The central bank of the United States basically is transferring money from everyone else to bail out banks.
Ben S. Bernanke, the chairman of the Federal Reserve, rejects that thinking, as do a majority of the Fed’s policy makers. They argue — and several of them repeated their arguments in interviews here that were mostly off the record — that they had no choice but to cut the key lending rate that the Fed controls to 2 percent from 5.25 percent in just eight months. Otherwise, they said, the housing and credit crises would have resulted in much more damage to the economy.
The Fed is basically using low interest rates to subsidize banks. The low interest rates boost inflation and therefore take money away from everyone else. The money gets transferred ot banks. The Fed exists to protect bank shareholders. You pay bank shareholders via inflation and via lower interest rates you get paid on bank accounts and bonds.
Now, they argue, the so-called federal funds rate must be kept at 2 percent — for no one knows how long — so that banks and other lenders can borrow at low rates and lend at higher ones, using their fattened earnings from this process to rebuild the capital they need. The banks’ capital eroded as numerous loans made during the bubble years went bad and were written off, reducing their ability and willingness to lend to the public.
“Lenders have been hit by a shock so severe that they are contracting and withdrawing from private sector lending,” Janet L. Yellen, president of the Federal Reserve Bank of San Francisco, said in an interview.
Lower interest rates mean that if you are a saver and put your money into certificates of deposit (CDs) at banks then you get paid less. Basically, part of the money to help banks recover is getting taken from you and the interest rate you get paid isn't enough to keep ahead of inflation. You aren't compensated for this. You aren't getting shares in these banks in exchange for helping to build up their capital reserves.
Do the rest of us derive a big enough benefit to make subsidizing banks in this fashion justified for the common good?
|Share |||By Randall Parker at 2008 August 24 08:05 PM Economics Financial|