Sunday, January 3, 2010

Why Should Banks Lend If They're Getting Free Money

Probably one of the dumbest things going is this country's current monetary policy. Unfortunately, Barack Obama's economic advisers don't seem to understand what is happening when they complain that banks aren't lending.

Under the current policy, any bank can borrow money from the Federal Reserve at an interest rate from zero to one-quarter percent. At the same time, banks can use that borrowed money to buy 10-year U.S. Notes from the Treasury Department and earn 3.84% in annual interest. The net gain is anywhere from 3.84 to 3.59 percent without spending a dime of their own money. Why should any bank risk giving out loans when they can easily earn no-risk money by working two separate agencies of the United States government?

If you want to force banks to start lending again, raise the Federal Reserve rate closer to the 10-year Treasury Note rate. And, keep the Treasury rate low by stopping the wasteful practice of deficit spending. It's as simple as that!

No comments: