Tag: banking

Some remedial math for Capital One bank

Capital One Bank’s latest ad campaign annoys me and it has nothing to do with Jerry Stiller, who I think is a great comic actor and who I loved in Seinfeld.

Capital One’s latest campaign talks about how great their checking account is because it pays 5 times the national average. Five times the national average. That sounds pretty remarkable if you don’t have the slightest grip on even the most remedial math. Furthermore, it is a classic example of how statistics can be deceiving while the underlying statement remains perfectly true.

I suspect that most checking accounts these days pay no interest. A no interest checking account has an interest rate of 0%. Let’s pretend for a moment, therefore, that the national average for checking accounts is 0%. We learn very early in our schooling (about the time we start learning the multiplication tables, what, second, third grade) that zero times any number is zero. With that in mind, Captial One bank pays 5 x 0% which equals exactly 0% interest. Note that the statement, five times the national average is true because 0 times any number is 0.

Of course, there are some banks who pay interest on checking accounts. My bank is one such bank so I checked to see what the interest rate was. It turns out that it is 0.01% on any part of the balance over $2,000. That means I earn no interest on the first $2,000 in the account. On anything beyond that, I earn one one-hundreth of a percent. Put in a way people can better understand, to earn one dollar in interest for the month, I’d need a balance of  $12,000 in my checking account. For one measly dollar in interest.

Okay, so Capital One pays five times the national average. Since many banks pay no interest and some pay 0.01% interest, the national average will be somewhere between 0 and 0.01%. Let’s split the difference and call the national average 0.005%. That’s one five-thousandth of a percent. I multiply this number by 5 and get 0.025%. Exactly one quarter of a percent interest on my checking account. If  I am very luck, I might earn a dollar or two each month. Of course, there are account fees to consider, which would easily wipe out these earnings, so what’s the point?

Mostly, though, my gripe is with how much of a big deal the ad campaign makes FIVE TIME THE NATIONAL AVERAGE seem. When you are talking about such incredibly low interest rates to begin with, while the underlying statement is true, the campaign itself seems intentionally deceiving.

History repeats itself: the financial crisis of Rome

From pp. 331-332 in Caesar and Christ:

The famous “panic” of A.D. 33 illustrates the development and complex interdependency of banks and commerce in the Empire.  Augustus had coined and spent money lavishly, on the theory that its increased circulation, low interest rates, and rising prices would stimulate business.  They did; but as the process could not go on forever, a reaction set in as early as 10 B.C., when this flush minting ceased.  Tiberius rebounded to the opposite theory–that the most economical economy is the best.  He severely limited the governmental expenditures, sharply restricted new issues of currency, and hoarded 2,700,000,000 sesterces in the Treasury.  The resulting dearth of circulating medium was made worse by the train of money eastward in exchange for luxuries.  Prices fell, interest rates rose, creditors foreclosed on debtors, debtors sued usurers, and moneylending almost ceased. The Senate tried to check the export of capital by requiring a high percentage of every senator’s fortune to be invested in Italian land; senators thereupon called in loans and foreclosed mortgages to raise cash and the crisis rose.  When the senator Publius Spinther notified the bank of Balbus and Ollius that he must withdraw 30,000,000 sesterces to comply… the firm announced its bankruptcy.  At the same time the failure of an Alexandrian firm… and the collapse of the great dyeing concern of Malchus at Tyre, led to rumors that the Roman banking house of Maximus and Vibo would be broken by their extensive loans to these firms.  When its depositors began a “run” on this bank it shut its doors, and later on that day, a larger bank… also suspended payment…. One after another the banks of Rome closed.  Money could be borrowed only at rates far above the legal limit.

Sound familiar?