Banks getting higher interest rates than everyone else (from Fed)

Discussion in 'Economics & Trade' started by kazenatsu, Feb 9, 2018.

  1. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    Banks that belong to the Federal Reserve system have to buy stock in their regional Federal Reserve Banks which they are not allowed to trade but which pays dividends. The current dividend rate is 6 percent. That's a 6 percent rate of return on their money.

    Meanwhile the return on 10-year Treasury bonds is 2.8 percent.

    Tell me, where in the U.S. economy right now can you find a guaranteed 6 percent rate of return on your investments without any risk?


    One might say that private big banks have an ownership stake in the Federal Reserve. That may be a bit concerning considering the Federal Reserve is the entity who issues U.S. dollars.
    (although dollars are physically printed by the U.S. Treasury, they are not issued by the U.S. Treasury)

    Presumably I don't have to mention the effects of compounding interest. If you put $100 in a bank account getting a 6% annual return for 10 years it would turn into $179, but a 3% rate of return it would be $134. You will notice that doubling the interest rate more than doubles the amount of money you make.

    If the Fed is lending money to the government, where is the interest on that debt ultimately going?

    Does the Fed have an unfair advantage because it can simply print money to lend to the government?
     
    Last edited: Feb 9, 2018
  2. Baff

    Baff Well-Known Member

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    The Fed is part of the government. It's the state bank.
    In a republic, that means it's owned by you. You and every other citisen has an equal share in the Fed.

    In my country we have a monarchy and the state bank, The Bank of England is owned by the Queen.

    Banks with their reserve deposits in the statebank are called "stock holders". This is not to be confused with a stock holder in a publicly traded company. Stock holders in the Fed don't own the bank. They only own their reserve that is kept in the bank.

    The bank is owned by the citisens of America and it's profits distributed to them in the form of government spending via the Treasury Department.




    Can you be more specific on this 6% please.
    OK here we go.
    https://www.federalreserve.gov/aboutthefed/section7.htm

    in the case of a stockholder with total consolidated assets of more than $10,000,000,000, the smaller of--
    1. the rate equal to the high yield of the 10-year Treasury note auctioned at the last auction held prior to the payment of such dividend; and
    2. 6 percent; and
    It seems not to be 6% but 6% or the ten year bond rate, which ever of the two is smaller.

    So that's 2.8% currently. (according to your figure)

    Not sure about the rules for small banks.

    Any profits the Fed make over this amount get sent to the treasury to be spent.
     
    Last edited: Feb 10, 2018
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  3. james M

    james M Banned

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    what does that mean?? an unfair advantage from doing what? Why not cut the BS and tell us what monetary policy ought to be if you don't like current one?
     
  4. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    That would be where you're wrong.

    If it was publicly owned like any other government department, privately owned banks would not own stock in it and be getting dividends.

    http://www.businessinsider.com/who-actually-owns-the-federal-reserve-2013-10
     
    Last edited: Feb 10, 2018
  5. Baff

    Baff Well-Known Member

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    Anyone who lends money to a bank gets dividends from it.

    It's not a publicly owned bank. It is a government institution.
    It's not a publicly traded company and the stock infers no ownership of the institution. Their stock infers no voting rights on policy.
    They do not receive a share of the profits, or sit on the board.
    They cannot sell their stock.

    So it's not "stock" as in Wall Street stock. Not "stock" as in stocks and shares in publicly traded companies. It's a state institution and it is run by a different system of rules to that which you are confusing it with.

    A great many private citisens and private companies own government bonds. Lots of people invest in the government.

    The private banks however are not investing. They are required to participate in this scheme by law.
     
    Last edited: Feb 11, 2018
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  6. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    They basically do effectively get a small share of the profits, since the interest rates they're getting are higher than outside in the market.

    (I suppose that's a matter of perspective)
     
    Last edited: Feb 12, 2018
  7. Econ4Every1

    Econ4Every1 Well-Known Member

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    Holy ****. We agree? Dam. Nicely done.
     
  8. Econ4Every1

    Econ4Every1 Well-Known Member

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    I wrote this a while back somewhere else, but I think it relevant and add's to what Baff has already said...


    The Federal Reserve System is not "owned" by anyone. Although parts of the Federal Reserve System share some characteristics with private-sector entities, the Federal Reserve was established to serve the public interest.

