Why do they like low interest rates?
How do the bubbles they create affect their interests?
Do they have any incentive to promote long term financial stability?
What is the relationship between the Fed and Commercial Banks like Bank of America etc?
Expediency is their motivation. They have to answer to politicians.
Doesn’t the Fed have shareholders?
I’ll take a shot at this. There are three distinct groups who benefit from the central bank: 1) The inherently insolvent fractional reserve banks, 2) the central government, 3) the market for government debt (bond market). Low interest rates are the reason the central bank exists; to print money, driving interest rates down. Printing money keeps #1 in business for awhile longer, allows #2 to grow beyond tax receipts, and provides a back stop for #3 in case #2 defaults. That’s why the central bank “likes” low interest rates, to satisfy the desires of these three groups.
Bubbles create the appearance of profits (in the short term), allows those in power to get reelected, and provide marketability for bonds (preserving their value, at least in the short term).
Incentive to promote long term financial stability: None. No such incentive. The incentive is to satisfy the needs of the three constituents.
The commercial banks are members of the cartel. They all agree to expand together, that is why the Greenspan housing bubble worked to perfection. In exchange for following orders, expanding together, there is tacit agreement that they will be bailed out as long as they obey the “rules” of the cartel.
You mean all of the banks right?
How? I understand the fed is the lender of last resort, but how do low interest rates help the insolvent fractional reserve banks make more money?
Well credit expansion lets them grow like this, but there’s no reason why the interest rate matters to government is there? Especially if they have this under the table agreement?
But the politicians can easily create prosperity by being free market guys… maybe they are ignorant? Though my impression in all this is is that the elites know EXACTLY what they are doing and use keynesianism/monteraism as smoke. This thread is my attempt to explore their hidden motivations.
Doesn’t at least #1 prefer financial growth? I understand from Hoppe’s perspective why #2 doesn’t care…
I agree, though many would charge us with speculation. Can you think of any stronger arguments or evidence for this tacit agreement to expand and be bailed out?
My gut instinct is still that the federal reserve, since it was created by central bankers, must serve the central banks in a large way. I suppose one question to ask, is that even if the institutions are behaving like they are in cahoots, is there any way (email correspondence, documents) to verify this conspiracy theory?
The FED finances government spending and the welfare state (it’s the governments financier). Without the FED, the government would have to levy enormous taxes upon the individuals in order to finance their wars and welfare programs (but the government=the FED, just want to make that clear). So the treasury sells bonds on the loan market, which banks and private investors purchase. Then the FED buys back the bonds and liquidates the governments debt–they don’t have to pay it back. This way, the government can keep taxes low (relatively speaking of course), and the FED gets to suppress interest rates stimulating booms. The politicians take credit for the booms, and blame the market for the busts, allowing them to further consolidate power. This process continues until the currency is hyper-inflated, or until there is a systemic collapse. Also, the “private banks” profit when they sell the bonds back the FED, which they use to speculate in the commodity and securities markets, causing illusory stock market rallies (also increases their profitability). Additionally, the FED bails out the connected banks when the bust comes, but only them. This eliminates their competition. It’s a perfect little system they’ve created, or so they think.
They don’t understand that they do not control the actual system, that is, the market economy. Once the demand for their money collapses, then the people will choose another commodity as the common media of exchange. One not controlled by diplomats who seem themselves fit to regulate all commerce. Unfortunately, history has shown us that they are extremely crafty and are able to regain control over the monetary system merely by promising the ignorant masses utopia. What can you do?
Fractional reserve banks are not “inherently insolvent.” They are inherently illiquid–there’s a big difference.
It’s conspiracy nonsense. All “profit” is handed over to the treasury every year.
So we can all prosper without the sacrifice of savings.
The other way around. The artificial lowering of the interest rate is what creates the bubble.
Nothing beyond the next elections
I would be more concerned about their relationship with the other branches of government.
Yes, all banks. It is my understanding that since the early 1980’s, all banks must belong to the Federal Reserve System (the central bank). All banks engage in fractional reserve banking.
It’s not the interest rate that matters, it’s the ability to loan money created from nothing that matters.
The government doesn’t care, per se, about the interest rate. It cares about it’s ability to expand.
You are correct about the elites knowing exactly what they are doing. Esuric described the motivations.
Under a sound banking system, absolutely yes they would prefer financial growth (sustainable growth). But we don’t have a sound banking system, which is one point I can make that is not speculative.
