"Are You Losing Money By Saving It?"

LIANE HANSEN, host:

If you have money stashed away in a C.D., savings or money market account, then you know the returns have been terrible lately. The Federal Reserve slashed short-term interest rates close to zero, and investors are paying for it.

Roben Farzad is the senior writer for BusinessWeek, and he joins from out New York bureau. Welcome back, Roben.

Mr. ROBEN FARZAD (Senior Writer, BusinessWeek): Hi, Liane.

HANSEN: You know, in some cases, interest rates on savings accounts, I mean, they're like tenths of one percent. What's the Federal Reserve's strategy in keeping rates so low?

Mr. FARZAD: The Fed euphemistically calls this flooding the plains strategy recapitalizing the banking system. So it's taking from savers, these ultra cheap deposits and giving them to banks, and they're putting them into Treasury securities, which yield higher, or when opportunistic, they'll go and actually loan the money out and enjoy very toothsome margins.

HANSEN: But if you consider fees, taxes and rising inflation, I mean, aren't investors actually losing money over time?

Mr. FARZAD: No doubt about it. And I think this is one of the unsung stories of this economic calamity. Those who are on their best behavior, those who resisted, I think, the siren calls of teaser rate mortgages and subprime largely have very little vindication in this. Of course, investors last year were saying that you should prioritize return of money over return on your money. But that seems to be an old kind of rule, considering how much the markets and all manner of assets have gone up this year.

So, in fact, you are the victim of a negative rate on your savings when you consider fees and inflation. And that's the Fed's intention to get you out of cash.

HANSEN: And into what?

Mr. FARZAD: Into investing, into any asset out there that's productive, into hiring, into capital, into equipment, into equities so companies can see their equity capitalizations go up. And Mr. Bernanke has telegraphed it for the foreseeable future, rates are going to remain at emergency lows.

HANSEN: Some analysts are saying the Federal Reserve is trying to drive investors into the stock market instead, as you said, to help buoy the economy. But you say a mass rush of investors into the market has its own risks.

Mr. FARZAD: Yes, Liane, we have seen that this year. You know, market wags call this a melt-up as opposed to a meltdown, where it was so painful to be in miniscule-yielding cash and C.D.s and even short-term Treasuries were yielding near zero at the heart of the crisis, that they went into ABC - Anything But Cash. And we saw that in junk this year. We saw that in emerging markets, small caps, large caps, gold, lead, you name it. It was anything but, you know, getting that 0.005 percentage rate on your checking account.

HANSEN: Yeah, well, all right, there's still not a lot of return on investments so, I mean, what should people do? Should they save? Should they invest?

Mr. FARZAD: You're not in a great position right now and the Fed has a very blunt instrument right now with emergency rate cuts. And it invariably leads to something like gold breaking $1,000. Or we saw money sluice into commodities last year and oil broke $140. And by the way, it tends to hurt the dollar, as well. I mean, when we keep rates this low, we're debasing the currency and that could lead to inflation down the road, which makes these low rates even more painful.

HANSEN: So, get out your crystal ball. Do you have any other financial predictions for the year ahead?

Mr. FARZAD: I hope a return to normalcy, whatever normalcy was. I mean, when you think about it, when was it last normal? If we could pick out a year this decade or anytime in the past 15 years when we didn't have these random economic crises or emerging market debt bombs or terrorism on the radar, I'm very curious and the whole world is waiting with bated breath to see how this crisis ultimately unfolds and, indeed, if we have to pay for this on the other end with inflation by debasing our currency.

HANSEN: Roben Farzad is a senior writer for BusinessWeek. He joined us from our New York bureau. Thanks. Happy New Year, Roben.

Mr. FARZAD: Happy New Year, Liane.