Is 5.00% APY On A 3-Year CD A Good Deal Right Now?

With all the chaos in the American banking system going on right now, consumers across the country are looking to for the safest place to store and grow their hard-earned dollars. The stock market crashed last week, with double-digit declines for each of the 3 major indexes. Though American equities regained some ground today, we are still dealing with a serious bear market. From the Prime Rate website:

"...Since closing with record highs on October 9, 2007, the DJIA has now lost 5,713.34 points (40.336%), while the S&P 500 Index has declined by 665.93 points (42.547%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15..."

Most of us don't trade individual stocks on a regular basis, but most of us are linked to stocks by our retirement savings, like 401(k) and 403(b) plans. The waning stock market is especially bad news for those near retirement, as most portfolios have lost a lot of value this year.

I Am Grateful for The Conservative Ways of Credit Unions

Back in 2003, when the Federal Reserve dropped the fed funds target rate to 1.00%, which in turn caused the U.S. Prime Rate to drop to 4.00%, I was very interested in a credit card on offer from my credit union. The APR was 6.99% fixed, and the typical credit line for this particular Visa® card was $5,000. I wanted this card bad, not just because of the interest rate, but also because it was from my credit union, and I knew that the term and conditions associated with this card would be more consumer-friendly than any card on offer from any traditional bank.

When I applied for the card, my application was met with fierce resistance. My credit score wasn't that bad, but I was, and still am, self-employed, so my credit profile must have caused one or more red flags go up. The loan officer who reviewed my application asked for 2 years of tax returns and proof that I was making the money that I claimed I was making on the application. I submitted all the documentation they wanted (took about a week to fax it all), but, in the end, my application was rejected. I did not received a canned "dear john" letter from the credit union. The loan officer called me at my home and explained that the credit union could not approve my credit card application because I did not have enough collateral with them, i.e. I did not have enough cash on deposit. I was told that I could reapply at any time. That rejection was painful, but I understood: the best credit cards on offer from the best financial institutions will only go to consumers who are very secure financially. If I had around $5k in my saving or checking account, I probably would have been approved.

Play it very safe; lend conservatively; don't lend unless the member has been thoroughly vetted. It's because my credit union stuck by these principles that it has managed to avoid the financial ravages caused by the excesses of Wall Street investment banks and the debt associated with lending hundreds of thousands of dollars to first and second homeowners who couldn't afford the monthly payments. Wall Street banks like Citigroup® chased the 11%-13% returns promised by super risky mortgage-backed securities, and, when the subprime fiasco was unfolding last year, ended up paying 11% on a loan from the sovereign wealth fund owned by oil-rich Abu Dhabi. Bottom line: Citi® was relegated to subprime borrower status because they got sloppy and too greedy. They were, in essence, issued an 11% APR subprime credit card by a foreign government that makes unbelievable sums of money for doing next to nothing. How's that for irony?

Is 5.00% APY On A 3-Year CD A Good Deal Right Now?

Right now, financial institutions are really into Certificates of Deposit (CD's), as evidenced by the high yields being offered these days. A week ago, my credit union was offering -- and they were pushing this offer very hard -- a generous 5.00% APY on a 3-year CD (CD's are called Share Certificates at credit unions), which may seem kinda' weird, because, as you can see in the screen capture image I've posted to the right, the rates on offer for 42 and 60 months are lower. Should be: the longer you let them hold your money, the better the interest rate you get, right?

The target rate at which most healthy American banks and credit unions can borrow overnight funds from each other via the Federal Reserve -- the target fed funds rate -- was lowered to 1.50% last Wednesday, and is expected to be lowered again at the October 29 FOMC meeting. With all the turmoil in the credit markets, the Fed has allowed financial institutions to borrow vast sums at very low interest rates and for terms much longer than overnight[1][2][3]. But the prospect of locking in a rate of 5% for 3 years is very tempting for my credit union, because they know how rates are going to look about a year from now.

With all the money the Fed is dumping into the American and international banking systems, the price we'll all have to pay for the Fed delivering truckloads of cheap cash at the doorsteps of our banks is inflation. A lot of money is being dumped in an effort to loosen up frozen credit markets, and this will inevitably translate to high inflation down the road. The Fed will respond to runaway inflation by raising interest rates, no matter how anemic the economy is. Since all that money that'll be sloshing around in the economy is likely to cause inflation to accelerate at a fast clip, the fed funds target rate (FFTR) will likely be raised to a relatively high level. The median FFTR from 1990 to now is 4.5%; the average is 4.367%. Don't be surprised if the FFTR is 6.0% or higher 12 months from now.

So if my credit union can lock in 5% for 3 years, and the FFTR will go to 6.0% or higher within 12 months or so, then you can see that my credit union will have gained the advantage by the time the CD matures.

So, is investing in a 3-year CD @ 5.00% APY a good idea right now? Absolutely! But, if you can, go for a 12-month CD for now, or reserve as much cash as possible for next year. When the Fed ends the next cycle of raising the FFTR, I'm betting that you will be able to get even better returns with 3-5 Year CD's, so much better that I'm confident it'll be worth the wait.

Yes, I am grateful for my credit union. My Roth IRA has continued to grow despite all the nonsense going on in the banking system. And I'm confident that I have nothing to worry about.

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A Gruesome Suicide Next Door

I got home late last night, having spent the evening hanging out with friends. When I drove through the security gate of my apartment complex, I noticed some police activity at a building that's a good distance away from my building. I parked my car near my place, stepped into the house for a few minutes to rehydrate, then walked about a quarter mile to where I spotted the police cars. The police had just left, but Larry, a security guard I know, was still hanging around the building. I asked him what happened. At first, he didn't want to tell me because he was told by the cops to keep quiet about the details. But I was able to get him to talk with a little prodding and a bribe in the form of a can of Cherry Coke I had in the car.

Turns out there was a fire in a downstairs apartment. The blaze produced so much smoke that the building had to be evacuated. Larry told me that the fire started in the bathroom and spread throughout the apartment. A middle-aged woman had committed suicide. Apparently, she poured gasoline into the bathtub, jumped in then sparked up a cigarette lighter. Larry let me into the crime scene for a minute so that I could satisfy my curiosity. The electricity was out in the bathroom so I couldn't turn on any lights in there. I couldn't see anything in the bathroom, but I was able to see that the rest of the apartment was a complete mess. Larry told me that if I went into the bathroom with a flashlight, I would have been able to see burnt flesh everywhere.

So, obviously, my next question was why. I was almost certain that it had something to do with the stock market (it crashed last week) but I was wrong. Larry informed me that the suicide note made no mention of finances at all. The victim was distraught because her partner had recently ended their romantic relationship.

What a strange way to end one's life. Surely some pills or a handgun would have been far less painful. Why gasoline?

I don't believe in suicide, but I do believe that euthanasia is acceptable in some very extreme circumstances, like if an individual is in constant and overwhelming pain, and there is no other way to end the suffering. To force someone to life a full life in terrible pain is cruel and should not be permitted in any civilized nation.

Suicide because you were jilted by your partner? I can't go for that. Suicide because you lost all your money in the stock market? Give me a break. Suicide because some debt collectors won't stop calling? Please!

But it happens:



Know your rights! Debt collectors who call and harass consumers are breaking the law, and they know it. If you are being harassed, visit Nolo.com and download a Demand Collection Agency Cease Contact form. Cost is $4.99. Or use one of the many form letters available for free on the Internet.

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