One of the most annoying U.S. government policies these days is the Federal Reserve’s decision to pay big banks not to lend money.
This bank handout continues while average Americans who have been responsible and lived within their means earn nothing on their savings.
The Fed initiated this pay-for-no-lending program during the financial crisis, when it decided to pay big banks interest on their “excess reserves.”
What are “excess reserves”?
Money that the banks aren’t lending out–money that banks are just keeping on deposit at the Fed.
The Fed is paying banks 0.25% interest on this money.
0.25% interest isn’t much, but it’s more than the banks are paying you to keep money in your savings or money-market account. It’s also more than you’ll earn if you lend the Federal government money for 2 years.
Oh, by the way, why, exactly, are you earning so little interest in your savings accounts and money-market funds?
Well, because the Fed is keeping short-term interest rates at zero in the hopes that you’ll borrow money (as if borrowing money wasn’t what got us into trouble in the first place).
In other words, the Fed is paying banks not to lend money and screwing you, American citizens, because you’re dumb enough to have saved money.
Why is the Fed paying banks not to lend? Well, back in the financial crisis, the Fed wanted to find ways to secretly bail out banks without it being obvious to every American that that was what it was doing. And this particular bailout program was one of the more successful ways the Fed discovered of doing that. Over the past few years, this program has secretly funneled about $12 billion in risk-free cash (rough estimate) directly to the banks, just for being banks and not lending.
Of course, the financial crisis is over now, and the banks say they are in tip-top shape. But the Fed’s still paying them not to lend. Don’t you wish you could get in on that game?
How much money are banks keeping in “excess reserves?”
Photo: St. Louis Fed.
Oh, about $1.6 trillion. (See chart)The Fed pays banks about $4 billion of interest a year on those reserves. And bankers get bonuses based on that interest, for not lending money and instead just taking the free interest from the Fed.
Meanwhile, you earn next to nothing (or nothing) on the money you’ve saved.
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