Does the Federal Reserve REALLY Control Interest Rates?
Submitted by legalizeliberty on Thu, 04/29/2010 - 13:34http://towneforcongress.com/economy/does-the-federal-reserve...
Many believe that the Federal Reserve controls interest rates. But what if they do not? Here is a case for readers to decide on.
The Federal Reserve, myself, and many others, have made the claim that the FED controls both the interest rates and supply of dollars and credit. [For those unfamiliar with the FED, you can learn just about everything you need to know from the links at the bottom of my Federal Reserve plank, and this article "Fractional Reserve Banking in Pictures."] Several weeks, I had a conversation with Karl Denninger from Market Ticker on the gold market, and we also discussed his theory that while the FED can jawbone and could theoretically move the federal funds rate wherever it wants, it still follows the marketplace. In other words, its control of interest rates may be all bluster and a false charade.
Denninger noticed that not only does the short-term 3-month US Treasury bill interest rate overlay with the federal funds rate as seen below, but it moves lockstep and actually precedes volatility movements up or down in the rate. The data and graph can be recreated at the FED's website here by clicking "Add Data Series" then downloading the data. and a spreadsheet download of the data is here.
continue reading at the link -
http://towneforcongress.com/economy/does-the-federal-reserve...
Fractional Reserve Banking is
Fractional Reserve Banking is another issue. Fractional Reserve Banking is FRAUD. When you lend out something that you do not have, and then charge interest, it is fraud.
I don't care if it's considered legal, it's similar to booking more seats on an airplane then you have, hoping that not everybody will show up. When they do, the airline offers a bribe. But imagine that everybody showed up all the time. That would soon put an end to the practice.
Fractional Reserve Banking is like a band that hires itself out to play two weddings at the same time, and at the same location. When the guests begin arriving, then notice that the band is in the center of the room, and they are restricted to one side of the room. On the other side of the room are the guests from another wedding party. Both wedding parties hired the band.
Fractional Reserve Banking is just as fraudulent as Inflation, in fact, it contributes to inflation even though no fiat currency is printed in the process. In the case of Fractional Reserve Banking, credit is created, just as fiat money is created. There is no wealth, just deception, and payment is collected from the Great Unwashed.
Guys come on.. think for a minute
This guy is talking about bills.. the shortest of short term paper. Of course it will lead the actual move in the funds rate as the market always anticipates potential changes in that rate. The eurodollar futures are typically used as proxies for estimating the probability the market is putting on a 0, 25, 50 or more bp change in the funds rate.
Sometimes the answer really is obvious.
gedankenexperiment.dk views on finance, politics and science
Just got off the phone with my banker friend !
So, to answer the question above," Does the Fed control interest rates?"
The answer is YES !
When I pressed my friend on interest rates her "Private" bank can charge or pay on interest bearing accounts, she says the Fed does indeed set the rates, apparently on every bank in the USA !
Talk about Communism,,,,now were living in it folks !
The Fed and banking rule setters are causing the destruction of the American banking system.
beesting
Here's one,Many corporations use the interest rates
To figure your "Cost of living" increase for your salary.
"They used to come get you and lock you up because you were insane, Now they come get you and lock you up because you are sane"
I agree
with Jake the "ship is sailing without a rudder."
The Fed admits they have a tough task;
"But with the long lags associated with monetary policy actions, the Fed must try to anticipate the effects of its policy actions into the distant future. To see why, suppose the Fed waits to shift its policy stance until it actually sees an increase in inflation. That would mean that inflationary momentum already had developed, so the task of reducing inflation would be that much harder and more costly in terms of job losses. Not surprisingly, anticipating policy effects in the future is a difficult task."
My take on the Fed is they are only concerned with "what's happening now" and do indeed change their ways once the market has changed course.
The Fed has two mandates;
Unemployment - they have failed - 9.7% current or much higher if you take into account disgruntled workers who are no longer counted in the formula.
Stable Prices - they have failed (we had rising prices up until 2007 and falling prices ever since till lately) - nothing "stable" about them.
If one puts on their banker hat right now, are you looking to lock in a 30 year fixed loan when you can pretty much guarantee the interest rates are going to shoot up with the coming effect of inflation the Bush and Obama administration has put upon this economy?
The Fed is aware of this predicament;
"Another problem is that a surprise inflation tends to redistribute wealth. For example, when loans have fixed rates, a surprise inflation redistributes wealth from lenders to borrowers, because inflation lowers the real burden of making a stream of payments whose nominal value is fixed."
"Surprise inflation?" Come on now... The bankers aren't stupid.
