Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19
The IPO Market Is Nowhere Near a Bubble - 9th Oct 19
US Stock Markets Trade Sideways – Waiting on News/Guidance  - 9th Oct 19
Amazon Selling Fake Hard Drives - 4tb WD Blue - How to Check Your Drive is Genuine  - 9th Oct 19
Whatever Happened to Philippines Debt Slavery?  - 9th Oct 19
Gold in the Negative Real Interest Rates Environment - 9th Oct 19
The Later United States Empire - 9th Oct 19
Gold It’s All About Real Interest Rates Not the US Dollar - 8th Oct 19
A Trump Impeachment Would Cause The Stock Market To Rally - 8th Oct 19
The Benefits of Applying for Online Loans - 8th Oct 19
Is There Life Left In Cannabis - 8th Oct 19
Yield Curve Inversion Current State - 7th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

Why Is the Fed Paying So Much Interest to Banks?

Interest-Rates / US Federal Reserve Bank Apr 02, 2019 - 06:10 PM GMT

By: Ellen_Brown

Interest-Rates

“If you invest your tuppence wisely in the bank, safe and sound, Soon that tuppence safely invested in the bank will compound, And you’ll achieve that sense of conquest as your affluence expands In the hands of the directors who invest as propriety demands.” — “Mary Poppins,” 1964

When “Mary Poppins was made into a movie in 1964, Mr. Banks’ advice to his son was sound. The banks were then paying more than 5% interest on deposits, enough to double young Michael’s investment every 14 years.

Now, however, the average savings account pays only 0.10% annually—that’s one-tenth of 1%—and many of the country’s biggest banks pay less than that. If you were to put $5,000 in a regular Bank of America savings account (paying 0.01%) today, in a year you would have collected only 50 cents in interest.


That’s true for most of us, but banks themselves are earning 2.4% on their deposits at the Federal Reserve. These deposits, called “excess reserves,” include the reserves the banks got from our deposits, and on which they are paying almost nothing; and unlike with our deposits, there is no $250,000 cap on the sums banks can stash at the Fed amassing interest. A whopping $1.5 trillion in reserves are now sitting in Fed reserve accounts. The Fed rebates its profits to the government after deducting its costs, and interest paid to banks is one of those costs. That means we, the taxpayers, are paying $36 billion annually to private banks for the privilege of parking their excess reserves at one of the most secure banks in the world—parking them, rather than lending them out.

The banks are getting these outsize returns while taking absolutely no risk, because the Fed, as “lender of last resort,” cannot go bankrupt. This is not true for other depositors, including large institutions such as the pension funds that hold our retirement money. As Matt Levine notes on Bloomberg:

[I]f you are a large institutional cash investor—a money-market fund, a foreign central bank, things like that—then in some sense you have no way to keep your money perfectly safe. … The closest that big non-banks normally get is “overnight general collateral repo”: You give your money to a bank, and the bank gives you back a Treasury security as collateral, and you can get your money back the next day.

This arrangement is reasonably safe for the institutional investor, which can withdraw its money on a day’s notice; and the investor gets interest that is close to 2.4%. But the bank is using the investor’s money to run its business, and the bank is leveraged. The money it gets from repo-ing Treasuries is used to buy other things and to trade in stocks, bonds, derivatives and the like. This makes the repo business highly risky for the market as a whole, as was seen when a run on the repo market triggered the credit crisis of 2008-09. As Jennifer Taub explained the problem in a New York Times article titled “Time to Reduce Repo Run Risk”:

An overnight repo would be like you having a car loan that is due in full every morning and if the lender does not renew your loan that day, you need to find a new one, each and every day or they take your car away.

When trust is strong and cash plentiful, repos are rolled over. When trust reasonably erodes, or there is a panic, cash is demanded from the repo borrowers who might have to sell the collateral or relinquish it. This leads to fire sales by the borrower and others with similar securities and downward asset price spirals. Indeed, the Federal Reserve Bank of New York has repeatedly warned of the repo “fire sale” risk.

Taub cited Federal Deposit Insurance Corp. (FDIC) officials Thomas Hoenig and Sheila Bair, who warned that the banks remain dangerously interconnected and vulnerable to sudden runs due to their dependence on short-term—often overnight—borrowing through the multitrillion-dollar repo market.

The Narrow Bank

One proposed alternative for large institutional investors is something called “The Narrow Bank” (TNB). TNB would take large-depositor money and park it at the Fed, and that’s all the bank would do. The Fed would pay 2.4%, TNB would take a small cut and the rest would be passed to the depositors. Because TNB would be only a pass-through for Fed accounts—it would not engage in trading, derivatives, mortgages, business loans or even Treasuries—it would be arguably the safest possible place for large institutional investors to keep their money while earning a good return.

