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Another Way That The Federal Reserve Makes Massive Gobs Of Money For The Big Banks

When most people discuss how the Federal Reserve benefits the big banks, they usually only focus on the ways that the Federal Reserve directly brings in income.  But there is so much more to it than that.  The truth is that the Federal Reserve is used in a whole variety of ways to indirectly assist the big banks in making huge gobs of money.  One of the ways this is currently being accomplished is through the U.S. Treasury carry trade.

So how does this carry trade work?

Well, it basically has three steps and it works something like this….

#1) Mr. Big Bank goes over to the Federal Reserve and says, “Hey Mr. Federal Reserve – please loan me a big bag of cash for next to nothing.”  Of course, the Federal Reserve is more than happy to loan it to him.

#2) Mr. Big Bank then invests the same big bag of cash into U.S. Tresuries which have a much higher interest rate than what Mr. Big Bank just borrowed at.  To give  you an idea, 10-year U.S. Treasuries are earning around 3 and a half percent right now.

#3) Mr. Big Bank sits back and enjoys the huge amount of risk-free cash which comes pouring in.

This little three step procedure helped enable four of the biggest U.S. banks (Goldman Sachs, JPMorgan Chase, Bank of America and Citigroup) to have a “perfect quarter” during the first quarter of 2010.  What that means is that these four banks had zero days of trading losses in the first quarter.

Wouldn’t you like to have a perfect batting average?

Don’t you wish you could pitch a perfect game every time?

Well, it certainly helps when you are being subsidized by the Federal Reserve as Bloomberg recently explained….

The trading results, which helped the banks report higher quarterly profit than analysts estimated even as unemployment stagnated at a 27-year high, came with a big assist from the Federal Reserve. The U.S. central bank helped lenders by holding short-term borrowing costs near zero, giving them a chance to profit by carrying even 10-year government notes that yielded an average of 3.70 percent last quarter.

Doesn’t it just seem like whenever we turn around the Federal Reserve is doing something new to “help out” the big banks?

This is just getting ridiculous.

Remember all of that talk about how the U.S. government had to help out Wall Street so that they could help out Main Street?

Well, a ton of money did get injected into the banking system.

In fact, the Federal Reserve pumped hundreds upon hundreds of billions of dollars into the banking system since the beginning of the financial crisis.  This has caused the U.S. monetary base to explode….

So did the big banks use all of that money to help out Main Street?

No.

In fact, business lending by the big banks has been falling precipitously.

So what have the big banks been doing with all of that money?

Buying U.S. government debt of course….

So instead of making loans to American businesses who desperately needed it, most of this new money has gone to pump up yet another bubble.  This time the bubble is in U.S. Treasuries.  Asia Times recently described how this trillion-dollar carry trade in U.S. government securities is setting up a very dangerous situation….

Remarkably, the most aggressive buyers of US government debt during the past several months have been global banks domiciled in London and the Cayman Islands. They borrow at 20 basis points (a fifth of a percentage point) and buy Treasury securities paying 1% to 3%, depending on maturity.

This is the famous “carry trade”, by which banks or hedge funds borrow short-term at a very low rate and lend medium- or long-term at a higher rate. This works as long as short-term rates remain extremely low. The moment that borrowing costs begin to rise, the trillion-dollar carry trade in US government securities will collapse.

But as long as the gravy train of the U.S. Treasury carry trade continues, why should the big banks make risky loans to American businesses and consumers when increasing numbers of them are turning out to be deadbeats anyway?

That is a good question.

Meanwhile, we have this sick situation where the Federal Reserve subsidizes the big banks and enables them to buy up a big chunk of the debt the U.S. government is constantly churning out.

Our national banking resources are increasingly being turned away from building up our once great system of free enterprise, and instead are being devoted to servicing the never ending spiral of government debt and funny money that we have created.

But a bunch of folks down on Wall Street are getting exceedingly rich from this little game, so they certainly aren’t going to complain about it.  And as long as the vast majority of Americans continue to stay in the dark about all of this, the bouncing ball will just continue to keep rolling.

  • Jayne B

    I gotta tell you most people think there is only one real world out there. The secret is that there are two real worlds. One is the world you see, the other is the world they dont want you to see, where they control you, with lies, deception, secrets, The guy from http://www.forecastfortomorrow.com wrote a good piece on this a while back.

    when are people gunna wake up to this.

