Friday, June 30, 2017

The bond market makes those payments


Thus, the Fed has instead determined to raise rates via paying banks interest on these excess reserves to  maintain the reserves at the Federal Reserve.  In short, pay banks not to lend money, not to invest the reserves.  This is just like Federal programs that paid farmers not to farm...IOER (interest on excess reserves) pays big bankers not to bank.
The payments come from treasury interest earnings on the treasuries held account.  So it is earnings taken from investment banks and distributed to member banks.  Government takes its share with interest subsidies. It seems bizarre, but I think we get this because we wanted a corridor system and law prevents it.

The real complaint is that our central bankers are not strictly currency bankers, they engage in ad hocism, discretion.  Many of their rules are mathematically unsound, but imposed by law. They have this additional role, enforce currency monopoly and keep government interest charges paid.

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