Sunday, November 22, 2009

It is time to open a Federal Reserve bank:

The Fed is loaning money at 0% interest, while mortgage rates are about 5%.

If the deposit from the Fed was like a checking account, in that the money could be called back at any time, then the Fed requires 10% of the deposited amount held in reserve as cash. Then the bank could earn 5% times 10 = 50% interest on the money held in reserve every year.

But if the deposits from the Fed are like CDs, in which you basically can not readily get your money out at any time, but instead have to wait, then the Fed has a zero requirement for the amount of cash reserves to be held by the bank. Therefore a bank could earn an infinite percentage return on the money it holds in reserve, when loaning money borrowed at 0% and loaned out at 5%.

Our tax dollars hard at work...

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