End the payment of interest on reserves while the FED is losing money

United States

Financial System

Problem

The Federal Reserve began paying interest on reserves in 2008 as part of emergency measures to direct additional funds to ailing banks and step in for the loos of liquidity in the market. It is true that the Federal Reserve had been working on passing a law to pay interest on reserves for many years and the ruling was sped up as a result of the problems in the market in 2008.

All banks are required to hold reserves at the central bank as part of our fractional reserve banking system. The control of these reserves allows for the central bank to manage liquidity in the system and is an important monetary tool. As part of the actions since the financial crisis of 2008 the Federal Reserve has begun buying up assets such as treasury bonds and mortgage backed securities to inject liquidity back into the economic system to prevent a more disastrous seizure of the economy. These purchases reside on the asset side of the balance sheet and do not make much money in terms of interest. The Federal Reserves liabilities are now mostly made up of the interest that they pay banks on the reserves that they hold with the central bank. If the Federal Reserve needs to raise interest rates as part of the normal actions of a central bank in a bettering economy the interest on reserves paid to banks will be greater than the assets purchased from the banks as part of rescue operations resulting in a loss for the Federal Reserve and ultimately the taxpayer.

The total possible losses? $125 billion. FED economist argue that the benefit to the taxpayer in terms of a improved economy far out weigh the cost and it the extreme long run the FED and the programs will be profitable. However, the FED economist leave out that that lost money will be going directly to the banks in the form of interest on reserves; a program that didn't begin until 2008. Oh and one last point, congress is currently trying to determine whether to cut food-stamp programs by $4 or $10 Billion over the next 10 years.

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Banks looking to charge customers for holding deposits if the "Fed" penalizes banks "lazy" behavior of stashing excess reserves with the Fed: http://blogs.marketwatch.com/thetell/2013/11/25/bank-look-to-charge-customers-to-hold-their-money-if-fed-says-stop-being-lazy/ "The amount of cash held at the Fed used to be negligible but is now in excess of $2.3 trillion. The logic is that the Fed wants the banks to stop parking their “lazy cash” at the Fed and start doing something with it, say experts." This is ridiculous. The banks are threatening to punish deposit holders as a hostage taking situation if the "Fed" takes away their easy money. -- V3ritas Posted At: 2013-11-26 14:14:42 UTC

Solution

Demand that Congress passes a law that the Federal Reserve does not pay interest on reserves in years when they are not profitable or in other words no remittances are paid to the Treasury, ultimately the taxpayer.

The Federal Reserve can continue to manage the banking systems reserve levels through reserve requirements, something they have done all the way up to 2008.

Yes, during the times when interest on reserves is not being paid this is an implicit tax on the banking system.  However, this implicit tax will be paid by the system that was rescued through the Fed's asset purchases.  It is time to value the taxpayer's dollars over the interests of the banks.

 

The very same system that was saved by the large asset purchases made by the Federal Reserve to protect the system and will ultimately result in a loss to the taxpayer.

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Facts

http://www.federalreserve.gov/pubs/feds/2013/201301/201301pap.pdf

 

The Division of Monetary Affairs of the Federal Reserve has issued a report that it is likely that the Federal Reserves will possibly go through multiple years, from 2015 to 2020, where they will not be transferring money to the Treasury, and will actually be running losses.

The reason for these losses is that if interest rates rise the interest on reserve that is paid to banks will be greater than the money the Federal Reserve earns on the bonds and mortgage backed securities that the Federal Reserve purchased to save the banks and protect the economy.

 

http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm

"The interest rate paid on balances maintained to satisfy reserve balance requirements is determined by the Board and is intended to eliminate effectively the "implicit tax" that reserve requirements used to impose on depository institutions"

Maybe the banks should go back to paying the "implicit tax" rather than the taxpayer losing $40 Billion a year in foregone payments to the treasure from the Federal Reserve.

 

 

 

Published in 2011 this article says that the losses will be minmal and are secondary to monetary policy.  Within 2 years the Board of Governors report basically shows that the FRB SF Economic Research department completely got the actual risk wrong:

http://www.frbsf.org/economic-research/publications/economic-letter/2011/april/fed-interest-rate-risk/

 "To make financial conditions more supportive of economic growth, the Federal Reserve has purchased large amounts of longer-term securities in recent years. The Fed’s resulting securities portfolio has generated substantial income but may incur financial losses when market interest rates rise. Such interest rate risk appears modest, especially relative to the Fed’s policy objectives of full employment and price stability."

 

There is no need to incur finanical losses.  The Federal Reserve can simply go back to Reserve Requirements.  The losses will be the implicit tax the banks pay by keeping reserves with the Federal Reserve without interest.  Something that has been the practice for the 80 years leading up to 2008, when the law was changed.

 

Who destroys U.S currency?

http://www.theatlantic.com/business/archive/2011/04/the-destruction-of-money-who-does-it-why-when-and-how/236990/

 

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Action

Starting October 5, 2013 if a law has not been passed that implements the solution we will begin clogging the Federal Reserve with unfit currency.

Unfit currency is paper money that needs to be taken out of the system. For example, a $1 bill that has been cut in two and is taped back together. It is removed by being collected and stored by banks then sent back to the Federal Reserve for destruction.

 

A demonstration is being organized for October 4, 2013 in San Francisco.  We will meet at 4:00pm at Justin Herman Plaza with our mutilated currency.  We will walk down Market Street to return the mutliated currency with replacements at Bank of America, Chase, and Wells Fargo banks.  These institutions will directly benefit from the payment of interest on reserves while the taxpayer will lose the average $40 billion payments to the treasury every year from the Federal Reserve.

Signs should read "End the payment of Interset on Reserves".  No violence will be tolerated.  Any memebers that disrupt the procedings will be pointed out to authorities.  If banks choose to lock their doors there will be no confrontation.  This will do more to gain visibility to the problem and the solution.

 

Those of us that demand are agreed upon solution be acted upon will begin taking unfit currency to banks in exchange for new currency.

The banks and the Federal Reserve System can waste all of their time cycling unfit currency out of the system or work to implement the simple and practical rules to protect the taxpayer that rescued the economy and have the banks that were rescued pay their fair share.

 

Heavily tapped $1's do not easily pass through the BPS 3000 ("Banknote processing system 3000," manufactured by German firm Giesecke & Devrient.)

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Posted by T.J.

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