Everyone knows the Fed's hands are tied right now. As long as the U.S. Dollar stays in a cyclical trend higher, they don't have to do anything. It's when the dollar index goes below 80 again, then the 2009 low of about 74.5 and subsequently the March 2008 low of just under 72 when they'll be shaking in their boots.
Raising the interest rates to combat the dollar decline (as China and Japan will demand in compensation for their holdings) will kill any U.S. recovery. I don't think the Fed would mind a decade of low interest rates. For me, the dollar will dictate what they are forced to do.
Moving forward, besides gold and silver, another good investment will be TBT, which is basically a short on 20 year treasuries. Any fall back to the 42 range or below on this cyclical dollar rise would be a good place to start dollar cost averaging into a position.
My Christian/Political Blog:
We the Serfs! Blog
Yes, of course they set
Yes, of course they set interest rates but there are some market forces working on them as well. The market did not set interest rates at the low rates they are now in the middle of a credit crisis.
Ventura 2012
this is just the market doing its job
In response to Mark Twain's post on Imaginary interest rates.
Well variable interest rates being set like this is exactly what the market is suppose to be doing. You average out what the average person / firm is willing to pay in interest for capital today. it changes daily of course.
The thing that is scary is how our economy in the US as well as the World economy is shaped so differently than before.
Free market theory works because it decentralizes everything and gives the most competitive price because you have so many options and competitors.
This was great when banks were numerous and regional in nature. This is the first time in history where there are only a handful of financial institutions rather than hundreds around the world that have considerable financial clout.
Follow the money...is the name of the game. If economic prosperity is abound but the most money is in fewer hands, you have more risk and danger and less competition.
Therefore you can see a flaw in what we know as good economic theory. The whole point of free markets is to ensure a wide variety of options and competition...but now it seems in the financial sector, there are just a few banks with ALOT of money and influence. Which limits competition and thus limits the amount of input the free market has on variable interest rates.
You could say that these big banks are able to stay atop because of big government and favorable legislation to them and it limits competition (putting up more high barriers of entry). To which I would have to agree with you on that.
thank you for the clarity of your
comment. This is well stated, I especially liked this succinct statement of why the free market works to the advantage of all.
It would also be nice to see a brief, illuminating comment over on Jake's site where he specifically asks for reader responses.
Thank You. You Are Much More Reasonable Than Me. Mark Twain
Your take: Reasonable. What you write is helpful to follow the news. Thank you.
My take: Correct, but at variance with most reported news.
No such thing as an honest bank in my lonely opinion. See: "Honest Money, Dishonest Money." There is even a web site.
Economics: The dismal science. Even the Nobel Prize will have none of it. The Economics prize that somehow is reported as if it is a real Nobel prize, is actually bought and paid for by a bank.
Economics big picture: GDP vs DEBT.
Gross Domestic Product (GDP)is very little about production. It is a measure of spending. How much you spend, says little about your ability to pay debt. We are burdened by a "Debt Based Legal Tender" world of finance.
From DailyPaul posts this month about you back our National Debt...
My comment on "You Back Our Debt":
http://www.dailypaul.com/node/132325#comment-1416042
Forum post and video: "You Back Our Debt": http://www.dailypaul.com/node/132325
Follow how Ron Paul stands for sound money! Where does our National Debt legal tender really come from? Why would bankers loan us legal tender for 100 years, with nary a principal payment? Why do all National Banks behave this way?
"Pay no attention to that little man behind the curtain." Wizard of Oz (as in Troy Ounce). Dorothy's slippers were "silver" in the book. Ruby red looked better on the big screen.
"If you don't read the newspaper, you will be uninformed."
"If you read the newspaper, you will be misinformed."
Mark Twain (1835 - 1910; Rode in on Halley's Comet. Rode out on the same.)
Mark Twain Posts 1835-1910-To-be-continued...
Daily Paul ☑ Ron Paul, 2012 ☑
Financial version of the "Hockey Stick"?
'nuf sed.
Interest Rates Are Banker "Imagination" "Make Believe"
Interest rates are what they believe them to be. Exactly.
Interest rates are derived from Banker imagination.
Fed Funds... The Fed
Fed Discount... The Fed
Prime... US Banks that are members of the Fed Resv Sys.
The Prime is created daily by survey of Banks. Any member may call in to report what the loan rate should be. About 20 call. The calculation is generally:
LIBOR (London Inter Bank Order Rate)
http://seekingalpha.com/article/105089-the-brave-new-world-o...
This is all very bad, in that variable rates are one-sided bank rates telling you by force of law, what you will pay.
Contracts throughout history seldom had variable rates. They should be fixed term, fixed rate (ie, fixed agreement consideration).
