Economics Questions

Re: Why does the Fed charge interest for issuing money?

chloe732 — Wed, 23 Jun 2010 03:43:11 GMT

Ravochol - "yes, just trying to explain the theory"

Understood. I just think your analogies are misleading. Perhaps you are describing a theory about how the Fed works from the perspective of the Fed, not from the perspective of reality?

Re: Why does the Fed charge interest for issuing money?

ravochol — Tue, 22 Jun 2010 17:35:11 GMT

"The Fed doesn't charge interest for issuing money."

Maybe it depends what you mean by "charge." All the money is "Federal Reserve Notes," so whenever the "Federal Funds Rate" is above zero, the Fed is mandating a minimum level of interest for issuing money.

quote

Setting interest rates is the most visible and important tool because it essentially sets the “wholesale” cost of money. If you make money cheaper, it tends to move more quickly through the system. So if the economy is sluggish, a rate cut perks things up. If the economy is strong, raising rates is supposed to prevent the economy from picking up too much speed. Under those circumstances, too much money in the system feeds inflation.

Open market transactions are more limited, but have a more immediate impact. That’s why the Fed turns to these when the financial markets get into trouble, as it did on Friday. The specific mechanics of open market moves are pretty simple.

The Fed operates a trading desk in New York through which is can buy or sell bonds. If it buys bonds, the broker-dealer that sold them gets cash in return. That cash then flows through the system. If the Fed wants to soak up money, it sells bonds from its account — taking cash from the dealer that bought them and taking it out of the system (or "draining" money.) The Fed maintains its own account, so any money being “injected” into the system is not coming directly from the tax dollars collected by the Treasury.

Re: Why does the Fed charge interest for issuing money?

ravochol — Tue, 22 Jun 2010 16:12:27 GMT

@ chloe

yes, just trying to explain the theory

Re: Why does the Fed charge interest for issuing money?

hugolp — Tue, 22 Jun 2010 08:24:47 GMT

In reality it does not.

As you said the Fed turns back all the interest (95% of them) to treasury. So if treasury pays something and then gets it back, in reality its not paying them.

Re: Why does the Fed charge interest for issuing money?

krazy kaju — Tue, 22 Jun 2010 05:54:07 GMT

The Fed doesn't charge interest for issuing money. Sometimes, it'll print money and lend it to financial institutions in distress through the so-called "discount" window, but usually the Fed buys government debt from private banks in order to expand the money supply. By doing that, the Fed actually issues money in order to lower interest rates on government debt. Because the Fed pays something like 95% of its profits back to the federal government, the Fed effectively monetizes the national debt when it purchases government debt.

Re: Why does the Fed charge interest for issuing money?

chloe732 — Tue, 22 Jun 2010 05:37:17 GMT

Sol Mr.,

I would think anything turned over to the Treasury by the Fed would be some form of confiscation from the public, either direct or indirect.

IMO, the interest question becomes insignificant when you realize the reasons for the Fed's existence:

1) To support a fractional reserve credit expansion by the commercial banks, ie, to create a cartel.

2) To purchase government debt with money created from nothing.

Re: Why does the Fed charge interest for issuing money?

chloe732 — Tue, 22 Jun 2010 05:24:28 GMT

so the rowers on the boat (the banks) hired a drummer when they were rowing past Jekyll Island in 1913 to coordinate them so they'd all be going at the same, (theoretically) sustainable pace.

The actions of the central bank are theoretically not sustainable. The inflation of the money supply merely creates malinvestment...a non-sustainable path.

Re: Why does the Fed charge interest for issuing money?

chloe732 — Tue, 22 Jun 2010 05:14:13 GMT

The Fed's like the guy on the Viking boat with the big drum; the banks are the rowers, and the drummer's (Fed's) job is to make sure they don't go too fast and burn out or go too slow and not get anywhere.

Nice analogy, if only it were true.

Ah, if only the Fed understood the term malinvestment. But they don't. They do not exist to correct malinvestment.

Oh and to further the analogy, the Viking boat (our economy)

No. The central bank is the Viking boat, and the economy is the VILLAGE being burned down by the Vikings in the first frame of your cartoon.

Re: Why does the Fed charge interest for issuing money?

ravochol — Tue, 22 Jun 2010 04:52:29 GMT

I think it's because the Fed basically sets interest rates for all of the other banks. When they raise rates, it forces all the other banks to raise rates too; when they lower rates, all the other banks can lower their interest rates on loans too. The Fed's like the guy on the viking boat with the big drum; the banks are the rowers, and the drummer's (Fed's) job is to make sure they don't go too fast and burn out or go too slow and not get anywhere.

Like, in theory, if the banks are making lots of dubious loans which is leading to malinvestments, the Fed'll jack up the interest rates, so banks focus on only the really promising loans, and if the economy is slowing, they'll lower interest rates to encourage banks to lend more. That's why interest rates are basically 0% right now - the Fed is trying to get banks to lend. The bank gets the zero % loan and then can turn around and charge 10% to you or me if they want to.

Oh and to further the analogy, the viking boat (our economy) is like the bus in the movie "Speed" - it can't stop moving (growing) or it will explode (the economy must grow or banks won't get their interest payments and the economy will self-destruct), so the rowers on the boat (the banks) hired a drummer when they were rowing past Jekyll Island in 1913 to coordinate them so they'd all be going at the same, (theoretically) sustainable pace.

relevant cartoon:

http://www.cartoonstock.com/directory/v/viking_ship.asp

Why does the Fed charge interest for issuing money?

Sol Mr — Tue, 22 Jun 2010 04:30:17 GMT

If it makes no real profits. It's supposed to turn over all profits from the interest to the Treasury after covering expenses. Wouldn't this be the same thing as the Treasury just using tax dollars to fund it's operating expenses?