The Fed, however, has refused to open an account for this sort of “Pass-through Investment Entity” (PTIE), and in a recent notice of proposed rule-making, it explained why. As Levine puts it:

[T]he Fed worries that having too safe a bank would be bad for financial stability: In times of stress, everyone will flee from the regular banks to the super-safe narrow banks, which will have the effect of bringing down the regular banks.

Besides impairing its ability to target interest rates, the Fed is worried that narrow banks would take funding away from regular banks, making it harder for those banks to trade stocks and bonds (a business largely funded by repo) as well as jeopardizing their lending business:

PTIE deposits could be seen as more attractive than Treasury bills, because they would provide instantaneous liquidity, could be available in very large quantities, and would earn interest at an administered rate that would not necessarily fall as demand surges. As a result, in times of stress, investors that would otherwise provide short-term funding to nonfinancial firms, financial institutions, and state and local governments could rapidly withdraw that funding from those borrowers and instead deposit those funds at PTIEs. The sudden withdrawal of funding from these borrowers could greatly amplify systemic stress.

The Fed, while declaring its “independence,” is obviously not a neutral arbiter. It is working for the banks. Says Levine:

The Fed just gets to decide who gets to compete in the banking business, and how that competition will work, and what their business models can be, by virtue of its control of access to reserve accounts. … There is no modern banking that is independent of the sovereign’s power to control money, and the question is just who the sovereign shares that power with.

The European Approach: Negative Interest Rates

While U.S. banks are being paid an unprecedented 2.4% for leaving their reserves at the Fed, the European Central Bank is taking the opposite tack: It is charging banks a negative interest rate of 0.4%  for holding its reserves. The goal is to get banks to move the reserves off their books by making new loans. If they lend money on to the real economy, and particularly to companies, this interest payment may be rebated to the banks, under a facility called “targeted longer-term refinancing operations” or TLTROs. In 2016 and 2017, the ECB returned a total of 739 billion euros to banks through TLTROs, and it is expected to renew that program, in an effort to avoid an even greater economic downturn than Europe is suffering now.

Negative interest rates were supposed to be a temporary emergency measure, but in comments on Saturday, ECB President Mario Draghi hinted that they could be around for a long time, if not permanently. The “new normal” is evidently a chronically abnormal state of emergency in which central banks can experiment with the formerly unthinkable and get away with it.

All of which suggests some interesting possibilities.

A Public Option for the Rest of Us

Even if large depositors were allowed to participate in the perks of Fed accounts through PTIEs, small depositors and small businesses would still be left with a meager one-tenth of 1% annually on their deposits. But some interesting proposals are on the table for opening the Fed’s deposit window to everyone, allowing us all to collect 2.4% on our deposits.

One such plan was presented in a June 2018 policy paper, titled “Central Banking for All: A Public Option for Bank Accounts,” by a trio of law professors and former Treasury advisers headed by Morgan Ricks. They suggested that for the physical infrastructure to handle so many accounts, the Fed could use the post offices peppered across the country.

Postal banking has been popular for two centuries in Europe and was offered in U.S. post offices from 1911 to 1967. Postal banks were in their heyday in the 1930s, when private banks were going bankrupt and were vulnerable to crushing bank runs. The postal banks were government-backed, paid 2% interest on deposits, and were very safe. Congress could have expanded that system into a national public utility that safely and efficiently served the banking needs of local communities. But instead, it chose to back the private banking system with federal deposit insurance, guaranteeing private bank deposits with taxpayer funds—again showing how the winners and losers are picked by government officials, depending on whose lobbyists have the most clout.

To prevent public banks from competing with private banks, Congress capped the amount of interest postal banks could pay and strictly limited their lending. As a result, in 1967, the postal banking system was shut down as being no longer competitive or necessary. But efforts are now underway to revive it. Last April, New York Sen. Kirsten Gillibrand introduced legislation that would require every U.S. post office to provide basic banking services.

A movement is also afoot to establish state- and city-owned banks that would have the ability to lend for infrastructure and other local needs. Local governments cannot get a risk-free 2.4% rate from the Fed for their demand deposits, but city- or state-owned banks could. Combining postal banks with a network of local public banks having affordable access to the Fed’s deep pocket could provide a safe and efficient public banking option for individuals, businesses and local governments.

Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her earlier books focused on the pharmaceutical cartel that gets its power from “the money trust.” Her eleven books include Forbidden Medicine, Nature’s Pharmacy (co-authored with Dr. Lynne Walker), and The Key to Ultimate Health (co-authored with Dr. Richard Hansen). Her websites are www.webofdebt.com and www.ellenbrown.com and http://PublicBankingInstitute.org

© Copyright Ellen Brown 2019

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules