In a healthy economy, the CD should always have a higher rate. For those that don’t know, a certificate of deposit is a sort of “long term” savings account. The idea is that you deposit some amount in a bank for a fixed length of time (often three months, six months, or one to five years) and, in its simplest form, you are penalized if you withdraw from the CD account during this time period. The idea is that the bank has a guaranteed source of funds. This illiquidity is good for the bank, but inconvenient for you. To make this inconvenience worth your while, the bank should give you a higher rate.

But I can’t find any banks that are actually doing so, at least for CDs with a reasonable term length. Citibank, for example is advertising an “Ultimate Savings Account” with a rate of 1.01%. Meanwhile, their CD terms are much lower: 3-month 0.25%, 6-month 0.5%, 10-month 0.5%. At 12-months, you get the same rate as the savings account: 1.01%. Only at 18 months do they do better, and then not by much (1.1%). For three years, they’ll give you 1.5%. Other banks have much the same setup.

So, what the banks are saying with their behavior is that it is better for them if you have a savings account, rather than a CD with a term less than a year. (Or, put another way, they are saying “if you want a CD with a term less than a year, then we don’t really want your business”.) Why would this be? On the surface, it would seem that money locked in to them even for a short period would be better for them than money that can be withdrawn at any time. I can only think of a few possibilities this would not be so, most of which are unsatisfying:

• Loss leader: Perhaps it isn’t that CD rates are too low, but that savings account rates are artificially high, with the idea that banks are inflating them to gain customers, with the intent of lowering the “teaser rate” drastically after some (short) period and hoping the customer doesn’t notice. It seems like if you make the assumption of classical economics that people are rational, this seems likely to fail. On the other hand, this classical assumption is almost always wrong, so maybe the bank knows they can get away with this kind of thing.
• Overhead: It could be that the costs of offering, setting up and maintaining CD accounts are larger than they seem. For the current behavior to be rational, it would have to mean that only if a CD lives for 18 months does it become worth the extra effort for the bank, compared to a savings account. I find this hard to believe, but, on the other hand, about the only time I’ve talked with a human at a bank in the last few years was to do something with a CD, so maybe it’s true. If you look at the way various ladder strategies work, you can imagine that a higher cost for customer interaction is plausible.
• Flexibility: Typically, rates of savings accounts are not fixed, while those of CDs are. This means that a bank that has lots of customers with savings accounts has a bit more flexibility than one where the customers all have CDs. That is, if things go bad, they can set the rate of the savings accounts to zero to control their costs, while the cost of the CDs would remain a constant drain. It seems to me that if this is really the reason, then these banks are in worse shape (or, at least, think they are) then we thought.
• Contempt: It could just be that banks think their customers are too dumb to notice. Maybe they are even correct. For example, I opened a CD a number of years back at over 3%. As the term on this CD expired, I let it automatically renew. At some point during these renewals, the rate dwindled below 1%, yet I did not realize this until recently. I’d like to think not enough of the country is as dim as I was to make this a viable strategy for banks, but I’m probably wrong.

Maybe all of these ideas have some truth? Whatever the case, it is fairly baffling. I’d love to hear from someone who knows better.

Wrong.

The American public, that is currently raising such a stink about this crisis, did as much to cause it as anyone. They are not the sole cause, to be sure, but they are not innocent and it disgusts me they they (we) are getting a pass. One of the few to even mention this is Chris Plummer, who recently provided a menu of blame that included the general public, twice:

Consumers

Railing against greedy thieves in the financial industry ignores how readily Americans availed themselves of the cheap credit that same industry offered them. If there’s honor among junkies, it’s that they don’t blame their drug dealer for their addiction.

…

American workers

Employees across all industries suddenly fear for their jobs and resulting financial hardship as the nation appears headed into a recession of considerable depth. The ones most at risk are the millions who lived beyond their means and failed to steer earnings into savings for just such potential emergencies. They sadly face just desserts for feasting high on the hog.

That may be harsh, but it is largely true. It’s clear that the trigger for this crisis has been home loans made to people who ultimately couldn’t pay them back. Yet, in a society of finger pointing, somehow no one seems willing to even mention that, just perhaps, the people that agreed to take such loans might have, just perhaps, helped to totally screw us all.

The common rebuttal to this is “but there was criminal, predatory lending! Those people didn’t know what they were getting into! They were being lied to!” But, even if there was outright fraud in every single case, “those people” still signed the paperwork. Essentially, this rebuttal is saying that consumers who suck at math and reading comprehension are automatically innocent. This argument doesn’t hold up in any other venue. I’d like to believe that a small outlay of cash to a rich Nigerian in exile would net me millions but, if I fell for this scam, no one would call me an innocent victim. They’d say I got what I deserved for being so stupid and greedy. Blame certainly falls on the scammer, but also on the willing participation of the scammed. It takes two to tango.