    The Federal Reserve derives its authority from the Congress, which created the System in 1913 with the enactment of the Federal Reserve Act. This central banking "system" has three important features: (1) a central governing board--the Federal Reserve Board of Governors; (2) a decentralized operating structure of 12 Federal Reserve Banks; and (3) a blend of public and private characteristics.

    The Board of Governors in Washington, D.C., is an agency of the federal government. The Board--appointed by the President and confirmed by the Senate--provides general guidance for the Federal Reserve System and oversees the 12 Reserve Banks. The Board reports to and is directly accountable to the Congress but, unlike many other public agencies, it is not funded by congressional appropriations. In addition, though the Congress sets the goals for monetary policy, decisions of the Board--and the Fed's monetary policy-setting body, the Federal Open Market Committe--about how to reach those goals do not require approval by the President or anyone else in the executive or legislative branches of government.

    Some observers mistakenly consider the Federal Reserve to be a private entity because the Reserve Banks are organized similarly to private corporations. For instance, each of the 12 Reserve Banks operates within its own particular geographic area, or District, of the United States, and each is separately incorporated and has its own board of directors. Commercial banks that are members of the Federal Reserve System hold stock in their District's Reserve Bank. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. In fact, the Reserve Banks are required by law to transfer net earnings to the U.S. Treasury, after providing for all necessary expenses of the Reserve Banks, legally required dividend payments, and maintaining a limited balance in a surplus fund.

    There is no stock in "the Fed".

    The Fed consists of "agency-like" entities, like the Board of Governors, which members are federally appointed, and who take federal oaths of office.

    The Fed also consists of twelve regional banks, which are wholesale banks. They do not make monetary policy. They're banks.

    The stock is in the banks. When a member bank buys stock in the Richmond Fed, it's ONLY stock in the regional bank in Richmond.

    It gives that bank no say over monetary policy.

    Do stockholders get any profits? No. Like preferred stockholders, they get a guaranteed 6% dividend on paid-in capital. In other words, no matter how much "profit" the regional bank makes, they get the same 6% of their paid-in capital as a dividend.

    Banks are also subject to assessments, or cash calls.

    Banks cannot trade their stock. They can only sell it back to the regional bank at the same price they bought it.

    Banks cannot buy more or less stock. The Fed tells them, based on their size, how much capital they must pay in to be Fed member banks. No matter how much they are assessed, they have one vote. One share, one vote. Your local bank, if a Fed member, has exactly the same number of votes as Citibank - one.

    All profits made by regional banks (less operating costs and the 6% dividend) are surrendered to the Board of Governors, who surrenders them to Treasury (the Fed's books are available on their website).

    But doesn't the Fed print money and charge is interest on it? No.

    The Fed prints no money. Currency is printed by the Treasury, who "loans" it to the Board of governors (those profits turned over to Treasury at nominal interest on all Federal Reserve Notes on circulation).

    The BoG then sells the notes to the regional banks, who sell them to your bank - for one dollar each.

    "Printing money" really isn't monetary policy. Currency is just distributed to respond to your demand at the ATM machine.

    "But aren't Fed employees and expenses not paid by the Federal government"?

    Sure they are. Federal monetary operations make money. Every year, the Fed turns its profits over to Congress. That's the government's money. The Fed's expenses and payroll are paid with money that would be paid to Congress - in other words, they come out of government's pockets.

    Also, nobody disputes that the Postal Service is federally owned, and its expenses are paid exactly the same way.

    So is the Fed privately owned? No.

    Not even a little bit. It does function as a "private entity" in very limited circumstances. If a truck owned by a regional bank hits you, you have no case against the government -

    Just against the regional bank.

    But there are no - count 'en, zero - private owners of the Fed.
     
  9. Econ4Every1

    Econ4Every1 Well-Known Member

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    That's not true. The Treasury creates dollars when it spends.

    Most people think that bonds pay for spending, however, this ignores the true order of operations.

    1) Congress sets the budget
    2) The Treasury spends (at the direction of the executive branch) by crediting bank accounts (thereby creating money).
    3) Taxes offset a portion of spending. If the sum of Spending - Taxes is positive the rest is offset by the sale of bonds.
    4) Bonds are sold to offset the remainder.

    If taxes and bond sales paid for spending, they would come first, not last.
     