Mark Twain Posts 1835-1910-To-be-continued...
Daily Paul ☑ Ron Paul, 2012 ☑
Excellent illustration on Fractional Reserve Banking.
I contend that underlying every problem in the banking system is the immoral practice of fractional reserves.
It's very simple to understand.
There are 2 types of deposits;
1. DEMAND DEPOSITES like savings and checking accounts
where these monies can be "demanded" back by the
customer at any time.
2. TIME DEPOSITS like CD's which are required to stay
at the institution for a certain amount of "time"
(like a year for example).
ONLY THE 2nd type of deposit can morally be lent out for interest. And even then, only until the original time deposit comes due at which time the customer must have access to those funds.
If that were the case and banks always had on hand the exact amount of money in demand deposit accounts as had been deposited there, then all banking problems would end.
No more bank runs and no need for a sham organization like the FDIC or the FED which are just there to allow banks to loan out more than they have in the hopes that not every customer will come back demanding their money at the same time.
In ANY OTHER business this would be considered FRAUD and they would be prosecuted accordingly.
"We have allowed our nation to be over-taxed, over-regulated, and overrun by bureaucrats. The founders would be ashamed of us for what we are putting up with."
-Ron Paul
Thank you
Thanks for your input.
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“The most important element of a free society, where individual rights are held in the highest esteem, is the rejection of the initiation of violence.” Dr. Ron Paul
It Would Seem To Me,,,
That local banks around the country are coerced by the FDIC insurance guarantees to only borrow money to be lent to borrowers, from the Fed and it's local banking affiliates.
Therefore low Fed interest rates are passed on to local banks all across the country, at a slightly higher than Fed rate, percentage wise amount.
But lets say an innovative local banker decides to raise money using a different method.
He offers a one year time deposit of a certain amount, say $1,000 at 5% for one year.
A $1,000 time deposit at 6% for two years, and a 5 year time deposit at 7% for 5 years, and so on.
Since this bank is offering a higher rate of return than most savings accounts offer, wouldn't many savers take advantage of this offer?
Of course some may say this is a ponzi scheme, but isn't the U.S. Treasury selling interest bearing bonds through out history the same type of thing?
beesting
hypothetical banker
If the banker wants to be profitable, those incoming funds at 5% 6% 7% need to be pushed out as loans above those rates. For example, with the new pot of cash the banker would need to finance mortgage loans at more than 5/6/7% (and even higher to cover the bank staff salary and overhead and risk of loan person defaulting).
The Fed has been (breaking the Fed charter) buying mortgage debt from fannie and freddie. That has kept longer term rates and mortgage rates low because there is an endless buyer which is keeping supply/demand out of balance and keeping rates low.
With the Fed holding mortgage rates down, the hypothetical banker can't find people who want to get a mortgage loan at 8%. Therefore if the hypothetical banker brought in money at 5/6/7%, the banker would go broke.
This is how the Fed is currently controlling long term rates. At some time the markets inside and outside the USA will overwhelm the Fed. We don't know when this will happen. As long as the Fed can literally create money to buy fannie and freddie mortgage debt, the Fed can keep mortgage rates low.
http://FlipFlopRomney.blogspot.com
Low mortgage rates means more
Low mortgage rates means more available cash means housing prices skyrocket.
Anytime money is less available for a specific product, it'll reduce demand and prices will drop.
What really baffles me is why the government would want to prop up the price of houses.
Houses used for personal residence are not an investment, they're a consumer item and a liability. They generate no cash unless you're smart enough to flip them.
It works out better for large banks if the interest rates are next to nothing. They can lend out much more cash, drive the price of the goods sought through the roof, and even if they're making 1% on a half a million dollar loan, it works far far better for them if they can make 1% on a million half million dollar loans using cheap new fed money than 5% on a few thousand $50,000 dollar loans using real capital. The bank makes its money on sheer volume.
The entire point of low interest loans is to drive up costs and get more people hooked on the banks.
If something looks too good to be true, it probably is.
I am out of touch with most Americans precisely because I am not out of touch with reality.
Banks Don't Use Your Cash to Make Loans. Just Accounting Entries
Confused? Bank loan or line-of-credit are accounting entries.
You sign loan documents.
Banks make accounting entries.
Banks cash your payment checks.
You work all your life paying off, what was just an accounting entry.
Our banking system under the Fed Reserve is secretly making legal tender out of thin air. Very illegal if you did it. But, alas, you are not a bank. Listen to Ron Paul. You will figure it out.
Mark Twain Posts 1835-1910-To-be-continued...