I would point to the September '08 meltdown of the banking system. Look how the central bank and the central government behaved. It did exactly as described in the specutive theory previously outlined. (And, by the way, the system did meldown completely. The FDIC actually guaranteed ALL non-interest bearing demand deposits without limit on non-personal accounts, several trillion dollars. Businesses with several $million (or $billion) in demand deposits accounts were exposed to loss. The taxpayer backstopped all of it. That’s when the panic stopped.) The Fed operates in secrecy, calling it “independence”.
i guess consuemr credit stems from bank deposits and what the federal reserve buys from banks in order to manipulate interest rates???
ie "Firstly, t_he Fed pushes new reserves into the system via the OMOs_ in order to try to bring the FFR down. Secondly the 'commercial banks pyramid loans on the basis of those reserves.’ So normally if the Fed increases the monetary base (not typically notes and coins but more commonly by increasing the total quantity of reserves in the system held on account with the Fed itself) by 100 billion you might expect an actual expansion of the overall money supply of maybe 1 trillion (in a very simple example)." found here the actual procedure of creating money (alt thread) "
i dont know if the above is true or not…it is what i was told but i cant confirm it.
www.economagic.com show total consumer credit (is this a real measure or an incomplete one?) increase from 1.7 trillion in 2001 to about 2.5 trillion in late 2008. a little over a 100 billion per year increase.
economagic shows m2 rising from 5 trillion to about 8 trillion over the same time period.
by comparison total consumer credit from 1994 to 2001 went from 900 billion to 1.8 trillion…a little faster pace than 2001 to 2008.
m2 went from 3.5 trillion to about 5.3 trillion
if the increase rate for consumer credit and m2 were similar between 1994 to 2001 and 2001 to 2008 why was there a banking meltdown in 2008? i dont recall the same happening from 1994 to 2001 unless some consider the notion of the tech bubble to be true.
if actions are an indication of motivation and if the above is true, it appears that the federal reserves motivation is to keep itself going no matter what bubbles or economic mishaps occur as a result of its money creation. but i cant confirm the above info.
So, as I understand it, there’s the federal reserve board and then multiple federal reserve banks (like 13?) for different districts in the United States. Is there any evidence that the people who work for the federal reserve have a financial interest in the commercial banks? I think the biggest myth is that the fed is a nonpartisan observer…
This has already happened to a large extent. Anyone who can afford to does not keep their assets in money, only liquidating just before a purchase. Its poor people who live paycheck-paycheck and get paid on fixed salaries that bear the inflationary burden. Too bad legal tender laws exist… I wish I could get paid in oil ><
Can’t they have both? Basically the could charge monopoly price for their loans. They probably wouldn’t choose 20% interest but, you know, just something that maximizes their profit. The lower they force the interest rate, the less profit they make. The more the market becomes saturated with loans, the fewer get paid back.
Actually it was interesting, the earnings of Bank of America etc were absolutely huge before the bust. Do they really make such high profit margins off such lower interest rates?
Why does it being sound change if it cares about the long term? The fed and the commercial banks obviously plan to be around for a while…
That’s pretty much correct.
“In 2008, 85% of the interest collected by the Federal Reserve (or “Fed”) was returned to the Treasury. The average interest rate on Treasury securities today is only about 3%; 15% of 3% is less than ½% – such a negligible interest as to make the money nearly free.” from this
Although the rest of the article can in some places be a little dubious…
Okay. Good to know.
That’s a good question. If their game was to charge “high” interest (whatever that may mean), fewer projects would be “profitable” that borrower’s might engage in. With low interest, borrower’s come calling. Remember, the money in the banking system as a whole is multiplied by a factor of 10. This is a stunning thought: The Fed could print $100 billion, the system as a whole can loan out another $900 billion. Banks make money on the spread, not by charging high interest rates. Think of it this way: What is the real cost of funds to the banking system of loaning out money created from nothing? Sure, the banks pay interest on deposits. But those deposits would not exist if not first loaned into existence.
The Fed drove the fed funds rate to zero (they say 0%-.25%, but that’s more due to not being able to control the rate perfectly). Longer term treasuries yield 1% to 3.0%. Banks can use “excess” funds to invest in treasuries at no risk, and get a spread that is close to what they would get by assuming risk. Banks are very happy with the interest spread right now. (In my opinion, the Fed will NOT be tightening for at least another year or more to keep bank interest spreads fat, and the quantitative easing will be extended to keep the bubbles going in the stock market and MBS market, but I know that is not your question. Let’s just wait and see what happens, shall we?[8-|])
Because under sound banking, the banks would want the loans to be paid back because there would be no taxpayer backstop. Under the existing system, in the long run, the taxpayers make good on the bad loans (by making depositors whole), creating moral hazard.
Fair enough. If more than a few percentage points of a bank’s loans become uncollectible, that bank would be insolvent. I agree, fractional reserve banking is not inherently insolvent, but it is inherently illiquid as you say.