Blog Archives

Why Is the Fed Paying So Much Interest to Banks?

“If you invest your tuppence wisely in the bank, safe and sound,
Soon that tuppence safely invested in the bank will compound,

“And you’ll achieve that sense of conquest as your affluence expands
In the hands of the directors who invest as propriety demands.”

Mary Poppins, 1964

When Mary Poppins was made into a movie in 1964, Mr. Banks’ advice to his son was sound. Banks were then paying more than 5% interest on deposits, enough to double young Michael’s investment every 14 years.

Now, however, the average savings account pays only 0.10% annually – that’s 1/10th of 1% – and many of the country’s biggest banks pay less than that. If you were to put $5,000 in a regular Bank of America savings account (paying 0.01%) today, in a year you would have collected only 50 cents in interest.

That’s true for most of us, but banks themselves are earning 2.4% on their deposits at the Federal Reserve. (more…)

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QE Forever: The Fed’s Dramatic About-face

“Quantitative easing” was supposed to be an emergency measure. The Federal Reserve “eased” shrinkage in the money supply due to the 2008-09 credit crisis by pumping out trillions of dollars in new bank reserves. After the crisis, the presumption was that the Fed would “normalize” conditions by sopping up the excess reserves through “quantitative tightening” (QT) – raising interest rates and selling the securities it had bought with new reserves back into the market.

The Fed relentlessly pushed on with quantitative tightening through 2018, despite a severe market correction in the fall. In December, Fed Chairman Jerome Powell said that QT would be on “autopilot,” meaning the Fed would continue to raise interest rates and to sell $50 billion monthly in securities until it hit its target. But the market protested loudly to this move, with the Nasdaq Composite Index dropping 22% from its late-summer high.

Worse, defaults on consumer loans were rising. December 2018 was the first time in two years that all loan types and all major metropolitan statistical areas showed a higher default rate month-over-month. Consumer debt – including auto, student and credit card debt – is typically bundled and sold as asset-backed securities similar to the risky mortgage-backed securities that brought down the market in 2008 after the Fed had progressively raised interest rates.

Chairman Powell evidently got the memo. (more…)

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Breaking with Wall Street: L.A. Puts It to the Voters

Wall Street owns the country. That was the opening line of a fiery speech by populist leader Mary Ellen Lease in 1890. Franklin Roosevelt said it again in a letter to Colonel House in 1933, and Sen. Dick Durbin was still saying it in 2009. “The banks – hard to believe in a time when we’re facing a banking crisis that many of the banks created – are still the most powerful lobby on Capitol Hill,” Durbin said in an interview. “And they frankly own the place.”

Wall Street banks triggered a credit crisis in 2008-09 that wiped out over $19 trillion in household wealth, turned some 10 million families out of their homes, and cost almost 9 million jobs in the US alone; yet the banks were bailed out without penalty, while defrauded homebuyers were left without recourse or compensation. The banks made a killing on interest rate swaps with cities and states across the country, after a compliant and accommodating Federal Reserve dropped interest rates nearly to zero. Attempts to renegotiate these deals have failed. (more…)

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Central Banks Have Gone Rogue, Putting Us All at Risk

Central bankers are now aggressively playing the stock market. To say they are buying up the planet may be an exaggeration, but they could. They can create money at will, and they have declared their “independence” from government. They have become rogue players in a game of their own.

Excluding institutions such as Blackrock and Vanguard, which are composed of multiple investors, the largest single players in global equity markets are now thought to be central banks themselves. An estimated 30 to 40 central banks are invested in the stock market, either directly or through their investment vehicles (sovereign wealth funds). According to David Haggith on Zero Hedge:

Central banks buying stocks are effectively nationalizing US corporations just to maintain the illusion that their “recovery” plan is working . . . . At first, their novel entry into the stock market was only intended to rescue imperiled corporations, such as General Motors during the first plunge into the Great Recession, but recently their efforts have shifted to propping up the entire stock market via major purchases of the most healthy companies on the market.

(more…)

How China’s Mobile Ecosystems Are Making Banks Obsolete

Giant Chinese tech companies have bypassed credit cards and banks to create their own low-cost digital payment systems.

The US credit card system siphons off excessive amounts of money from merchants, who must raise their prices to cover this charge. In a typical $100 credit card purchase, only $97.25 goes to the seller. The rest goes to banks and processors. But who can compete with Visa and MasterCard?

It seems China’s new mobile payment ecosystems can. According to a May 2018 article in Bloomberg titled “Why China’s Payment Apps Give U.S. Bankers Nightmares”:

The future of consumer payments may not be designed in New York or London but in China. There, money flows mainly through a pair of digital ecosystems that blend social media, commerce and banking—all run by two of the world’s most valuable companies. That contrasts with the U.S., where numerous firms feast on fees from handling and processing payments. Western bankers and credit-card executives who travel to China keep returning with the same anxiety: Payments can happen cheaply and easily without them.

(more…)

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Trump Takes on the Fed

The president has criticized Federal Reserve policy for undermining his attempts to build the economy. The best way to make the central bank serve the needs of the economy is to make it a public utility.

For nearly half a century, presidents have refrained from criticizing the “independent” Federal Reserve; but that was before Donald Trump. In response to a question about Fed interest rate policy in a CNBC interview on July 19, 2018, he shocked commentators by stating, “I’m not thrilled. Because we go up and every time you go up they want to raise rates again. . . . I am not happy about it. . . . I don’t like all of this work that we’re putting into the economy and then I see rates going up.” He acknowledged the central bank’s independence, but the point was made: the Fed was hurting the economy with its “Quantitative Tightening” policies and needed to watch its step.

