The markets wouldn't be so important if there were a safety net.
</soapbox>
edit: "from making profitable trades" -> "from not making trades"
They're also buying assets, e.g. Treasuries. This is about increasing liquidity, not printing money.
Lets remember what causes slowdowns in productivity, panics, the great depression, the recession etc: people being slammed with too high interest rates for what's feasible for them to repay when times are tough. If the fed offered low interest rates directly it would be a different world. Remember also, the world is an auction house, so when people get these kinds of perks and you don't, your money doesnt go as far.
If I want to give my friend a loan, I need to earn that money first by working hard. FED does not conduct any profitable activity that would earn them any money, they DO PRINT that money from thin air.
I mean you just magically put $15T into circulation?
Won't this lead to inflation?
If you have ever taken a loan from a bank you are aware that you must prove to the bank that you are able to repay the sum. Based on the information they receive they will calculate the default risk and increase the interest rate accordingly.
Warning. Extremely simplified for ease of demonstration.
If you have a 50% default risk then someone else has to cover your missed payments. For every $10k you want to borrow the bank has to ask for another $10k in additional interest to cover the default risk. If your loan lasts 8 years that means $833 additional interest per year or around 8%.
Now, if you are a young poor person with a bad credit score then you might end up paying 5% on top of the actual interest rate. Negative interest: 5% - 0.1% = 4.9%. Positive interest: 5% + 1% = 6%. I'm glossing over compounding interest but the picture is clear. Negative interest rates are not going to meaningfully change the cost of borrowing money for the average person unless they get a mortgage that is backed by the value of the house. Meanwhile for rich people and companies who can get rates as low as 1% lowering the interest rate to -0.1% is almost like a cheat code. At those rates the money might as well be free.
The situation is exactly as kylebenzle inferred; the Fed is injecting new fiat money into the economy and it's going straight into the pockets of rich financial institutions which add no value whatsoever to the economy or society.
Financial institutions control who gets levered money (loans). They provide a huge value to an economy and society in a fractional reserve banking system.
You are upset about the Fed, when you should be upset about the government who controls fiscal policy. The government can provide tax holidays and other benefits more directly to people, as is their role, not the Fed.
Both the government and the Fed are to blame; one for designing the whole scheme and the other for implementing it. I'm upset about the idea that the Fed can inject money into the economy based on obscure criteria. From the perspective of an average citizen, who is legally obliged to accept Fed money in exchange for their labor, whatever set of criteria the Fed chooses is going to be inherently inadequate; the mere lack of transparency behind the Fed's operation is by itself sufficient to discredit the validity of the entire operation.
Money backed by gold was good money precisely and fundamentally because everyone understood what gold was and where it came from. Now, essentially nobody knows what fiat money is or where it comes from and yet everyone is legally obliged to accept it.
Even when "money backed by gold" was a slightly less completely inaccurate fiction than it is now, what people "knew" to be money was many, many, many different things, depending on where they were and what they did for work.
Stories like this are like religious narratives, and "money backed by gold" is like the story of the angry god allegedly giving tablets to some dude. It is at BEST an allegory but yall go and read it like it happened.
Money is a much more interesting topic that goldbugs give it...um...credit for.
There is another recent discussion on HN:
https://news.ycombinator.com/item?id=22573204
that has a lot of pointers to good resources from which to begin the discovery process.
The alternative is, the bank collapsing, taking some part of the economy with it.
I remember 2 years ago the market throwing a tantrum because of the fed unwinding it balance sheet. Doesn’t that mean that typical loans are never repaid and the Fed just let the bonds mature?
Personal finance and monetary policy are not similar even though they both involve money. Money in your bank account is not the same as money in the Federal Reserve or even money printed at a mint.
That's what central banks want you to believe: that what they are doing is something special, "God's work" - as some drunk Goldman Sachs executive put it. Truth is: law of economics are pretty much like laws of physics - they work the same in small and large scale. It is no coincidence that Great Depression happened in 1929, mere 16 years after FED was created - that was just a first of many consequences of central bank's irresponsible actions.
This injection isn't really comparable because those other things are expenditures, while the 1.5t refers to short-term loans to very creditworthy borrowers. It really doesn't come at the cost of providing universal healthcare.
> The Federal Reserve System is an independent government institution that has private aspects. The System is not a private organization and does not operate for the purpose of making a profit.
From https://en.wikipedia.org/wiki/Structure_of_the_Federal_Reser...
Fed = Monetary policy == Make sure money can flow "appropriately"
Government = Fiscal Policy == "Who gets money"
I don't know how your quote is relevant at all.
Not saying the OP is a goldbug or currency conspiracy theorist, but they're the only people I ever see tossing that out so quickly and without any elaboration on what they mean.
