Question please

[cjppjc]

Where does The Federal Reserve get all it's money? Are their treasury holding that vast. And is that what they are lending to the other banks?

Thank you.

[we_are_toast]

Re: Question please

Where does The Federal Reserve get all it's money?

Thank you.

[cjppjc]

Re: Question please

So you're saying they just print it. Come on

[*T*]

Re: Question please

Where does The Federal Reserve get all it's money? Are their treasury holding that vast. And is that what they are lending to the other banks?

Think about it. Ask google.

Method 1
Treasury sells bonds
Treasury puts proceeds on deposit at fed
Fed buys stuff

Method 2
Fed prints money
Fed buys stuff with money

Somebody had to print it at some point, no?

http://en.wikipedia.org/wiki/Federal_Reserve_System
http://en.wikipedia.org/wiki/Quantitative_easing

[bart]

Re: Question please

So you're saying they just print it. Come on

In essence, he's correct although its done by computer these days.


Here's one applicable quote. There are many more.

"ECCLES: We created it.
PATMAN: Out of what?
ECCLES: Out of the right to issue credit money.
PATMAN: And there is nothing behind it, is there, except our government's credit?
ECCLES: That is what our money system is."
-- Federal Reserve Board Governor Marriner Eccles in testimony before the House Committee on Banking and Currency in 1941, during questioning by Congressman Wright Patman about how the Fed got the money to purchase two billion dollars worth of government bonds in 1933.

[Fiat Currency]

Re: Question please

You might want to read ...

"The Creature From Jekyll Island"

Dollar stripper.gif ... isn't the printing press the best invention ever !?!

[cjppjc]

Re: Question please

Think about it. Ask google.

Method 1
Treasury sells bonds
Treasury puts proceeds on deposit at fed
Fed buys stuff

Method 2
Fed prints money
Fed buys stuff with money

Somebody had to print it at some point, no?

http://en.wikipedia.org/wiki/Federal_Reserve_System
http://en.wikipedia.org/wiki/Quantitative_easing

I have asked Google. I cannot find the answer to my question from what I consider a "reliable source." Please don't get on me about who is reliable. I feel that this site is a reliable source. So the answer to my question is.....

1) Fed is lending Treasury money parked at it's memeber banks after auctions? (As an example: I lend money to A. A lends to B. I get mine back when B pays A?) This is how my Sunday football betting goes.

2) Fed prints money because it can. Let's say 1/2 a trillion, cost to them about 6 cents per $100. Buys Govt debt. Or maybe just then via computers sends new money to bad banks?

I don't MEAN to be thick but this can't be what happens.

[bart]

Re: Question please

I have asked Google. I cannot find the answer to my question from what I consider a "reliable source." Please don't get on me about who is reliable. I feel that this site is a reliable source. So the answer to my question is.....

1) Fed is lending Treasury money parked at it's memeber banks after auctions? (As an example: I lend money to A. A lends to B. I get mine back when B pays A?) This is how my Sunday football betting goes.

2) Fed prints money because it can. Let's say 1/2 a trillion, cost to them about 6 cents per $100. Buys Govt debt. Or maybe just then via computers sends new money to bad banks?

I don't MEAN to be thick but this can't be what happens.

Its not quite as simple as your #2, but its in the right ball park per my own understanding, research, etc.

These apply too in my opinion:

"Only puny secrets need protection. Big discoveries are protected by public incredulity."
-- Marshall McLuhan

I wouldn't have seen it if I hadn't believed it.
-- Marshall McLuhan

All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.
-- Arthur Schopenhauer (1788-1860)

This is from my FAQ page:

How is money created in the U.S.?

First, don't expect an easy answer. Also, don't expect that it is a fully sane or believable process either. Some of the answers below are deceptively simple, don't necessarily expect to understand them quickly.

1. The system of fractional reserve banking.
2. The Federal Reserve, by virtue of its ability to set certain interest rates, can encourage or discourage borrowing and therefore affect item #1.
3. The Federal Reserve doing open market operations.
4. Banks and the U.S. Treasury borrowing from the Federal Reserve via the Discount Rate or the Fed Funds Rate, and the Federal Reserve creates the money via a book keeping entry. Then #1 above applies. When the U.S. Treasury receives money from the Federal Reserve, this is usually also known as "monetizing the debt".
5. The Federal Reserve can also affect banks needs for funds via changes in reserve requirements, directly causing an effect on the fractional reserve system. Note that bank reserves plus currency in circulation is tracked by the monetary base.
6. Via tools such as the buying and selling of repos they can affect short term supply of and demand for money, and thereby affect #1.
7. Loopholes in banking laws and regulations allow certain types of lending and borrowing actions that are not subject to reserve requirements or reporting or oversight, so money can be created easily and in large quantities by simply moving it around in the financial system.
   • Government sponsored entities such as Fannie Mae borrow money very cheaply and then lend it out. They act similarly to a bank and item #1 applies again.
     (If you're really a economics masochist and have to know details of how this is done, see Doug Noland's work here. It's called Money Market Fund Intermediation.)
   • There are many other financial companies and entities and even financial instruments that act similarly to Fannie Mae.
     (If you just have to know... and we really don't recommend mentally abusing yourself and also leave it up to you to find definitions and understanding but... some of them are captive finance companies such as GE Capital, Wall Street brokerage houses, credit swaps, hedge fund activities, and other quite sophisticated and complex instruments like CDOs, asset or mortgage backed securities, and SPEs. These items all fall under the general term derivatives.)
   • An "outside" and indirect source, is central banks of other countries like Japan. They print their own money, and then use it to directly buy dollar denominated items from the Federal Reserve, or directly buy assets from other U.S. financial institutions.
   • Organizations like the FHLB and others are far off the beaten path but do create money.
   