  10. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    Incorrect. You're not informed on this subject.

    A long time ago there were hundreds of big private banks that issued their own bank notes. You could take the note to the bank and withdraw a certain amount of money, which was in the form of gold or silver coins.

    The U.S. dollar is now a bank note. Guess which bank?
    While these notes are no longer backed up with gold or silver, they are, at least in a very theoretical sense, backed by the Reserve Bank's reserve assets.
     
    Last edited: Feb 12, 2018
  11. Econ4Every1

    Econ4Every1 Well-Known Member

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    I understand your confusion and I also understand how it can appear to be an argument in semantics, however, when you look at the Fed's balance sheet....

    [​IMG]

    Here you'll see that most of the Feds assets are in US Treasury securities. Notwithstanding the $1.7 trillion it now holds as part of the QE non-sense, the Feds "assets" are mostly in Treasuries which the government creates out of thin air and sells to the public.

    Step back and understand what's really happening.

    The government is simply swapping one liability, cash for another liability Bonds. The private sector is doing the same only opposite. Trading one asset, cash, for another asset, bonds.

    Cash is, well, cash. It's what we put in our checking accounts. Bonds, on the other hand, we use to save. So swapping one to the other is just like moving money from our checking to our savings.

    When money is saved it's not circulating in the economy and lowers demand and this affects inflation, thus bonds are sold as a way to reduce the threat of inflation.


    True but entirely irrelevant.

    It ended somewhere between 1934 and 1943 depending on the landmark you wish to cite.

    Thus today when the Treasury spends it simply sends instructions to the Fed to increase the account of the payee by whatever dollar amount the Treasury wishes to pay. For example, when the Treasury sends out billions to people for tax returns, there's no account with a big pile of cash in it that the Treasury is debiting from (remember that the Treasury spends BEFORE taxes are collected and bonds are sold). Sure, there is an "account", but it's all on "paper" tracked in a spreadsheet. There is no actual money being moved around. So when you get your $2000 tax return in your account. The Treasury merely sent instructions to the Fed to increase the reserves of the bank that you bank at. Your bank then increased the money in your account by $2k.

    That adds money to the economy, however, when looking at the economy as a whole we have to do a little math.....

    (Government spending - Taxes) + (Imports - Exports) + (Investment - Savings) = Money added or taken out of the economy.


    Now I don't mind the response, but how about you address a few more of my points?
     
    Last edited: Feb 12, 2018
  12. Econ4Every1

    Econ4Every1 Well-Known Member

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    Let me hit this one more time.

    I think I see where you're going when you say "dollars" you're referring to physical paper? Do you know how little of our money is in physical dollars? Just a few percent. The vast majority of it is electronic and exists because the US Treasury has spent it into the economy.

    Now banks also create money Endogenously and this is where most of the money in the economy comes from. However, every dollar a bank creates has a liability of an equal amount attached to it. Thus if a bank creates $1 the bank must be -$1. When looked at from a macro view, the amount created is zero because: $1 + (-$1) =zero dollars.

    That's not to say that bank money is useless, it's not, it's just that the amount that banks can create is limited by the amount the government creates modified by private sector productivity.

    The Treasury on the other hand also goes negative, but the money it goers negative exists outside the private sector. Thus, when the government deficit spends $400 billion (thus is -$400 billion), the private sector earns that money as income and increases +$400 billion.

    The problem is that people don't separate the government sector from the private sector.
     
    Last edited: Feb 12, 2018
  13. Fenton Lum

    Fenton Lum Banned

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    Yeah sure, the Wall Street/donor/"job creator" class answers to the people. That's why we bailed them out with socialism.
     
  14. Baff

    Baff Well-Known Member

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    Sure you did.
    Absolutely. You bailed them out with all your taxes.

    Oh no wait a minute it's them that pays all the taxes and socialists who sponge off the state they pay for
    For a minute there you almost had me going.

    I almost made my witty placard and went down to Wall Street. Until I remembered I have a job that is.
     
    Last edited: Feb 12, 2018
  15. Baff

    Baff Well-Known Member

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    oops double post
     
    Last edited: Feb 12, 2018
  16. Baff

    Baff Well-Known Member

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    Incorrect.
    They are exactly the same rates as you suggested they ought to be.
    The rate of a ten year treasury bond.

