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Tuesday, July 9, 2013

Paying Banks NOT to Lend; the New Normal

The other day we wrote about the ideology behind the Fed's decision to focus solely upon the stock market as the means of carrying out its ruse to hoodwink the American public into believing there was a recovery which in reality, doesn't exist.

And we explained how the goal of the Fed for the last 30 years or so whenever there's been a recession is to do as absolutely minimal as possible while projecting the con that they're doing everything humanly possible.

Now we turn to the Fed and its relationship to banks.
We know the Fed was created by bankers to be a financial backstop for bankers in times of crisis and to use taxpayer money to foot any costs accrued to ensure insolvent zombie banks have at least enough cash handy to keep up basic operations..

Once again, its a con game to prevent mass panic if people truly understood how in the hole financially most banks are due to past speculative investing and the trillions in toxic mortgages still on their 'shadow' books...

So right now, the Fed lends money to their banking buddies to the tune of near zero interest which in turn they either lent to other banks at around the same percentage, or lent to the public at 10-20x the interest rate i.e mortgages, car loans, etc..
Now the money the banks do lend out the the public is quite minimal in comparison to the billions upon billions they've acquired from their amigos at the Fed..

So how do the banks generate profit off that money?

Well one way is to take those funds and invest it into the market..

This is done in many different avenues..  A bank could use the money to buy up millions of shares of its own stock to give the impression to shareholders that earnings are stronger than they really are..
Or the banks go back to their old risky pre-Lehman ways of speculative investing, derivatives, etc...

So many ways to make money in a corrupted, rigged market if you are one of those in the "IN"

But there's a second way the banks make money off the borrowed funds..  The Fed pays banks interest -- a quarter of 1% to hold onto the money for them and Not to let the funds circulate into the general public.

In other words, the Fed acts as a 'bank' for banks..  This way not only are banks really not paying any interest to 'borrow' the tax-payer money but are making an additional profit to acquire the funds..
And though the interest seems super low, .25% of one billion = $2.5 million -- that's yearly bank profit just to allow the Fed to hold the zero-interest "loans"

Now back in October 2008, just as the last financial crisis was starting, Federal Reserve Chairman Ben Bernanke announced that the Federal Reserve would start paying interest on the reserves that banks keep at the Fed..

 This caused an absolute explosion in the size of these reserves.   In 2008, U.S. banks had less than 2 billion dollars of excess reserves parked at the Fed.
Today, they have more than 1.8 trillion.

2 billion look like this:              $2,000,000,000

1.8 trillion looks like this:  $1,800,000,000,000

In less than five years, the pile of excess reserves has gotten nearly 1,000 times larger.

You may ask yourself, 'Why?'
Its simple really..  QE has pumped nearly $4 Trillion dollars into the system in the last 4 years so banks and corporations could recoup profits and to reward professional Investors the government needs to buy US Treasuries (bonds i.e. buy up our debt)

If this money was circulated into the everyday economy, you'd have without any exaggeration or hyperbole, Weimar Germany or Zimbabwe hyper-inflation on US shores..

And that $1 bill in your pocket would eventually be worth a tenth of one cent..

And that loaf of bread would become $100... then $200...then...
That's why none of this money goes to help the 99%; the Main Street economy.

It is not meant to--

Their recovery comes directly from Fed stimulus.  Our recovery is supposed to come from being convinced the economic rains have stopped and now its sunny again to consume and borrow...

AP recently stated that, "Americans increased their borrowing in May at the fastest pace in a year... Credit cards (borrowing off of) reached its highest point since the fall of 2010."
Of course they tried to make this a positive; said it reflected a more confident American consumer in the US economy..

At this moment, Americans in totality are $2.84 Trillion in debt.

This is why the Fed and by extension Bernanke is so deeply evil and so dangerous to the survival of our nation economically..

And interest rates can't be kept at near-zero forever...
In a recent article for the Huffington Post, Professor Robert Auerbach of the University of Texas explained (in blue font):

"One reason that the excess reserves grew to an extraordinary level is that in October 2008, one month after the financial crisis when Lehman Brothers went bankrupt, the Bernanke Fed began paying interest on bank reserves. 

Although it has been 1/4 of 1 percent interest, this risk free rate was not low compared to the Fed's policy of keeping short-term market rates near zero. 
The interest banks received was and is an incentive to hold the excess reserves rather than lend to consumers and businesses in the risky environment of the major recession and the slow recovery.

The Bernanke Fed is now facing a $1.863 trillion time bomb, they helped to create, of excess reserves in the private banking system. 

If rates of interest on income earning assets (including bank loans to consumers and businesses) rise, the Fed will have to pay the banks more interest to hold their excess reserves."
All actions cause reactions..  Everything has repercussions..

So what's the other option?  Well, if the Fed does not raise its interest rates on the reserves being held, the banks, being the selfish cut-throat bastards they are, will withdraw that money and begin offering it to the public as loans...

This will cause an avalanche of money pouring into the economy and cause the currency to devalue all while provoking inflation to ultimately spike to levels the Fed will not be able to control or manipulate...
The Fed is stuck.. they can't really end QE even if they wanted to, especially with all the pungent vermin who make their living via the stock market so completely utterly dependent on it...

There are no easy answers or solutions..  

Most people are woefully uninformed and truly do not understand what is going on.. 

We simply provide truthful information so you are at least made aware of how precarious our economic footing is..  

What you do (or don't do) with the knowledge is entirely up to you