As I described earlier, the Fed began paying banks interest on their reserves one month after the September 2008 financial crisis struck the United States economy and spread throughout the world. The Fed (actually taxpayers) paid the banks more than $2 billion in 2009 at a small, but risk free, rate of one-quarter of 1 percent.
Economists inside and outside the Fed said these payments would be an incentive for banks to sit on their reserves rather than loan the money to businesses in a risky environment. This was the Bernanke Fed's contribution to unemployment.
I suggested that interest payments on reserves should be lowered and short term interest rates targeted by the Fed be allowed to rise to maintain a moderate rate of increase in the money supply.
However, Fed policy still persists as the banks sit on $1.047 trillion in reserves on September 1, 2010. This is 53.4 percent of the money (the monetary base) the Fed has issued. Compare this to 5.3 percent on August 1, 2008 before the financial collapse and the interest payments on bank reserves were paid.
So what does the Fed want to do now? Three Fed officials, Federal Reserve Bank Presidents, William C. Dudley (New York), Charles L. Evans (Chicago) and Eric S. Rosengren (Boston) have signaled their views making headlines: "Fed Officials Signal New Economic Push." (New York Times, 10/1/10) The officials reportedly suggest buying longer term Treasury bonds and thus issuing more money.
Once such transactions are made the sellers will deposit the money in a bank account. The banks may continue to hold more than half of the new money in reserves and collect more risk free interest. Instead of buying bonds why not follow the suggestion to lower interest payments on bank reserves and raise target interest rates to allow the money supply to increase at a modest rate?
Temporary attempts to change long term interest rates on U.S. Treasury bonds have many collateral effects, such as changing the current (spot) and future exchange rates, inducing outflows of capital from the U.S. and causing turbulence in the international money markets. I do not recall that the previous four Fed Chairmen (Arthur Burns, G. William Miller, Paul Volcker and Alan Greenspan) discussed these collateral effects of Fed policies in House Banking hearings where I assisted in preparing questions. Hello, the U.S. is affected by changes in the international money markets that respond to Fed policies.
The banks certainly favor the Fed's interest payments if they can continue to earn sufficient risk free interest on their reserves. Naturally, these Fed Bank presidents would be expected to have a strong incentive to please the banks that elected them to their office and may wish to be reelected at the end of their five-year terms. Two thirds of the nine board of directors that elect the presidents at each of the twelve Federal Reserve district banks are elected by Fed member banks in the district. (All national banks must be member banks. It is optional for banks chartered by state governments.) The election must be approved by the Board of Governors in Washington, but first the applicants must win over the votes of the bankers.
I had experience with this political process when a lawyer at the Kansas City Fed bank successfully ran to be its president. I was one of his staff tutors on monetary policy and general economics. It is an important political process that is also a major conflict of interest for the nation's most powerful bank regulators to be elected by the banks they will regulate.
When I testified against the payment of interest at a Congressional hearing, Congressman Pat Toomey (now running for the Senate in Pennsylvania) made a compelling and common argument for the payment of interest on bank reserves required by the Federal Reserve. (3/5/2005) If banks are required to hold reserves, it is a tax on their earnings, from money they cannot invest, that should be offset with interest payments to the banks. Surplus reserves (reserves that are not required) do not qualify under this rationale.
Economists have also said that the interest payments on reserves would be passed on to the depositors so that people could earn interest on money rather than wasting resources searching for secure investments that pay market rates of interest.
These arguments are not applicable in the current U.S. banking system. First, the interest payments on reserves are unlikely to be fully passed on to "ordinary" depositors by most banks. Rather, it would be a gift to bank stock holders estimated to have a present value of $16.7 billion. The reason interest payments are not fully passed on to depositors is another story about bank pricing practices.
An underlying fact is often ignored. Reserve requirements imposed by the Fed on banks are actually optional for many depositors. Vice President Richard G. Anderson of the St Louis Federal Reserve Bank calls them a "voluntary tax." ("Economic Synopses", 2008, No. 30) One reason is that many business depositors have "retail deposit sweep programs."
These are zero balance accounts because the money is taken off the banks' books before the banks close and interest is paid overnight. Then the money is put back into the accounts. That is all phony accounting to pretend there is no money in the account that would require the banks to hold reserves. The banks can pay a higher interest on these accounts because the Fed does not require reserves to be held against the accounts.
This a deplorable form of price discrimination that treats the "ordinary" depositors as fools who receive regular accounts that pay lower interest, currently often near zero. The Fed should stop this price discrimination, but why would they hurt the banks that elect the Fed Bank presidents?