  • Sid Davis

    Creating checking account balances out of thin air and loaning them to individuals, businesses and government is the very scam that our monetary system is. They collect interest on all this “out of thin air” money. In 1933 M2 money supply was $32.2 billion; today it is $8,575 billion. This is the magnitude of the fleecing of the public by the banks using their government granted privilege of creating our money (perhaps creating bank debt masquerading as money would be a better description).

    This is outright fraud. And it is unconstitutional because the Constitution grants to Congress the power to coin money, and further it prohibits States from making anything but gold or silver coins legal tender. So, how can federal reserve notes be legal tender in any State in the Union?

    The Federal Reserve Bank’s creation of checking account balances on its books to loan to member banks is just the system. It is one of the ways they increase reserves of banks so that banks can expand the money supply by printing up checking accounts on their own books to make loans to individuals, businesses and government.

    The only reason that the member banks are not loaning to businesses is that under current economic conditions, they don’t trust that they will be repaid. They know that they are not likely to be repaid for loans to the federal government, but these are the only opportunity they have to keep their current profits looking good.

    I find it unbelievable that the public has not yet revolted against the government that imposed this atrocity on us, but I suppose that very few in the public understand the nature of banking, plus up until very recently, the pain and suffering from going along with this fleecing has been less than that which will come from revolution. This is rapidly changing; give the pot a decade or so to come to a boil.

  • GaryT

    Hello… The Fed is OWNED by the same parties that own the big banks. Is it any wonder then that the Fed’s policies serve these banks interest first and foremost.

    Of course it goes far beyond that. These ultra wealthy parties pour huge amounts of money into the outright buying of the U.S. Government. I’m talking Congress,the regulators and the President.

    Obama is their most recent purchase. Like Bush (and Clinton before him) the U.S. prez is merely a tool for the elite.

    Wake up America. You are the Frog slowly being boiled. Revolt by withdrawing any business dealings with the major banks.
    Don’t even think about re-electing incumbents.
    Dismiss the Dem/Repub major parties for they are hopelessly corrupted. DEMAND that the (privately owned) Federal Reserve be disenfranchised and renounced as the crooks that they are.

    Heck, a hundred and fifty years ago President Andrew Jackson did just that by revoking the charter on the 2nd national bank of the U.S.
    Unfortunately the bankers came back in 1913 and got their foot in the door a 3rd time.
    Same results as before though… a cornucopia of corruption. END THE FED. It’s the bankers evil tool

  • daveco

    I am glad somebody is doing math. But alas the general public does not see it and the media is a complete JOKE.

    Americans are by and large stupid idiots who have college degrees but can not do simple math!

    I watch tv only to see what propaganda is being spewed to understand when to duck and when to hide.

    The stock market is not only a lie but the idea that the dow is a measure of prosperity is so laughable that it is tragic to SEE how many believe it! When a company goes down like gm they just replace it with another, now how does that make the number any good!

    Also the sub prime mortgage was supposedly how the banks lost money yet nobody can do simple math to realize that loaning money over 10% that you borrowed from the federal reserve at less than 1% means that you only have to get 30% to pay and you make lots of money! Ask any loan shark! Well 50% did pay so how did the banks lose anything not to mention pmi.

    The answers are simple. Vote and Vote some more. Not blindly tea party but for people who will only do

    two simple laws.

    1. The government makes the money and does not borrow from anyone!

    2. Our government does not allow any imports from countries that do not follow our minimum wage laws, labor laws, environmental laws, and litigation laws.

    Why have someone besides the government print and control money, it is illegal under the constitution.

    WHy have minimum wage laws and environmental laws and litigation laws if the corporations can just thumb there nose at them by driving over a border to Mexico or ship it from China and India.

    But Americans are too stupid to stand up for this and too busy watching survivor and dancing with the stars to understand what a bunch of idiots we are and we are handing our children a bag of shit that our forefathers worked there asses off for and gave us if not a silver spoon than at least a pot to piss in and home to go to at night and now we let the banks take the pot and the house!!!!!!!!!

  • http://www.thunderdrake.com/blog/ Aury (Thunderdrake)

    Abolish the Fed. Reform the banking system.

    That’s all I can say from here…

  • disengaged

    two issues
    1. illiteracy is much higher than publicly stated. the census ask if you can read a newspaper, no one checks. but a study a few years back in south chicago (interviewers tested houselhoders) showed 67% functional illiteracy. yes you read that right 67%.

    2. americans dont have a culture of arguing with their masters. demonstrating and rioting against oppressive govt action is second nature to the french (and we see the greeks too).

    so dont hold your breath waiting for yankee doodle to either understand the situation or do anything about it.