When you are out and about, and a bomb set by a complete stranger goes off and kills you for no reason, you are an innocent victim. If you willingly enter a contract that fully explains what will happen, you are not innocent, no matter what anyone told you the contract said. That isn’t how contracts work. If you don’t understand a contract, you don’t sign it. Especially for something as large and important as a home.

You hear a lot of demand for “accountability” from the public, the media and politicians regarding Wall Street, government, the banking industry and so on. But this same public seems pathologically unable to be accountable themselves. We demand responsibility from others, but shown none ourselves. Why would we? We have no end of talking heads telling us we are the innocent victims.

Now, as mentioned, “Main Street” isn’t the sole culprit in this. There are a lot of other forces at work (which samaBlog lucidly explained). The point of this post is not to lay the blame solely at the public’s feet, but rather to act as one of the only places that assigns them any blame at all.

I tend to agree with the sentiment from a bad Michael Crichton movie that started this post, that blame just isn’t particularly useful. But, if you must point fingers, make sure you point them in the right direction.

In the past five years, health insurance providers have gained more and more control over the business of health in the United States. This has made them very profitable, as this comparison of four large, publicly held health insurers—Humana (HUM), CIGNA Corporation (CI), United Health Group Inc. (UNH) and Aetna Inc. (AET)—with the S&P 500 index from 2003 to 2007 shows (for the color blind, the S&P line is the one on the bottom):

Image and data from Google Finance

In the process, they have essentially gained control of the pricing of nearly every procedure that they cover. They, not the doctor, set how much the doctor charges. I will have more to say about this later but, briefly, the result of this has been to cause a toxic environment with at least two major consequences: 1) in most cases, neither the person consuming health care nor the person providing it have any input or influence on what the care costs (this basically turns the invisible hand into a middle finger) and 2) doctors are now, essentially, indentured servants to insurance companies.

As a direct result of the latter development, doctors in private practice are now forced to make one of three choices: either close their practice down now, continue practicing until forced to close by bankruptcy, or find some way of making money that doesn’t involve dealing with insurance companies. A great many doctors have been choosing the third path by exploiting a loophole of sorts: insurance companies usually don’t cover voluntary surgery. Voluntary surgery, like breast augmentation.

It should, therefore, come as no surprise that plastic surgery is on the rise. There are now huge numbers of doctors motivated to get people to pay for it, so that the doctors themselves can, you know, house themselves and eat. This makes it cheaper, easier to get, and gives plastic surgery the perception that it is now routine (which, sadly, it is becoming). Ever heard of labial plastic surgery, where women have their genital “lips” reduced? You will, as millions of OB/GYNs discover they can’t actually survive by doing things like delivering children into the world.

As I said, I will have more to say on this later. For now, keep in mind when watching all these idiots on television that the rise in plastic surgery has real economic causes.

This sells a lot of the superstar’s albums and makes tons of money for the label. For the superstar, there isn’t much evidence that this will lead to strong career. In an analysis of long term successful albums Chris Johnson observes that, in spite of making millions, there is…:

…considerable evidence to suggest that when Britney [Spears] stops being pushed on the market by her record company, sales will fall off a cliff.…There are very few acts post-1990 that can boast platinum certifications more than a year after release.…The promoters will just as happily push Hanson as Bob Dylan, Spice Girls as Aretha Franklin: they are completely agnostic on the quality front.…In effect, the record labels cannot afford to build artist careers anymore. They can only afford to milk the current promotional mechanism.

I think this is fantastic because it suggests a way to hasten the demise of such record companies, which have become relics clinging to outdated methods instead of offering me the products that I want. The strategy to do so lies in the answer to the following question: If, hypothetically, Britney Spears were to vanish in some way (sudden retirement, injury, plane crash, etc.) what would that do to the financials of her label and the company that owns it. If such an event were unexpected, it’s fair to say that Jive Records would need to scramble to survive and would have a fair chance of collapsing. Sony would, unfortunately, fair better, being more diversified, but would take a financial hit as well.

By putting their eggs in one basket, record labels leave themselves open to attacks aimed at destroying the basket that don’t cost very much. All a dedicated group of people would need to is target the major superstars of a label all at once and bring them down with smear campaigns and/or industrial espionage (e.g. stealing and destroying master tracks before they can be published, injecting random signals into a CD production, etc.). Since the media largely no longer check facts, they would be useful accomplices. A clever group could probably do the whole thing without even breaking the law.