A key question about the Fed!
Posted April 30th, 2008 by ralphwaldo
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I'm in a heated debate about how the Fed makes money and need an informed 2nd opinion.
Question: If the FED prints or electronically creates a million dollars and loans it to the US taxpayers at 2.5%, do the taxpayers pay back just the 2.5% interest or, the million dollar principle PLUS the 2.5% interest?
Thanks
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Most of the interest
Most of the interest generated by the Fed is remitted to the US Treasury, so they don't exactly make huge sums of money off of it.
Here's G. Edward Griffin's response. (Author of The Creature From Jekyll Island)
"It is true that most of the money paid by the government for interest on the national debt is returned to the government. That is because the Fed’s charter requires any interest payments in excess of the Fed’s actual operating expenses to be refunded. However, before we jump to the conclusion that this is a wonderful benefit, we must remember that the banking cartel is able to use tax dollars to pay 100% of its operating expenses with few questions asked about the nature of those expenses. After all of those expenses are paid, what is left over is rebated to the Treasury, as Flaherty says. There is no secret about this, and you will find an explanation of it in my book. Technically, there is no “profit” on this money. However, remember that creating money for the government is only one of the functions of the Fed. The real bonanza comes, not from money created out of nothing for the government, but from money created out of nothing by the commercial banks for loans to the private sector. That’s where the real action is. This is the famous slight-of-hand trick. Distract attention with one hand while the coin is retrieved by the other. By focusing on the supposed generosity of the Fed by returning unused interest to the Treasury, we are supposed to overlook the much larger river of gold flowing into the member banks in the form of interest on nothing as a result of consumer and commercial loans."
Hope that helps ya!
Well I have been reading about how the
central banks make so much money off of lending money to governments including financing both sides of wars. Since this would not involve the regional and commercial banks where are they making all of that money.
Also I am wondering if they are the owners of the regional Fed banks?
My guess is that this is in
My guess is that this is in regard to the Monetary Control Act of 1980. That enabled the Fed to buy bad foreign govt debt and monetize that debt into Fed notes so it can be repaid. This is accomplished internationally through the IMF or Export-Import Banks. Many private mega-international bankers loan to govts, I suppose to finance war among other things. They only care about receiving interest payments from their borrowers.
When the Fed buys up that foreign debt, it is considered an "asset" in our curent state of affairs, thus they can create money. That money is then loaned through the IMF, or Ex-Im Banks to those countries to enable them to at least meet the interest payments to their lenders. The Fed could also just send the funds to the US banks and make payments for the debtor nation. There are a few ways to get the banks paid back depending on a number of variables, but the banks never go without.
The regional Fed Banks are owned by the private share holding member banks in that region, to the best of my knowledge.
It's not so much about the central banks making money, as it is about the private banks. The central banks are of the bankers, by the bankers, and above all, FOR the bankers!
I haven't read "The Creature" yet, it's the next book in line, so I don't know if Griffin gets into this issue or not... hopefully this is some info you were looking for.
*Here's a great link about this, http://www.paulsholtz.com... It even features a little letter from RP back in the early 80's. This language in the Act may have since expired, I can't seem to tell for sure.*
So he's talking about
So he's talking about fractional reserve banking and the money multiplier, right?
Ron Paul Explorer: The All Paul Search Engine
That's correct. Most money
That's correct. Most money (but not all) is created through private banking. Of course the Fed is and has been a major enabler in the inflationary evils of fractional reserve banking.
Ok, thanks that seems to explain it.
I have heard Griffin explain that when the banks use the fractional banking system they can "lend-out" 10 dollars for every one dollar they borrow or have on hand. So in essence those bankers are creating 9 out of every 10 dollars out of thin air and that principle is payed back with interest by people who turn it into real money by their labor.
They can only lend out (or
They can only lend out (or create) $9 for every $1 in reserve, so they have $10 total, but need to retain 10%, or $1, as reserves. And don't forget all that new money (either created for the govt or by the banks) helps to drive up prices in the marketplace.