In commentary on CNBC.com, Richard Bove contended that the president was positioning himself to take control of the Federal Reserve. Bove said Trump will do it “both because he can and because his broader policies argue that he should do so. . . . By raising interest rates and stopping the growth in the money supply [the Fed] stands in the way of further growth in the American economy.” (more…)

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A Public Bank for Los Angeles? City Council Puts It to the Voters

California legislators exploring the public bank option may be breaking not just from Wall Street but from the Federal Reserve.

Voters in Los Angeles will be the first in the country to weigh in on a public banking mandate, after the City Council agreed on June 29th to put a measure on the November ballot that would allow the city to form its own bank. The charter for the nation’s second-largest city currently prohibits the creation of industrial or commercial enterprises by the city without voter approval. The measure, introduced by City Council President Herb Wesson, would allow the city to create a public bank, although state and federal law hurdles would still need to be cleared.

The bank is expected to save the city millions, if not billions, of dollars in Wall Street fees and interest paid to bondholders, while injecting new money into the local economy, generating jobs and expanding the tax base. It could respond to the needs of its residents by reinvesting in low-income housing, critical infrastructure projects, and clean energy, as well as serving as a depository for the cannabis industry. (more…)

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Blackstone, BlackRock or a Public Bank? Putting California’s Funds to Work

California has over $700 billion parked in private banks earning minimal interest, private equity funds that contributed to the affordable housing crisis, or shadow banks of the sort that caused the banking collapse of 2008. These funds, or some of them, could be transferred to an infrastructure bank that generated credit for the state – while the funds remained safely on deposit in the bank.

California needs over $700 billion in infrastructure during the next decade. Where will this money come from? The $1.5 trillion infrastructure initiative unveiled by President Trump in February 2018 includes only $200 billion in federal funding, and less than that after factoring in the billions in tax cuts in infrastructure-related projects. The rest is to come from cities, states, private investors and public-private partnerships (PPPs) one. And since city and state coffers are depleted, that chiefly means private investors and PPPs, which have a shady history at best. (more…)

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Fox in the Hen House: Why Interest Rates Are Rising

The Fed is aggressively raising interest rates, although inflation is contained, private debt is already at 150% of GDP, and rising variable rates could push borrowers into insolvency. So what is driving the Fed’s push to “tighten”?

On March 31st the Federal Reserve raised its benchmark interest rate for the sixth time in 3 years and signaled its intention to raise rates twice more in 2018, aiming for a fed funds target of 3.5% by 2020. LIBOR (the London Interbank Offered Rate) has risen even faster than the fed funds rate, up to 2.3% from just 0.3% 2-1/2 years ago. LIBOR is set in London by private agreement of the biggest banks, and the interest on $3.5 trillion globally is linked to it, including $1.2 trillion in consumer mortgages.

Alarmed commentators warn that global debt levels have reached $233 trillion, more than three times global GDP; and that much of that debt is at variable rates pegged either to the Fed’s interbank lending rate or to LIBOR. Raising rates further could push governments, businesses and homeowners over the edge. In its Global Financial Stability report in April 2017, the International Monetary Fund warned that projected interest rises could throw 22% of US corporations into default. (more…)

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The Bayer-Monsanto Merger Is Bad News for the Planet

Bayer and Monsanto have a long history of collusion to poison the ecosystem for profit. The Trump administration should veto their merger not just to protect competitors but to ensure human and planetary survival.

Two new studies from Europe have found that the number of farm birds in France has crashed by a third in just 15 years, with some species being almost eradicated. The collapse in the bird population mirrors the discovery last October that over three quarters of all flying insects in Germany have vanished in just three decades. Insects are the staple food source of birds, the pollinators of fruits, and the aerators of the soil.

The chief suspect in this mass extinction is the aggressive use of neonicotinoid pesticides, particularly imidacloprid and clothianidin, both made by German-based chemical giant Bayer. These pesticides, along with toxic glyphosate herbicides (Roundup), have delivered a one-two punch against Monarch butterflies, honeybees and birds. But rather than banning these toxic chemicals, on March 21st the EU approved the $66 billion merger of Bayer and Monsanto, the US agribusiness giant producing Roundup and the genetically modified (GMO) seeds that have reduced seed diversity globally. The merger will make the Bayer-Monsanto conglomerate the largest seed and pesticide company in the world, giving it enormous power to control farm practices, putting private profits over the public interest. (more…)

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The War on the Post Office

The US Postal Service, under attack from a manufactured crisis designed to force its privatization, needs a new source of funding to survive. Postal banking could fill that need.

The US banking establishment has been at war with the post office since at least 1910, when the Postal Savings Bank Act established a public savings alternative to a private banking system that had crashed the economy in the Bank Panic of 1907. The American Bankers Association was quick to respond, forming a Special Committee on Postal Savings Legislation to block any extension of the new service. According to a September 2017 article in The Journal of Social History titled “‘Banks of the People’: The Life and Death of the U.S. Postal Savings System,” the banking fraternity would maintain its enmity toward the government savings bank for the next 50 years. (more…)

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Funding Infrastructure: Why China Is Running Circles Around America

“One Belt, One Road,” China’s $1 trillion infrastructure initiative, is a massive undertaking of highways, pipelines, transmission lines, ports, power stations, fiber optics, and railroads connecting China to Central Asia, Europe and Africa. According to Dan Slane, a former advisor in President Trump’s transition team, “It is the largest infrastructure project initiated by one nation in the history of the world and is designed to enable China to become the dominant economic power in the world.” In a January 29th article titled “Trump’s Plan a Recipe for Failure, Former Infrastructure Advisor Says,” he added, “If we don’t get our act together very soon, we should all be brushing up on our Mandarin.” (more…)

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