  • TLC

    None of this surprises if you understand that the Fed’s purpose is to protect the precious banking system at all costs. If this latest crisis and how it is being handled doesn’t make it obvious whos interest are being served and who really runs this country, I’ll give you a clue- it’s not Mr and Mrs Average working American….

  • Dov Henis

    Greed Cancer Cells Also Follow Laws Of Evolution
    Failing Treatment Of Economic Collapse Simplified

    A. “Survival of the fittest: even cancer cells follow the laws of evolution”
    http://www.eurekalert.org/pub_releases/2008-08/foas-sot080108.php

    Of course. Expected. The cancered cells are proliferating. The energy constraint of their genome is enhanced. Their genes effect ingestion of the energy of their host cells in order to survive. They proliferate, evolve. Yes, theirs is a shorter survival time, postponement time of loss of energy, shorter than the survival time of uncancered organism’s cells. But, like and even more than most humans, they instinctively act per the encountered circumstances. This is evolution. This is natural evolution.

    B. Life genetics evolves via culture. In human culture one component is unique, it bypasses genetics.

    Culture is a ubiquitous biological entity
    http://www.the-scientist.com/community/posts/list/98.page#266

    There is natural ubiquitous evolution and there is human cultural evolution. Humans evolved language, that became a biological entity.

    Whereas nature’s evolutionary rungs are gains or losses of energy constraints for few “fittest” at ongoing circumstantial constellations, including modifications of genetic expressions, some Western cultured groups assess and extend the prospective temporal limits of evolution beyond the immediate scenario. They manipulate the circumstantial constellations, postponing or modifying natural evolution, to gain enhanced energy constraints for a community much larger than of “few fittest”. This is what all levels of politics are about. Local, national and international.

    C. Greed cancer cells also follow laws of evolution, with money being humans’ cultural energy.

    Not only physiological cancer cells follow the laws of evolution. Human greed cancer cells follow them, too. Evolution is evolution. EOTOE.

    The total amount of cosmic energy is constant even if mass diminishes with the ongoing expansion. Hence the universal melee of mass specimens to ingest each other’s energy to survive. Ingesting energy translates into ingesting mass, which is the other face of energy. Humans artificed money to stand for energy. The ideal ethical goal per the 20th-21st centuries technology culture is amassing money, the human energy artifact. Humanity’s present technology culture is founded on the brilliant idea that whereas in nature it takes work, converting of mass, to ‘amass’ energy, humans will – instead – print money, print it and base on it a make-belief culture, founded on make-belief energy. Printing money, posits the brilliant thinking, enables us to bypass nature, to spend more energy than we actually amassed.

    D. So again and again, the economic collapse will not be repaired by mechanisms but by basic cultural modifications

    The greed cancer cure requires a prolonged resolute determined change of culture, of values and ethics and goals, of consumption and living modes and patterns.

    Dov Henis
    (Comments From The 22nd Century)
    03.2010 Updated Life Manifest
    http://www.the-scientist.com/community/posts/list/54.page#5065
    Cosmic Evolution Simplified
    http://www.the-scientist.com/community/posts/list/240/122.page#4427

  • serf1984

    The banks can’t loan money to the unwashed masses-that would cause massive inflation (as would a real, jobs-driven, recovery). Bernanke recently told congresss the Fed plans to siphon back all the excess printed money to the Fed/Treasury Dept in order to prevent inflation. Point is they never intended money to reach the serfs and I’m not sure how they plans to siphon back the excess fiat money out of economy (helicopter Ben never would say) but maybe that is where a VAT tax or other massive taxes (cap & trade) come in? I wish someone would explain how their ponzi scheme ends, bet they would if it ended well for us.

  • Roger A. Huddleston

    We the People must SECEDE from the USA (peacefully, by the ballot box), and return to precious metals currencies. CUT THE HEAD OFF THE SNAKE.

  • Henry

    The banksters, instead of lending the billions doled out to them by the fed to businesses, are buying “high” yield treasuries. What more proof is needed that banks act only in their own interests and serve little national purpose at all. banks should be replaced with a neutral money exchange system for the taking of deposits and advancing of loans — which is what banking is supposed to be about but isn’t any more.

  • Barry

    A massive collapse is coming that will wipe out the US banking system. No more banks or ATMs. Be prepared for a barter system of commerce. Gold is IN and dollar is OUT!

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