   
8. Per the Humphrey Hawkins Act, "the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt."
   Source of the quote is a November 2002 speech by Ben Bernanke of the Fed, located here.
9. There also exist some unusual and limited abilities of the Fed to directly buy certain short term financial instruments from the banks (source) to soften a crisis and aid banking liquidity.
10. Note that the actual currency is printed by the US Treasury, and only distributed by the Federal Reserve System. Total currency is less than 5% of the grand total of all dollars everywhere.
11. As far as the Fed's authority to create money and where it comes from: "...the testimony of Marriner Eccles before the House Committe on Banking and Currency on September 30, 1941. Marriner Eccles was the Governor of the Federal Reserve System in 1941. He is being questioned by Congressman Wright Patman about how the Fed got the money to purchase two billion dollars worth of government bonds in 1933.
    
    ECCLES: We created it.
    PATMAN: Out of what?
    ECCLES: Out of the right to issue credit money.
    PATMAN: And there is nothing behind it, is there, except our government's credit?
    ECCLES: That is what our money system is. If there were no debts in our money system, there wouldn't be any money."

[cjppjc]

Re: Question please

I want to thank you so much Bart. I will re read this over and over again till I understand it. 2-3 months ought to do it.

[Sharky]

Re: Question please

Where does The Federal Reserve get all it's money?

It creates it from thin air. The Fed's checking account is unique; the money to fund their checks comes into existence as soon as the checks are cashed. There are no assets or even an existing balance behind them.

Are their treasury holding that vast.

No. They don't need Treasury holdings to create money.

And is that what they are lending to the other banks?

When the Fed creates money through the FOMC, for example, it does so by buying Treasuries from the public -- using those "magic" checks. When they lend to banks from the Discount Window, the accept some collateral from the banks and add digits to the bank's account at the Fed; again, it's newly-made money.

BTW, the Fed doesn't print money. Paper money is printed by the US Treasury, although that happens only in response to requests from the Fed, who then buy the printed notes from the Treasury at their production cost (a few cents each, regardless of denomination). Notes are issued to banks in exchange for money they have on deposit with the Fed. When the notes arrive at a bank, they can then be exchanged for deposits. The bottom line: money never comes into existence by actually printing the notes. It's done with accounting tricks first; the paper comes much later in the process.

[cjppjc]

Re: Question please (Thanks all)

This is beginning to become clearer to me. Excuse me I think I'm going to be sick.

[Sharky]

Re: Question please

1) Fed is lending Treasury money parked at it's memeber banks after auctions? (As an example: I lend money to A. A lends to B. I get mine back when B pays A?) This is how my Sunday football betting goes.

Money received after a Treasury auction goes into the Treasury's checking account at the Fed, where it becomes available for the government to spend. It is not lent from there by the Fed or anyone else.

2) Fed prints money because it can. Let's say 1/2 a trillion, cost to them about 6 cents per $100. Buys Govt debt. Or maybe just then via computers sends new money to bad banks?

The cost to the Fed for creating new money is much closer to zero than to 6 cents per $100 -- that's the cost of paper money, which is not how it's created.

But otherwise, yes, that's pretty close to how it works. The main catch or limit is that the Fed can only create money in exchange for something. It does have a balance sheet -- and many central banks have failed in the past when they neglect that fact (as they all seem to eventually).

I don't MEAN to be thick but this can't be what happens.

And yet it's true. The more you know about how the system works, the goofier it gets.

[Sharky]

Re: Question please (Thanks all)

This is beginning to become clearer to me. Excuse me I think I'm going to be sick.

If that makes you sick, you're going to love to hear how commercial banks work. It's pretty much the same thing.

Banks don't really "lend" money, at least not in the same sense as when one private party lends to another. They don't take out of one pile and add to another. Every penny they lend is newly-created money. Like with the Fed, it's created from thin air; it's just a bookkeeping entry.

[bart]

Re: Question please (Thanks all)

I want to thank you so much Bart. I will re read this over and over again till I understand it. 2-3 months ought to do it.

This is beginning to become clearer to me. Excuse me I think I'm going to be sick.

I don't think there's any iTuliper that doesn't truly understand your sentiments.
It isn't a pretty picture... but knowing about it gives one more of a better & fighting chance to be able to counteract it, in spite how difficult it might be.

I'm sorry to have dumped on you like that with that large and somewhat complex cut & paste from my FAQ page, but in my experience the money creation game is so non intuitive and deceptive that some personal study of the realities is essential to "get it". I'm sure there are others who can explain it better than me too - I'm usually not known for being terribly clear.

Just hang in there and take it at your own speed.

[cjppjc]

Re: Question please

The cost to the Fed for creating new money is much closer to zero than to 6 cents per $100 -- that's the cost of paper money, which is not how it's created.

But otherwise, yes, that's pretty close to how it works. The main catch or limit is that the Fed can only create money in exchange for something. It does have a balance sheet -- and many central banks have failed in the past when they neglect that fact (as they all seem to eventually).


All right lets see if I've got it. The Fed lends 80 or so billion to Aig or 100 billion to Citigroup by computer and receives some kind of collateral. (Preferred stock, common stock, T bills) maybe with a market value of 5-10 billion?

This works ok as long as all these borrowers pay it back. Or does it not matter to the Fed because the Treasury has said the taxpayer will make goos on any default?