When it comes to the Federal Reserve banking system, few people really understand how it works and there are those who say this opaqueness is purposeful.
There are many mysterious things going on at the Fed and they aim to keep it that way if they can, saying to make many of their movements public would threaten the very institutions it exists to protect and that public observation and opinion would politicize the Fed.
Bloomberg News brought the mighty Federal Reserve to court under the Freedom of Information Act after the banking crisis and asked it to reveal where all the bailout funds went. The court sided with Bloomberg.
The resulting report was an eye-opener, to say the least, revealing hundreds of billions of dollars being given, exchanged or loaned to entities far and wide, including domestic banks, foreign banks and private companies to name just a few. The amounts totaled into the trillions.
As expected, the outcry came far and wide, but soon subsided (people have such short memories) and the Fed is again operating with little public scrutiny.
Fed Chief Ben Bernanke announced another round of quantitative easing (QE3) a few weeks back in another attempt to lower interest rates and flush the banks with cash to hopefully (so they tell us) get them lending again. But looking at the details of the QE programs, you have to scratch your head a little as to the real motive.
The Fed claims shuttling billions to the banks was done to stimulate bank lending, therefore helping the economy, but no such lending stipulations were given to the banks when the money was handed out.
After three such programs (and a dozen more varieties called by strange names) you would think the Feds would have figured out that to get the banks lending again, you make it a requirement with the money giveaway, but no such requirement was ever made.
In fact, the banks take the money and do a variety of things with it, and very little of it is actually lent back to us. Proceeds first filter into the stock and commodity markets as banks find it hard to make money in this zero-interest rate environment (also set by the Fed); the banks in essence gamble with it in the markets where the returns are better.
They also buy U.S. government debt with it (US Treasuries) and pocket the difference between what they pay the Federal Reserve to get the money and the higher interest they charge the Treasury Department to borrow it. (Sounds crazy, but that’s how it works).
Even more interesting is what they do with another chunk. They take the money from the Federal Reserve and redeposit the money back into that same Federal Reserve as “excess reserves.” The Federal Reserve then pays the banks interest on that money.
All this begs the question, if the Federal Reserve really wants to get the banks “lending again,” why don’t they require banks begin lending as a condition of that money? Also, why do they then pay them interest to redeposit that same money right back into the same institution?
When asked those questions, the answer is as opaque as the Fed itself.
It’s no wonder the Fed is so mysterious; half the stuff they do doesn’t make any sense.
This article expresses the opinions of Marc Cuniberti. He hosts “Money Matters” on KVMR FM 89.5 and 105.1 FM at noon on Thursdays. He has been featured on NBC and ABC television and on a host of made for TV documentaries for his economic insights. His website is www.moneymanagementradio.com.