4 ms·

Can't be done, and here's why: the 0.25% rate he's referring to is the federal funds rate, which is the rate banks borrow/loan money from/to each other. You don

by tsiki 17y ago

Can't be done, and here's why: the 0.25% rate he's referring to is the federal funds rate, which is the rate banks borrow/loan money from/to each other. You don't just "borrow from the Fed". Most loans between banks are very short-lived, for example a bank might want to loan money to a major company but doesn't want to wait days or weeks until it has enough in reserves, so it loans the money from another bank. Because the loans are very short-lived and are usually between established banks, they're also very cheap compared to the loans offered to the public. The interest rates of the loans are also negotiated between banks. Now, when you take the fact that, in this case, the borrower would be a complete unknown, and especially the fact that this loan would be for a much longer period than what is usual, 0.25% is impossible. Hell, you could be the Goldman Sachs and be lucky to get under 5% for a 30-year loan. (TL;DR: can't loan that much money with a rate that low for 30 years)

mattmaroon 17y ago
Wait, you mean there isn't an easy way to make a billion?
pmorici 17y ago
I think that's the point of the article (it's not something just anyone w/o the right connections could do). It's a satirical illustration of how this small group of people who should have gone bankrupt are making out like bandits at the general publics expense whilst the whole scheme is constructed in a way to obscure the nature of what is ultimately happening. Also it isn't saying you should take out the .25 percent loan for 30 years it is saying you buy 30 year treasuries. I think it is assumed you can sell those treasuries back to the Fed at some point when the original loan needs to be repaid.
stevedekorte 17y ago
You don't need to take any loans at all - the bank with $1B in deposits could just "loan" a subsidiary $9B to buy US treasuries with via the magic of fractional reserve banking. Then it's earning 4-5%. The real problems I see with the plan is that 1) that rate is on 30 year treasuries - so you don't get income immediately and 2) inflation may exceed the return on those treasuries. Why not just use $3B of the $9B the fed let's you effectively print to buy 300% overpriced assets (say, mortgage bonds) from shadow companies you and your buddies own and lend the rest to whomever eg: loans for overpriced homes. So you spent $1B on the bank, $1B on the assets and sold the assets you sold for $3B. You end up with $1B in profit (100% ROI) and who cares about what happens to the rest?
- Eliezer 17y ago
  That's not how fractional reserve banking works.
  - noelchurchill 17y ago
    I believe, if you have $1B, then you can loan out $900M, keeping 10% of the original balance in reserves.
    - va_coder 17y ago
      Yes but that 900M is deposited into another bank, who then loans out 90% and eventually the system loans out 9B. And the system is dominated by a few banks.
      - fan 17y ago
        Yes but $9b of "credit" is created this way. The US government emphatically does not sell bonds for credit, only cash, which you still only have $1b of...
- coliveira 17y ago
  > 2) inflation may exceed the return on those treasuries. This is not an issue, because you are getting 4% on borrowed money, which means you are really getting 40% on your money. It doesn't matter how thin the margin is, as long as you can leverage the loan with borrowed money. This is essentially what every bank does.
  - stevedekorte 17y ago
    That's a good point and a much simpler way to make good returns.
gamerates 17y ago
Well you can "borrow from the Fed" but you are right that it is different from the federal funds rate. You can borrow from the Fed at the discount window which traditionally is about a point higher than the federal funds rate (and as such only used in emergencies when banks won't even loan to each other overnight). Traditionally it was also an overnight loan that was audited by the fed and which U.S Treasuries were put up as collateral. Traditionally, there was also a large stigma attached to borrowing from the Fed as it was sort of a "last resort" option. That's changed a bit now as the Fed has does whatever it can to increase liquidity. Less of a stigma, the discount window rate is about what the fed funds rate is, the time period of the loans is longer, etc. So, you can borrow from the discount window (the fed) and you can do so at a rather low rate. However, the whole theory that the recent upsurge in banking profits is from buying treasuries is a bit silly. For starters it isn't risk free to buy a 30 year treasury note when you are financing it with short term loans the rate of which could be changed at any time. If interest rates go up your 30 year treasury you bought isn't going to be worth much and may actually start to lose you money. Remember if you are 10x leveraged the market price of that 30 year treasury only has to drop a little for you to lose money. So instead, let's invest in short term treasury rates ( http://www.bloomberg.com/markets/rates/index.html http://www.bloomberg.com/markets/rates/index.html) well except the return on short term treasury rates is about what you would pay at the discount window. I guess you could invest in short term bonds or other investments, but it isn't going to be risk free then. And it really isn't a scandal that trying to set low interest rates will encourage lending/investing some of which could turn out to be speculative or would not have been made if interest rates were higher. It could also lead to inflation. Those are sort of the costs/benefits of cheap money.