Money as Debt
Watch Money as Debt to understand how this all works.
http://video.google.com/v...
I'm not sure about this, but
I'm not sure about this, but I believe that the Fed may be able to both inflate as well as deflate the currency.
So in regards to your example, the principal would be destroyed (or otherwise taken off the books) once it is repaid - thus deflating the currency. It could also be lent out to another party instead of printing more or deflating it.
Also
The banks do not necessarily want to be repaid as they consider their debt an asset.
Correct
That is what is called the Business Cycle.
The United States taxpayer
pays the interest earned on the debt. That is why we have a deficit.
What would happen if the Supreme Court declared
the whole operation to be unconstitutional.
What about the million dollar principle!
Does the Taxpaper have to pay that back as well?
I think that's about 1/3
of the US's national debt. no government official (except possibly Ron Paul) intends to pay off this debt while they are in office.
a more thorough explanation:
1. US treasury prints the money, selling it to the Federal Reserve for a few cents on the dollar.
2. the fed loans out the money, usually back to the US government.
3. the first year's intrest is covered by the original few cents, the rest is unpayable -there isn't enough money printed to pay it off.
I Could Be Wrong
...but I could have sworn that I read (at lewrockwell.com or 321gold.com, maybe) that Treasury notes are given to the Fed for the amount of fiat currency printed.
Can anybody clear that up?
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Are you saying the principle is still owed and continues to
accumulate and draw interest for the Fed owners?
yeah
It would be the same for you-
borrow 300,000 (say, for a house)
pay intrest only for a few years,
you still owe $300,000.
on another note, if your house suddenly is worth only 200,000, because of a market downturn, you'll probably decide you can't or won't pay. hence- the current housing crisis.
Well in the case of a house, the principle is payed off.
There seems to be a lot of confusion about this!
not if you only paid intrest
and the house isn't worth the amount of the principal of the loan.
The principle must be paid off in a house loan.
In a standard loan, a portion of each payment goes toward the principle and the priciple is completly paid off when the loan is paid off.
The question about the Fed is, are they making money just off of the interest or are they realizing a profit off of the original amout they are creating our of thin air.
True, but these aren't standard loans
The whole subprime mess was about deferred-principal loans. When the deferrment ended, the balloon hit and people got nailed with payments they couldn't afford. Contrast that to fixed loans where the payment is fixed but the principal vs. interest differential changes over the loan term (you pay more interest up front and more principal later as the amortiziation schedule shows, which is why paying extra principal each month make a huge difference!). Fixed loans aren't seeing foreclosures like the subprime mess, but we are seeing our equity going to hell because of it as well (and that makes me mad since I saw this one coming 5 years ago!).
Contrast that to the Fed setup. They buy wholesale FRNs from the Treasury for production costs. That means the Treasury makes no profit on the deal. Then the Fed turns around and loans the Treasury (and other banks) the FRNs for FACE VALUE plus interest (which just got cut a quarter point today). So if it costs the Treasury $1 to print a sheet of 100 $100 bills, and they loan it out at 2% interest on the $10K face value on that ONE sheet, well, do the math and ask yourself why can't WE get that kind of sucker deal. The Treasury needs $10,200 to repay that $10K, and they don't even have the $1 the Fed paid tem for the wholesale production because the production costs ate it. Where are they going to get that extra $200 interest , not to mention the $10K principal? The next 2 sheets of printed bills, of course. And the cycle continues.
That cycle can be broken by simply having the Treasury sell the bills at face value to the Fed, and not selling all of them to the Fed. Then the transactios become interest-only with principal on-hand to repay the loans. At a 50% sell rate at face value, the debt could be paid down and off rather quickly. The effects on the market are left to the reader.
it's being rolled over not paid back
.
So are you saying the principle is never paid back,
It's just re-loaned at the current rate.
that's how it is
that's why the fed should be abolished.