“The Fed Should Not Be Paying Banks Not to Loan Money.”
Okay. Economics can sometimes be confusing to all but the nerdiest financial “wonks”, so we’ll do our best to keep this in understandable terms. But once understood, there’s significant reason to be outraged by the Federal Reserve’s current fiscal policies.
In a phrase, “The Federal Reserve is stifling growth, not encouraging it.” How? By putting a “muzzle on the ox that is treading the grain.”
I’ll explain.
There are two interest rates that the Federal Reserve can set.
One is the interest rate that applies to businesses, consumers, and homebuyers…the one most commonly thought of when consumers hear about the Fed cutting the rate for borrowers.
But there’s another rate. It’s the “IOR” rate (Interest on Reserve Balances) that the Federal Reserve pays to banks for letting the FED sit on their money. Effectively, it’s what the FED pays to banks for keeping their money out of use and circulation. And it’s a pretty good rate.
How good of a rate? At 4.4%, it’s a rate that encourages banks to let their money sit unused while spurning private sector borrowers. Last year, banks made $186 billion from the Fed for not lending.
By comparison, it’s enough money to cause banks to look at their earnings from commercial and consumer loans as the equivalent of “chump change.”
But there’s a problem with that.
“It’s muzzling the ox that treads the grain,” says Oberweis. “The ox is the American entrepreneur, the small businessman, the private citizen who grows our economy through hard work…who creates businesses, jobs, and wealth by taking risks for the greater good. Our great American economy was built by such citizens and depends upon them.”
“Anytime federal authorities pay you not to do something, it usually proves to be a bad idea that ends up costing you more in the end,” says Oberweis. “The best thing the Fed can do is get off our backs and stay out of our pockets.”
“Not surprisingly, the rate that the Fed began paying bankers not to loan money began increasing during the Obama Administration, and has nearly doubled since then,” Oberweis pointed out. “The rate used to be zero. As usual, letting politicians play with our money never has a good outcome. As a Congressman, I will resist any effort by the Federal Reserve to interfere with the natural supply-and-demand, market-driven functioning of a free economy.”
“I stand with Senator Ted Cruz’s recommendation that the Federal Reserve cut the IOR rate to stimulate the economy by incentivizing more bank lending, not by paying banks to do nothing!” declared GOP candidate Jim Oberweis.
-30-
