Reply #10: I dont understand what you are trying to say [View All]

[vert1276]

who is handing out the money at virtually 0% interest? The treasury or the Fed? The treasury is loaning money to the Fed at 0% interest this is true. But that is to increase the money supply to increase economic growth (the monetary policy of the USA). As an economy grows you HAVE TO increase the money supply. Now you may disagree on how much and how fast to increase it but thats a different debate.

Now, about the discount window at the Fed. I think you know just a little to much about this to get yourself in trouble, as they say. But not enough to fully understand it. FYI I am a working economist and have been one for banks and private equity firms so take that for what its worth to you, but im not just talking out of my azz. And I did almost take a job at the Fed in Seattle after WAMU went down(the bank I was an economist for) but the pay sucked so I went to work for a private equality firm instead LOL :)

Well before I can totally explain why you were wrong about the discount window I have to start at the beginning. Why the Fed was created? 2 main reasons really first and most importantly to prevent bank runs and second to standardize the currency. Before the Fed in 1913 there were something like 20,000 different bank notes in circulation in the US. This was hurting the economy because it created 20,000 different currency exchanges. So when the Fed was started by law they are the only bank that can issue bank notes. Now if you became a member bank of the Fed (there are like 7,800 banks in the US only like 2,700 are members of the Fed, but all NATIONAL banks are required to be by law) you have to give them 6% of your cash to hold 3% up front and 3% in reserve that the Fed can demand at any point. This creates a huge "Kittie" of cash the Fed is holding of member banks. This is so they can prevent bank runs. A bank is required to have a 10% reserve ratio by law (in some cases less then that if the bank is small) So if a Bank has a liquidity issue (not a solvency issue, this is KEY) meaning their assets are greater then their liabilities. But they just don't have enough cash to meet there on demand accounts (depositors at the bank)they can call up the Fed and say "hey send us over some cash" this would be "going to the discount window" at the Fed. It works just like a pawn shop on a repo agreement meaning the Fed hands over the cash (the banks own money really and the money of MANY other member banks) and in exchange the bank hands over collateral. Traditionally that collateral had to be very safe, like only a select few AAA rated bonds. They couldn't give the Fed Dotcom stock as collateral lol. Although with the banking crisis the Fed has loosened up what they will take as collateral at the discount window, but they are still AAA rated bonds. Now the Fed (the discount window) is the "lender of last resort" the banks don't want to go there to get money. They are for sure not going there to get money to re lend out. There would be no point to that because they have to hand over an asset. That would be like going to the pawn shop to pawn your $1000 ring to get a $1000 bucks in cash to go out and buy another ring lol plus on top of that you have to pay the pawn shop (and the Fed) interest on that $1000. The first choice of the bank would to go to another bank for the loan they need to shore up their liquidity issues (because they wont have to hand over an asset). At somewhere close to the Fed "target rate" the Fed sets the "target rate" this is the rate they want the banks to lend to each other at on a 24 basis.The rate they are paying at the discount window is the "discount rate" and traditionally that is a higher rate then the "Target rate" because the Fed wants a bank to go on the open market and get a loan from another bank not come to them (although this is ALL screwed up right now and the discount rate is lower then the target rate with the banking crisis but it will be back to normal soon). When you hear on the news "the Fed is lowering interest rates" they are talking about the "target rate" how they do this is they get a loan from the treasury (basically the Fed pays the treasury a small fee to print money and give it to them) but like a said this is a LOAN is not free money and to offset this loan on the Feds balance sheet they go out and buy US treasuries gaining an asset to offset it(like I said in the other post this his how the US dollar is backed by treasuries not gold anymore) on the secondary market (that is key!! they are buying them on the secondary market that means from you and me and investment firms ect ect. If they were going to the primary market it wouldn't work. They are not going to US treasure bond auctions and buying NEW issued US bonds. That would mean the Fed is just borrowing money from the treasury then just giving it right back to the government at a bond auction LOL) the people selling them get the cash and HOPEFULLY put it in the bank increasing the banks liquidity, meaning they have more cash to lend meaning they can loan it to other banks at lower rate. Of course they do the exact opposite to raise rates. SO I guess the whole point of this long post is to say when a bank goes to the discount window at the Fed for a loan the money they are getting is basically their OWN money back, not "printed free money from the treasury" or "tax payer money" ect ect.

Now I'm not talking about TARP here, that is a totally separate issue we can go into if you want. I was just explaining how the discount window works at the Fed.

Now when you said in your post "Instead of being held accountable and required to face liquidation they and their principals were given free money and the opportunity to make even more enormous profits." That is a 100% false statement. If a bank is facing liquidation that means it's INSOLVENT! meaning it liabilities are greater then its assets, so even if every asset it had was paid (loans it has outstanding to people) there still would not be enough money to pay the on demand accounts (the people who deposited money in the bank) In this case they don't get a loan from the Fed discount window they go into receivership!!! Meaning the Fed (if its a member bank) and the FDIC come in and shut them down!! Give all the depositors their money back and sell off the banks assets and try to come as close as they can to breaking even in the end.

This was a VERY long post and I'm not gonna proof read so don't rip me apart on grammar ok lol? And I hope that cleared some stuff up :) have a nice day!