Tuesday, March 24, 2009

Blame your grandparents...

Yes the whole financial meltdown was caused by you grandma and grandpa. After the tragedy of September 11, 2001, the financial markets suffered a shake-up that showed the fragile nature of the system. Many people like your grandparents (and me) pulled a lot if not all of their monies out of risky investments and put it in some type of secure fund. Many of the guaranteed funds offered a 4 or 5% return. This was small potatoes at that time, but the safety assurance was a load off their minds.

To get the highest return, the banks would offer you a higher percentage return if you would invest in a certificate of deposit, especially a long term CD like a 36 to 48 month maturity. This was the case up until around the beginning of 2006. At that time you could get a 5.75% (Annual Percentage Yield) CD with a maturity of 36-48 months. Many people took the banks up on this safe form of investment.

The bad news is, as the mortgages failed and the market tanked, the banks were still required to pay this "guaranteed" rate. So the money they got from your grandma and grandpa was invested by the banks in mortgages and investments that had generally earned a positive return was now losing money ... bad. So in other words, banks were headed for the red. Other factors actually contributed to unfortunate outcomes, but your grandma and grandpa were partly to blame.

The good news is, the banks were VERY quick to realize this and the guaranteed interest rates have dropped to around 2%. and all the long term CD's are now maturing and the banks can get back on track to black.

So thanks a lot grandma and grandpa for the near collapse of the nation. We have the last unfortunate laugh though because people on fixed incomes that use to rely on the revenue from interest on their CD's are royally screwed.

So I guess we are even...

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