Why is the Most Crucial Issue of our Times Ignored by All Presidential Candidates?
by California State Assemblyman Mike Gatto
WolfStreet.com
February 15, 2016
The large and eclectic field of presidential contenders is in full-out campaign-promise mode, as voters demand positions on everything from ISIS to ethanol. With the economy so fragile, now might be a good time to seek commitments on who our next president will appoint to the Federal Reserve, and statements on what the proper role of the Fed should be.
Recent history is too important to ignore. After the Fed lowered interest rates to zero during the recession, it found itself lacking options for further “stimulating” the economy. It therefore began what it called Quantitative Easing (QE), which works more or less as follows: A bank buys a treasury bond for $97 million. Assume this bond matures in one year, and will be repaid at $100 million, or (very roughly) a 3 percent annual interest rate.
Under QE, the Fed creates new money. In our example, it will create $98 million, to buy this bond. By doing so, the interest rate has decreased to approximately 2 percent. And the bank made an easy profit, risk-free, on top of any commissions. But if the bank fails to lend out those funds, it does little for the economy.
You might ask yourself why the quasi-governmental Federal Reserve doesn’t just buy bonds directly from the Treasury. “No,” they say, “that would be too close to just printing money for the government.” As if using a middleman and generating private profits makes the process significantly more palatable.
After easing for years, now the Fed seeks to raise rates. Of the available methods, it does not wish to force the government to repay loans, so it rolls over the bonds where possible. It also doesn’t want to sell the bonds right back to the banks, which might make it appear they were “churning” – generating transactions to earn fees. And the Fed’s typical pre-recession move – controlling the supply of money by soaking up bank reserves – would be ineffective now, since it created so much new money during the last decade.
So, what will the Fed do? It will offer interest to banks on the funds they hold on reserve. In other words, the Fed will pay banks to let their money stay put, instead of lending it to me and you. The percentages might seem small, but remember, this is risk-free profit, generated on vast sums. If you’re questioning these actions – bidding up an asset that private parties own, paying them a commission to buy it, and then paying interest on the money you gave them – you’re not alone.
The Rest…HERE