> Specifically, "the fed is a private bank" is a common refrain among goldbugs and currency conspiracy theorists, and it's not true, no matter how often it's repeated.
I'd recommend reading The Creature from Jekyll Island. Once you understand the origins of the Fed you will understand that it's an institution founded by public and private individuals and entities to drive profit and leverage the system and taxpayers where it can. It's a creature with public/private/independent parts. It requires no conspiracy because much is known about it, although most people are unaware. JP Morgan, Wells Fargo, Citibank, the government and others founded it together!
"At the end of November 1910, Senator Nelson W. Aldrich and Assistant Secretary of the U.S. Treasury Department A. Piatt Andrew, and five of the country's leading financiers (Frank Vanderlip, Henry P. Davison, Benjamin Strong, and Paul Warburg) arrived at the Jekyll Island Club to conduct a secret meeting to plan the country's monetary policy and banking system, formulating during the meeting the Federal Reserve as America's next central bank.[14] [15] According to the Federal Reserve Bank of Atlanta, the 1910 Jekyll Island meeting resulted in draft legislation for the creation of a U.S. central bank. Parts of this draft (the Aldrich plan) were incorporated into the 1913 Federal Reserve Act." [1]
[1] https://en.wikipedia.org/wiki/Jekyll_Island#Planning_of_the_...
>As an independent institution, the Federal Reserve System has the authority to act on its own without prior approval from Congress or the President.
And later:
>The twelve Federal Reserve banks provide the financial means to operate the Federal Reserve System. Each reserve bank is organized much like a private corporation so that it can provide the necessary revenue to cover operational expenses and implement the demands of the board. A member bank is a privately owned bank that must buy an amount equal to 3% of its combined capital and surplus of stock in the Reserve Bank within its region of the Federal Reserve System.
*edit - Also, the source for your quote is cited as "BoG 2005", with a dead/nonexistent URL
That aside, the common misperception of TARP is that the government gave away $400+B of taxpayer money, which is a very, very far cry from a small inflation-adjusted loss.
I don't think this is a common misconception, I think it's a strawman argument to deflect criticism of the bailouts.
Regardless of whether or not the government made money, we created a massive moral hazard by allowing banks to engage in shady behavior, avoid any criminal prosecution, get below-rate loans to avoid the market consequences of their actions, and left the common people out in the cold.
On top of that, we supposedly fixed the problem by expanding banks' reserve requirements, but when they got into trouble in the repo market, the FED runs to their rescue with even more below-market-rate loans, which seem to get larger and larger by the week.
Banking clients are demanding more liquid assets (ie cash) than banks have access to, so they are swapping treasuries for cash from the Fed.
It's not like this is banking profits; would you rather the bank fail and you or your business or your employer lose everything you had there? Because that is also an option.
Central bank ≠ treasury.
1. https://www.pewtrusts.org/en/research-and-analysis/issue-bri...
It's the opposite: it's a step toward removing the moral hazard that allowed predatory loans to be offered to students in the first place. The logical end-point is to get back to free or affordable tuition.
> Instead, you should give each young person $300k
Admirable suggestion, but how does that _not_ create perverse incentives to e.g. blow it all speculating on Hearthstone cards?
Yes, this means the Fed is very very worried about the state of the market, it means they think it's at risk of stopping normal operation. Maybe not ongoing crisis but they're worried about crisis in the near future.
The fact that the stock market circuit breaker has been hit a grand total of once before, back when it used a different set of rules and was easier to hit, and then we've hit it twice in a week is pretty fucking bad news, if that sets the backstory for you at all.
The markets literally pay for the entirety of any safety net. Without the markets there are no jobs, so no payroll or income tax revenue. Without tax revenue, there are no safety nets.
Without the markets, there are no investments, so no capital gains tax revenue.
Without the markets, there is nothing to sell, so no sales tax revenue.
Without the markets, there is capacity for charity.
If you don't understand how critical the markets are to the functioning of the country, you don't understand how countries function.
I completely agree that in the long term this is completely faulty and just helps to exacerbate the underlying causes of economic crisis. But our government (typically) does not act in long-term interests. We as a people do not hold our politicians accountable.
I'm pretty sure its treasury bonds that are "Backed by the full faith and credit of the United States". Dollars are backed essentially by what you can buy with them.
This is why each note has “Backed by the full faith and credit of the United States” printed on it.
https://en.m.wikipedia.org/wiki/History_of_the_United_States...
https://www.reference.com/business-finance/backs-up-currency...
No they don't. I just checked three different bills in my pocket (a $1, a $10 and a $100) and none of them say this. They say "This note is legal tender for all debts public and private" but there is absolutely no reference to "the full faith and credit of the united states"
The "budget" is equity.
These are the companies you are actively shorting. Think about that. This isn’t the same as 2008.