Thursday, December 26, 2013

The So-called $83B Bank Subsidy

Our modern banking system has many huge problems - mostly the fact it seems to be run and allowed to be so run by socioaths.

BUT: A clarification on that "$83 billion subsidy" proclamation.  It is not what it seems.

The government does not give that money to banks - the so-called "subsidy" arises from a standard central banking function: "lender of last resort."

IF a regulated bank is in trouble and having trouble attracting sufficient deposits to remain in operation, and IF the central bank decides it is a temporary situation and the bank can be restored to profitability, THEN the central bank (in the US, the Federal Reserve) will lend money to that bank to restore it.

Now, most people don't know that banks are constantly lending money to each other, large amounts of money - to help maintain reserve deposits and as a central part of the money payment systems among banks, etc.

Those loans are made between banks at the "Fed Funds rate," a rate set among the banks (NOT by the Federal Reserve.)  And the Fed Funds Rate is the rate on which all other rates are based - commercial loans, consumer loans, credit card rates, etc.

Like all loan rates, the rates reflect the perceived risk that the borrower will default.  

Because of the lender of last resort policy, the perceived risks of inter-bank lending are lower, and that keeps the Fed Funds rate low, which in turn is reflected in all other loan rates.

That "$83 billion subsidy" is the calculated savings from lower interest rates which arise from the "lender of last resort" policy.

So (1) it is not money going from the Fed to the banks, and (2) it keeps interest rates throughout our economy lower - and in that sense is a subsidy for all of us.