Earlier I mentioned that I don’t understand exactly how the Fed works, so I have started reading up. This link has a very good explanation for those who want the long winded version, for those less patient, I’ll sum it up here:
The Federal Reserve is made up of independent banks and receives no budget appropriations from Congress. These banks are essentially “bankers’ banks” and make their money in the following ways:
- Interest from holding U.S. Treasury notes
- Interest from loans to depository financial institutions
- Fees from services to these institutions, like Automated Clearing House transfers (ACH).
The shareholders of these banks are payed a fixed 6% dividend, and any additional revenue is given back to the U.S. Treasury.
The Federal Reserve is tasked with maintaining a balancing act between recession and inflation, for keeping the economy in an optimal position. The tools at their disposal are the following:
- Purchase and sale of U.S. Treasury - This affects the amount of money and credit available to the economy.
- Reserve requirements - The fed can change the percentage of reserves at banks, which also affects the amount of money and credit available, but this is rarely done.
- Set the discount rate - The discount rate is the interest rate set by the Fed for short term loans to other banks.
So now armed with a better understanding of the Fed, I wanted to understand how the Fed’s decision to lower the discount rate resulted in a lower rate at my ING Direct account.
In late December, the Fed’s discount rate was 4.25%, whereas my ING Direct account’s rate was 4.1%. It makes sense that ING’s rate would be slightly lower than the Fed’s, because why would ING bother borrowing money from me, if they could get it cheaper from the Fed?.
Now the Fed’s discount rate is 3.0%, but my ING account is still yielding 3.4%, which is now higher than the Fed’s discount rate, which doesn’t make sense to me. Is this an arbitrage situation?
If a bank can borrow money from the Fed at 3.0% and put it into an ING Direct savings account at 3.4%, then they can make risk-free money doing nothing. Economic theory says an arbitrage situation like this can’t last long…
Is this just temporary, as ING wants to keep the shock of the falling interest rates low? Are they afraid of losing deposits by cutting their rates too quickly?
3 responses so far ↓
1 J.C.’s Money Blog » Blog Archive » ING Direct lowers interest rate on my savings account again // Mar 13, 2008 at 6:05 pm
[...] ING Direct quietly lowered their interest rate on savings accounts once again. About a month ago, I speculated that this would happen, because their rate was higher than the Fed’s discount rate. At 3.1% APY, they are just [...]
2 Chris // Mar 18, 2008 at 7:51 pm
Why would ING borrow money from you?
They “borrow” money from the fed. But that does not mean that someone elses deposited money is being moved around. It means the fed is printing money, or selling treasuries.
A bank does not actually borrow money and deposit it. If it did, then everytime it lent money, wouldn’t the total of all deposits go down? And if they were loaning your money the banks balance and yours should go down. They don’t. They aren’t loaning out your money or anyone elses.
The fed puts it on the books. Then your bank puts your loan on its books and hands you a check, or maybe even cash, but not from deposits. From the money created by making the accounting note in the ledger of the reserve bank and then having it printed.
Of course ING is going to pay you a % for keeping your money with them.
What a great deal. They keep everyones money, allowing them to have a greater amount of reserve, which allows them to “borrow” more from the fed, and then they loan the new money, not your deposited money.
So now, they have your money, and they are loaning out money that they don’t actually have and they get interest on all of it. Interest that can never be paid back. INTEREST THAT CAN NEVER BE PAID BACK.
How does that work you might ask? Simple.
If I print $100.00, loan it to you, but you have to pay me $5.00 in interest, where will you get the $5? I didnt create it. I created and loaned you $100.00. You can never pay me that 5$ unless I loan you more money.
And how awesome. I loan you $100.00 by making an entry in a accounting book. You pay me back $105.00. I simply cross out the $100.00 accounting entry and keep the $5 you gave me. NICE!!!
Where did the $5.00 come from if I never printed it? Credit. Credit or mortgage against real property like houses, cars, gold etc.
So now, gimmie my $100.00 I lent you, and I will give you $100.00 against your land and you give me my $5 interest out of that money I lent you. By the way, next year you’ll iwe me another 5 for the money I just lent you against your property. But remember, I never printed that $5. So eventually, someone somewhere along the line is going to have to give up their real property to cover that $5.
This is simplified, but it is how it works. It is robbery. The government has the ability to create money without interest or the private FED Corporation. In facct, Kennedy did it. Of course he was shot. But he told the treasury to print one silver certificate for every dollors worth of silver in the treasury. It created some 4 billion in interest free money that the bankers got no interest from.
I think that was a precedent the bankers found worth killing for and it had nothing to do with war or anything else.
Friggin awesome. And this is how bankers are slowly robbing all of us of all of our wealth. The FED sux.
3 J.C. // Mar 19, 2008 at 3:34 am
Hi Chris,
thanks for the comment. I can’t really follow your logic, but it sure made for an interesting read.
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