Daily Paul ☑ Ron Paul, 2012 ☑
Sure but they can't make
Sure but they can't make loans unless you either deposit money, they borrow it through federal funds, or they borrow it through the discount window.
Fractional lending can only increase cash theoretically tenfold. The fed creating money is limitless.
And IIRC, some of these banks aren't limited to the 10% requirement. Some of them leverage 30 to 1 or more.
I am out of touch with most Americans precisely because I am not out of touch with reality.
Fed Lending is Limitless. So are bank loans.
You have a conventional view of what is taught in public. Generally you should be correct. But bankers seem to be less than forthright. Dodgy loans. Yes. Fractional reserve? In a conventional world, you can't loan more than you have. But, alas... you and I are not bankers. They think of ways to loan way more than they have. 10 to 1, 30 to 1, 100 to 1, Fannie and Freddie were 200 to 1 when someone noticed it was a house of cards.
Actually, they seem to not loan our money at all. If you or I want a withdrawal, it is always waiting for us. How can that be? We are taught bankers loaned out each of our dollars 10 times. Mystery.
They create bank legal tender "out of thin air" when you sign a loan document. All magic. No armored truck in the driveway.
Listen carefully to Ron Paul and others. They are saying, "Hey, something is amiss!"
Mark Twain Posts 1835-1910-To-be-continued...
Daily Paul ☑ Ron Paul, 2012 ☑
Yes, and if I recall
Yes, and if I recall correctly, those big huge federally chartered banks don't really have any limits to how low of a reserve they're required to keep.
That coupled with the fed's ability to lend to whomever they want, however much they want, and in total secrecy (they could be lending money to Al Qaeda, legally, for all we know!) is a huge recipe for disaster.
If we were talking about just the banks who are required to keep 10% on hand, then that's only a tenfold increase, but when you throw in these guys with unlimited lending power, it changes the equation.
So what are the repercussions if these guys extend too much credit, other than a dollar collapse? Where are the checks and balances?
I am out of touch with most Americans precisely because I am not out of touch with reality.
No, Please let me explain further the hypothetical banker.
The banker is taking in time deposits. No interest is paid by the bank until the maturity date of the C.D. {1 year, 2 years, 5 years }
If a saver/investor of a C.D. wants to cash in before the maturity date, they are penalized with no interest payment and a processing fee. This is a normal practice in banking.
Now as C.D. savers flood the bank with additional cash, because of the higher than average return on investment that is promised to be paid in the future, the banks cash assets rise.
Soon the bank has enough cash on hand to finance a house loan for a "Qualified" potential buyer of a house.
Lets say the average house loan is around 6% to the buyer of the house, that has good credit and a steady income and a large down payment.
The house sale is completed for 75% of the true total value of the house, and other investors are still buying C.D. time deposits.
For the first 7 years of the house payments "Most" of the payment money goes to pay off interest, and only a small fraction goes to pay on the actual amount borrowed. The interest payments paid by the home buyer are paid on a monthly basis.
So lets say in a years time 10 houses are financed in this manner.
At the end of the first year the bank now has monthly house payments coming in of several thousand dollars, hopefully enough cash to pay off with interest the first one year C.D. saver/investors, some of whom may decide to buy/invest in another C.D. time deposit, further adding to the cash on hand for our hypothetical bank.
I would say this hypothetical banker is helping potential qualified home buyers buy a house, and at the same time offering savers/investors a "Local" way to create a retirement plan by eventually having enough invested in local C.D.'s to collect monthly interest payments on the maturity dates of the C.D.'s.
* C.D.= Certificate of Deposit.
P.S. a long time friend of mine works in a bank selling C.D.'s and says she has sometimes sold up to 7 figure amounts in one day.
P.P.S. Even a hypothetical bank can't be started on a shoe string, therefore our hypothetical banker must save XXXXXX amount of cash to even think about opening a bank.
Please think about this !
beesting
I have thought about it and
I have thought about it and extensively looked into it. On a shoestring budget, $1M can open a new bank.
Banks are regulated by the Federal Reserve, so if you do anything interesting they will shut you down or bleed you out with audits.
I have found another path and I am getting people to sign up and deposit funds. I expect a two year time frame until we see results locally. At that point, I intend to duplicate the idea in other communities if there is interest.
http://FlipFlopRomney.blogspot.com
good points
"ponzi scheme,isn't the U.S. Treasury selling interest bearing bonds through out history the same type of thing?"
Many countries did not even pay off their first world war debts...the whole planet is bankrupt - and yet they keep on spending trillions of dollars on their military.
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“The most important element of a free society, where individual rights are held in the highest esteem, is the rejection of the initiation of violence.” Dr. Ron Paul