Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Latest Double Standard from the Fed

Interest-Rates / US Federal Reserve Bank Oct 07, 2018 - 02:18 PM GMT

By: Rodney_Johnson

Interest-Rates Collectively, we just got screwed again, and I bet most people didn’t even know it. It happens so many times, particularly at the hands of the Federal Reserve, it’s hard to keep track.

A new bank called The Narrow Bank, or TNB, recently applied for an account with the Fed.

This would give the bank recognition by a local reserve bank, in this case New York, and access to its services, like distribution of currency, check processing and other forms of electronic payments.


The application is short, and TNB checked all the right boxes.

The Fed normally approves applications within a week. TNB’s application sat for a year. And then the Fed denied it for undisclosed procedural concerns, whatever that means.

It doesn’t really matter why the Fed says it rejected TNB, the reason seems obvious enough.

The new bank was going to cut into the profits guaranteed to banks by the Fed, taking away some of the Fed’s power and slapping big banks in the face at the same time.

You can’t expect them to go down without a fight. They lobbied, er, worked hard for this money!

It all goes back to the financial crisis, the beginning of the best years ever to be a banker, but not a saver, and it’s part of what David Stockman writes about in his Deep State Declassified newsletter.

In 2008, Fed Chair Bernanke asked Congress to speed up the Fed’s authority to pay interest on excess reserves (IOER).

Before then, if a bank parked funds at the Fed, it earned zero. Banks were required to hold some funds at the central bank, but required reserves were limited, totaling less than $100 billion before the crisis.

When Congress approved the Fed’s request in 2008, it gave the central bank the ability to give banks a gift – interest for nothing.

Before the change, banks had to either lend out their funds to borrowers to earn a return, or lend their excess funds to other banks, who then lent out the funds.

Either way, the money made it to the hands of people who wanted to borrow. After the change, banks no longer had to lend money to the little people.

They could simply park any excess funds at the Fed and earn just as much as if they lent it to another bank. Who in their right mind would risk lending money to another bank when the Fed would pay the same interest?

And it gets better. For years after 2008, short-term rates sat at 0.0% to 0.25%. So the Fed paid banks about 0.125% for doing nothing, and banks paid depositors absolutely zero.

Well, here we are, four years after the Fed began raising rates, which now sit at 1.75% to 2.00%. A bank holding deposits at the Fed will earn about 1.95%, whereas Bankrate notes the national average for a savings account is 0.09%.

Notice the discrepancy? If the Fed, which uses our money to buy bonds and earn interest for itself, is paying banks 1.95%, then why are depositors earning a mere 0.09%?

Because that gives banks the fattest guaranteed profit possible for doing nothing. This allows the Fed to guarantee that banks will be profitable and can build their capital accounts, and it’s all done by stealing money from savers.

TNB threatened this cozy deal, it wanted to start a bank that took money only from large depositors and then parked the funds at the Fed.

TNB, named for its single-minded business model, intended to pay a hefty portion of the IOER to its depositors, keeping a little bit for itself.

Clearly this would have drawn funds from other banks, which presumably would have to raise deposit rates to compete, and might even have to throw more crumbs at small account holders.

But nope, the Fed killed the deal, even though law says the central bank must approve any proper master account application.

TNB has sued the Fed, and maybe it will win. The guy behind TNB worked at the central bank for decades, so he knows how the game is played. But maybe he won’t.

The Fed has time, and trillions of dollars of our money on its side.

If you want to find out more about the shenanigans of the government, and how it doesn’t typically work in your favor, check out Stockman’s Deep State Declassified, and be sure to catch his presentation at the Irrational Economic Summit next month in Austin.

Rodney

Follow me on Twitter ;@RJHSDent

By Rodney Johnson, Senior Editor of Economy & Markets

http://economyandmarkets.com

Copyright © 2018 Rodney Johnson - All Rights Reserved 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.

Rodney Johnson Archive

© 2005-2022 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