The Federal Reserve: Screwing Ourselves?

[Oliveloaf]

I know very little about how this works, so bear with me here.

This is going to be hyper over simplified, but...

The Fed lends money to certain banks that, in turn, lend money
to other banks and people and businesses...and whomever needs
money and is credit worthy...right?

To get this money, the Fed borrows it from the U.S. Treasury--or just taps the Treasury...right?

But, we're broke...right?

Here I see that the U.S. auctioned off some debt in the 1.5-2.0% range.

http://www.google.com/hostednews/ap/...dFiTwD9E621FO0

Here I see that the Federal Reserve discount rate to banks is .75%, up from .50% recently.

http://www.marketwatch.com/story/fed...k=MW_news_stmp

Does this mean that the U.S. takes about a 1% hit on all the money the Fed lends?

What the hell does that cost?

I ask because I have never heard anyone discuss this gap. It's lost money, right?

This seems like a massive expense.

[OtakuLoki]

Unless you have reason to doubt their numbers, your first article talks about debt being auctioned off with a 0.125% to 0.190% rates, i.e. ten times less interest than you're reporting.

At which point the dichotomy you're concerned about goes away. I don't know if you can compare those things, or not. I'm just saying that I think you shifted a decimal place there.

The Treasury Department auctioned $26 billion in three-month bills at a discount rate of 0.125 percent, up from 0.100 percent last week. Another $28 billion in six-month bills was auctioned at a discount rate of 0.185 percent, down from 0.190 percent last week.

(emphasis added)

[Feirefiz]

To get this money, the Fed borrows it from the U.S. Treasury--or just taps the Treasury...right?

I don't know much about the Federal Reserve in particular, but generally speaking, no, that's not how it works.
Essentially central banks can conjure their own currency out of thin air. Of course they are constraint by the relevant regulations and their own procedures and the very strong desire to avoid excessive inflation.

However the simplified idea is that they offer credit at an interest rate that they think will result in a desirable outcome. If someone (i.e. a bank usually) accepts that, then they hand out money that didn't exist before. When the credit is paid back, the money disappears.

[Oliveloaf]

No, no I don't doubt the numbers.

And I don't know if we can compare them...as you mentioned.

So, in theory, we're making money?

[Oliveloaf]

I don't know much about the Federal Reserve in particular, but generally speaking, no, that's not how it works.
Essentially central banks can conjure their own currency out of thin air. Of course they are constraint by the relevant regulations and their own procedures and the very strong desire to avoid excessive inflation.

However the simplified idea is that they offer credit at an interest rate that they think will result in a desirable outcome. If someone (i.e. a bank usually) accepts that, then they hand out money that didn't exist before. When the credit is paid back, the money disappears.

This, of course, is the legendary "printing money"

[Feirefiz]

This, of course, is the legendary "printing money"

Exactly, but as long as it is kept under control it is a normal part of the process.

[Oliveloaf]

I think the most important thing we have learned here today is this:

I don't know what the hell I'm talking about

[vison]

If it helps, John Maynard Keynes is making a comeback. Theoretically speaking . . . .

On the other hand, I learned last evening that Alan Greenspan knew Ayn Rand personally, and admired her.

So there you are.

Enough esoteric economic information for one day, eh?

[tunaman]

Actually, Greenspan wrote a few articles in Capitalism: The Unknown Ideal, a book of essays by Rand and others, and edited by Rand.

[Jaglavak]

What happens is, the US Treasury puts up bonds for sale. Some of the bonds are purchased by the Federal Reserve. The money to do that comes from thin air. It's not even printed anymore, they just push a few buttons and bingo! New money. Which means that each of your dollars is worth less than it was a few minutes ago. It seems so simple that many folks think there must be more to it, but since the early 1970's that's how it works.