    Now if interest rates (on 10 year bonds) were ever to go up beyond 6%, they would have their repayments capped to below the market rate.
    So they get the market rate, as long as the market rate isn't very high.
    Their potential dividends are capped to 6%. (The rest of the markets are not capped at all)

    Their actual dividends are 2.8% (Or whatever a ten year bond pays today)

    So the dividend of a ten year bond, it's market rate, may go higher than 6% but a banks reserve rate never can.
    Currently they get the same rate as the market rate, but in some circumstances they will get less than the market rate.
    Less than. Not more than. Never more than. Occasionally less than.
     
    Last edited: Feb 12, 2018
  17. Baff

    Baff Well-Known Member

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    Double oops.
     
    Last edited: Feb 12, 2018
  18. Baff

    Baff Well-Known Member

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    Treble oops.
     
    Last edited: Feb 12, 2018
  19. Baff

    Baff Well-Known Member

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    @ econ, money saved typically is circulating in the economy.
    Banks lend it out.

    Even their fractional reserve gets lent to the government in the form of bond puchases.

    Recently we had a credit crunch. We ran out of savings to lend. It had all been lent out and spent.
     
    Last edited: Feb 12, 2018
  20. Econ4Every1

    Econ4Every1 Well-Known Member

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    Oh man, and we were agreeing too...

    Reserves aren't lent outside the banking system, thus they are not circulating in the economy (except for cash. When a customer withdraws physical cash a bank draws down on its reserve account, of course, that cash usually makes it way back into a bank as a deposit, so the amount of cash is reasonably constant and is small proportion of the total money)

    While it's long and rather boring, this was an empirical test that demonstrates that banks do not lend reserves. If you're having trouble sleeping, I highly recommend.

    Here are a few more articles that point out the same fact:

    Article 1

    Article 2

    Article 3

    Having said that, banks do create money endogenously. The result is money created is offset by debt created within the private sector. The point is, money creation by banks is limited by the private sector's willingness to borrow and how banks assess the risk of the people that wish to borrow.
     
    Last edited: Feb 12, 2018
  21. Battle3

    Battle3 Well-Known Member

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    All the replies dealing with who prints money and who lends money and is the Fed a govt or private institution are all BS distractions.

    Its all a scam designed to empower the politicians and those who control them.
     
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  22. Econ4Every1

    Econ4Every1 Well-Known Member

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    You should really stick to fact-based responses and not emotional pleas.
     
  23. Battle3

    Battle3 Well-Known Member

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    It is fact based. Do they follow their own laws? No, they do what they want to do. They setup a structure that gives the perception of a legal entity with a specific function, but when they need to do something outside their mandate they just go ahead and do it and justify it by claiming the entire system will collapse if they don't do it.

    Anybody who thinks the US Treasury and the Federal Reserve and the IMF don't work hand in hand as if they are one entity is utterly naïve.
     
    Last edited: Feb 13, 2018
  24. Baff

    Baff Well-Known Member

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    @Econ
    I have no interest in arguing with you or being agreeable to you.


    Perhaps you aren't old enough to remember the last banking crisis very well.
    It was a fluidity crisis.

    The Credit Crunch.
    Banks didn't have much money to loan out.

    I am willing to borrow as much money as you are able to create. As is everyone else. Demand for borrowing is infinite.

    If banks could create money they would never run out of money. And hence no credit crunch would have been possible.
    No bank could ever fail. No run on the bank could ever occour. Failure to repay a bank would be of no consequence to a bank.
    The bank would have no need of trading at all and could simply create money for it's staff and anyone else it felt like while they sit at home drinking champers.
    Which is perhaps what some imagine they do.
    So enough with the stupid talk already. Qualifying stupidity with other peoples stupidity isn't helping you.

    I'm not interested in your stupid arguments.
    Alright?

    It's not up for debate.

    As far as I am concerned I have explained to you how it works and you have understood my explanation. Nothing more to discuss with you on the matter.
     
    Last edited: Feb 13, 2018
  25. Reiver

    Reiver Well-Known Member

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    Yep and its all run by Queen Liz, the Lizard People's monarch...

    I feel nostalgic for the good ole days, when at least right wingers tried to peddle Friedman as a monetarist guru. It had a snippet of economics to it, just a snippet mind you.
     
    Last edited: Feb 13, 2018

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