by tsiki 17y ago

mattmaroon 17y ago

Wait, you mean there isn't an easy way to make a billion?

pmorici 17y ago

I think that's the point of the article (it's not something just anyone w/o the right connections could do). It's a satirical illustration of how this small group of people who should have gone bankrupt are making out like bandits at the general publics expense whilst the whole scheme is constructed in a way to obscure the nature of what is ultimately happening. Also it isn't saying you should take out the .25 percent loan for 30 years it is saying you buy 30 year treasuries. I think it is assumed you can sell those treasuries back to the Fed at some point when the original loan needs to be repaid.

stevedekorte 17y ago

You don't need to take any loans at all - the bank with $1B in deposits could just "loan" a subsidiary $9B to buy US treasuries with via the magic of fractional reserve banking. Then it's earning 4-5%. The real problems I see with the plan is that 1) that rate is on 30 year treasuries - so you don't get income immediately and 2) inflation may exceed the return on those treasuries. Why not just use $3B of the $9B the fed let's you effectively print to buy 300% overpriced assets (say, mortgage bonds) from shadow companies you and your buddies own and lend the rest to whomever eg: loans for overpriced homes. So you spent $1B on the bank, $1B on the assets and sold the assets you sold for $3B. You end up with $1B in profit (100% ROI) and who cares about what happens to the rest?

Eliezer 17y ago
That's not how fractional reserve banking works.
- noelchurchill 17y ago
  I believe, if you have $1B, then you can loan out $900M, keeping 10% of the original balance in reserves.
  - va_coder 17y ago
    Yes but that 900M is deposited into another bank, who then loans out 90% and eventually the system loans out 9B. And the system is dominated by a few banks.
    - fan 17y ago
      Yes but $9b of "credit" is created this way. The US government emphatically does not sell bonds for credit, only cash, which you still only have $1b of...
coliveira 17y ago
> 2) inflation may exceed the return on those treasuries. This is not an issue, because you are getting 4% on borrowed money, which means you are really getting 40% on your money. It doesn't matter how thin the margin is, as long as you can leverage the loan with borrowed money. This is essentially what every bank does.
- stevedekorte 17y ago
  That's a good point and a much simpler way to make good returns.

gamerates 17y ago

Well you can "borrow from the Fed" but you are right that it is different from the federal funds rate. You can borrow from the Fed at the discount window which traditionally is about a point higher than the federal funds rate (and as such only used in emergencies when banks won't even loan to each other overnight). Traditionally it was also an overnight loan that was audited by the fed and which U.S Treasuries were put up as collateral. Traditionally, there was also a large stigma attached to borrowing from the Fed as it was sort of a "last resort" option. That's changed a bit now as the Fed has does whatever it can to increase liquidity. Less of a stigma, the discount window rate is about what the fed funds rate is, the time period of the loans is longer, etc. So, you can borrow from the discount window (the fed) and you can do so at a rather low rate. However, the whole theory that the recent upsurge in banking profits is from buying treasuries is a bit silly. For starters it isn't risk free to buy a 30 year treasury note when you are financing it with short term loans the rate of which could be changed at any time. If interest rates go up your 30 year treasury you bought isn't going to be worth much and may actually start to lose you money. Remember if you are 10x leveraged the market price of that 30 year treasury only has to drop a little for you to lose money. So instead, let's invest in short term treasury rates ( http://www.bloomberg.com/markets/rates/index.html http://www.bloomberg.com/markets/rates/index.html) well except the return on short term treasury rates is about what you would pay at the discount window. I guess you could invest in short term bonds or other investments, but it isn't going to be risk free then. And it really isn't a scandal that trying to set low interest rates will encourage lending/investing some of which could turn out to be speculative or would not have been made if interest rates were higher. It could also lead to inflation. Those are sort of the costs/benefits of cheap money.