Sweep accounts are not the only method banks have used to reduce reserve requirements. One example is an accounting scheme called "The Eurodollar Game" that large banks with offshore branches can use to reduce their reported deposits and thus their required reserves. (The game includes counting Friday as three days in calculating average deposits. The deposits can be transferred to offshore accounts so they don't appear on Friday and then brought back on Monday, another phony accounting trick.) Fed Chairman Paul Volcker replied to a request from Banking Committee Chairman/Ranking Member Henry B. Gonzalez to stop the Eurodollar game. Volcker replied that since there were other ways to bypass reserve requirements it would not be desirable to fix this one problem.
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So why do they give bank's 0% interest and let them charge 30% interest.
Is it not time to restrict banking to only 80% of the deposits and 0% on Demand Deposits. Which should be what the name applies to.
Second, the average savings account in the US pays 0.24% with the highest rate at 2.00% (acording to MRI a market research firm) while the Fed pays 0.25%. So, on average, a bank who gets a deposit from a customer and sells that money to the FED is making 0.01% and only because the customer is not pricing shopping. And that does not include all the other costs for a deposit (see below).
Third, if someone uses either a sweep or a eurodollar account they have no FDIC insurance on that money, which is the real reason it is used. The insurance charge from the FDIC is between 0.15% and 0.30% so keeping the deposit "on balance sheet" and insured means they are losing money if they sell it to the FED. The weekend sweep is the most risky because failed banks are most often taken over by the FDIC over the weekend. It is also the reason the FDIC is changing the insurance premium to be based on the size of the assets and not deposits.
Lastly, the only thing in this article that makes sense is to raise the rate. The last 1% was pushing on a string and does nothing to increase borrowing, but it does destroy savers but reducing returns to nothing. The real issue is the fight between spenders and savers, and spenders are winning.
The FED began with approximately 300 people or banks that became owners (stockholders purchasing stock at $100 per share - the stock is not publicly traded) in the Federal Reserve Banking System. They make up an international banking cartel of wealth beyond comparison. The FED banking system collects billions of dollars in interest annually and distributes the profits to its shareholders. The Congress illegally gave the FED the right to print money (through the Treasury) at no interest to the FED. The FED creates money from nothing, and loans it back to us through banks, and charges interest on our currency. The FED also buys Government debt with money printed on a printing press and charges U.S. taxpayers interest. Many Congressmen and Presidents say this is fraud.
Jefferson,Jackson,Lincoln and JFK AGREED.”
Put the entire Federal Reserve System int RECEIVERSHIP/BANKRUPTCY RE-ORGANIZATION
It's hopelessly bankrupt
We need to restore Glass-Steagall before it's TOO LATE!!!
The International Financier cabal irrationally demand that their derivative loses be covered by government bailout trillions and force austerity on the population. Fed machinations further this objective. The Fed members should all be indicted for fraud, misprision at least. If the US does not indict, we are no longer a nation, but a enclave of the International Financiers.
Crisis economy formation measures must be implemented now or this great nation is doomed. Reinstate Glass-Steagall in US banking, put the Fed into bankruptcy protection. recover the bailout trillions. Enact the Bank and Homeowners Protection Act. Stop the Perpetual War. Then fund the necessary economic recovery measures that will save the nation and protect the population.
The United States must activate its' economic platforms: Expand Social Security and Medicare, Expand NASA space programs, Start the Nuclear Fueled Energy Economy, Construct the interstate maglev rail system, Construct the water distribution system proposed in the NAWAPA plan. these measures will employ 4-5 million Americans, reversing our crisis.
We live in a world/universe of abundance. The International Financiers, the institutions of Globalization have perverted our reason and perspective.
The United States must rid itself of the International Financier agents in the government, must commit itself to the redevelopment to the North American continent to counterattack Globalization, activate actual economic recovery and restore the national security.
Just think about this; if Bernanke wired ioo billion to each state in this country,what would happen?
NOTHING----because there is no accounting or accountability for the 10s of Trillions he has wired to unknown entities in the world and what he has taken as collateral,if any!Can anyone fathom this scenario? Why do you think the Federal Reserve fights audits or any version of accounting for its actions? It's because they are actually doing exactly what I have just explained here! If no-one but the chosen few know the game and do not speak of it,the game continues for the few players involved,while the other 98% of us die a slow and painful existence in a jobless-homeless-and hopeless life!!!
I really do look forward to the day when the hammer falls and the Fed's operations are significantly curtailed (or even eliminated). Unfortunately, that day will coincide with economic devastation since they are taking us down the road to economic ruin.