mention this?

A: It would not be in good taste. But it is mentioned by implication in references to reserves of £249,000,000,000 or thereabouts. That is the money they have made.

Q: Out of the customers?

A: I suppose so.

Q: They also mention Assets of £500,000,000,000 or thereabouts. Have they made that too?

A: Not exactly. That is the money they use to make money.

Q: I see. And they keep it in a safe somewhere?

A: Not at all. They lend it to customers.

Q: Then they haven't got it?

A: No.

Q: Then how is it Assets?

A: They maintain that it would be if they got it back.

Q: But they must have some money in a safe somewhere?

A: Yes, usually £500,000,000,000 or thereabouts. This is called Liabilities.

Q: But if they've got it, how can they be liable for it?

A: Because it isn't theirs.

Q: Then why do they have it?

A: It has been lent to them by customers.

Q: You mean customers lend banks money?

A: In effect. They put money into their accounts, so it is really lent to the banks.

Q: And what do the banks do with it?

A: Lend it to other customers.

Q: But you said that money they lent to other people was Assets?

A: Yes.

Q: Then Assets and Liabilities must be the same thing?

A: You can't really say that.

Q: But you've just said it! If I put £100 into my account the bank is liable to have to pay it back, so it's Liabilities. But they go and lend it to someone else and he is liable to have to pay it back, so it's Assets. It's the same £100 isn't it?

A: Yes, but..

Q: Then it cancels out. It means, doesn't it, that banks haven't really any money at all?

A: Theoretically..

Q: Never mind theoretically! And if they haven't any money, where do they get their Reserves of £249,000,000,000 or thereabouts??

A: I told you. That is the money they have made.

Q: How?

A: Well, when they lend your £100 to someone they charge him interest.

Q: How much?

A: It depends on the Bank Rate. Say five and a-half percent. That's their profit.

Q: Why isn't it my profit? Isn't it my money?

A: It's the theory of banking practice that...

Q: When I lend them my £100 why don't I charge them interest?

A: You do.

Q: You don't say. How much?

A: It depends on the Bank Rate. Say a half percent.

Q: Grasping of me, rather?

A: But that's only if you're not going to draw the money out again.

Q: But of course I'm going to draw the money out again! If I hadn't wanted to draw it out again I could have buried it in the garden!

A: They wouldn't like you to draw it out again.

Q: Why not? If I keep it there you say it's a Liability. Wouldn't they be glad if I reduced their Liabilities by removing it?

A: No. Because if you remove it they can't lend it to anyone else.

Q: But if I wanted to remove it they'd have to let me?

A: Certainly.

Q: But suppose they've already lent it to another customer?

A: Then they'll let you have some other customers money.

Q: But suppose he wants his too..and they've already let me have it?

A: You're being purposely obtuse.

Q: I think I'm being acute. What if everyone wanted their money all at once?

A: It's the theory of banking practice that they never would.

Q: So what banks bank on, is not having to meet their commitments?

YOU GOT IT!

We're in a real mess aren't we.

The banks buy money on the money markets to fund their lending. Only a small proportion of the lending is made using savers' deposits. We stopped using banks in 1988, and have used the Nationwide ever since. Of course, it's as near to being a bank as a mutual can be, but we get a lot more than 0.01% on our savings. The rates are still pretty dismal though, but 1.2% is a lot better than 0.01%. In fact, it's 120 times better. 

Scooot posted:

If the rates you mention are going to be the norm for the preseable future take your money and buy premium bonds.You ain't got nothing to lose.

What constitute as premium bonds in the UK? I have read somewhere that there is a huge amount of infusion in bonds right now in the UK.

In the US, T -Bills or Municipal bonds are not as a sure thing as they used to be. In order to get 2% interest in T bills  I have to lock in for 20 years!

High quality corporate bonds are looking attractive as ever right now.

Yes, HH. I know some other accounts offer much better rates. For example, I've another easy access account with Virgin that pays 1.25%.   What I'm struggling with is how a bank like Nat West/RBS is going to attract capital to use to lend, at a profit, to those who want to borrow.  Indeed by offering near zero interest rates I would expect them to experience a rapid outflow of capital because many savers will regard that rate as not just derisory but almost 'taking the pi**!

Dave M - I recall Dr Mark's post with that old and funny explanation of the banking model. I'm also aware of his regular posts forecasting that we are all (save for the elite, as Dr Mark asserts)  heading for a global financial meltdown.  Dr Marks arguments about global finance are pretty complicated. But leaving aside that complexity I just don't get the business model which says 'let's offer our existing and new customers no reason to invest with us'!   

kuma posted

High quality corporate bonds are looking as attractive as ever right now.

Hah! Nope.

Hi Kuma,

The bonds I refer to in short are lottery tickets.The premium bonds don't gain interest but are entered into a monthly draw.The draw picks random premium bond numbers and allocates ( basically a prize ) of between £25 - £1000000 if you are fortunate.You can cash them in at any time and receive full value back.

My grandma bought me £15 worth when I was born.I am now 49 and haven't won a penny.So probably not the best investment if you are looking for a guaranteed return however small.

I do know someone however that had £3000 pounds invested and recently won £50000.

Scott

The premium bond prize fund is basically the interest, it's just random who gets some, each bond is supposed to have the same chance. The current prize fund interest rate is 1.25%. I hab £1000 worth a few years ago, won £50 the first month and then nothing for 2 years, the rate halved in that time so I cashed them in and bought a Hicap. The interest rate on those was more like -50%. in the first year but improved after that.

Scooot posted:

Hi Kuma,

The bonds I refer to in short are lottery tickets.The premium bonds don't gain interest but are entered into a monthly draw.The draw picks random premium bond numbers and allocates ( basically a prize ) of between £25 - £1000000 if you are fortunate.You can cash them in at any time and receive full value back.

My grandma bought me £15 worth when I was born.I am now 49 and haven't won a penny.So probably not the best investment if you are looking for a guaranteed return however small.

I do know someone however that had £3000 pounds invested and recently won £50000.

Scooot,

How interesting. Lottery ticket as a form of savings. Is this something UK government issue?

I suppose it's safe if you don't lose the principal no growth for 50 years is worse than a CD or saving passbook. :/

JamieWednesday posted:

kuma posted

High quality corporate bonds are looking as attractive as ever right now.

Hah! Nope.

Yeah. but hate to lend the free money to the bank!@

Looks like FEDS are going to raise the interest by the end of the year in the US but I'll never see a kind of yield I used to get. 

Hi Kuma,

Yes,it's through the uk gouverment.

The national savings and investment agency.

scott

MDS posted:

Dave M - I recall Dr Mark's post with that old and funny explanation of the banking model. I'm also aware of his regular posts forecasting that we are all (save for the elite, as Dr Mark asserts)  heading for a global financial meltdown.  Dr Marks arguments about global finance are pretty complicated. But leaving aside that complexity I just don't get the business model which says 'let's offer our existing and new customers no reason to invest with us'!   

No, I don't get the business model either, but trying to shift funds to keep up with the ever downward spiral of interest rates has become somewhat self defeating, and yet.........................the banks continue to make huge profits.