Banking 14: Fed Funds Rate

[zoeplankton]

you're fantastic! thanks so much!

[parenteaujason]

@yrebrac I hope that makes sense. I had a tough time trying to explain that through text.

[parenteaujason]

@yrebrac The only thing he did differently in this video compared to other videos is that he drew the reserves below what he previously had. If you could imagine him drawing it on top, he would've initially drawn it as a liablity, which makes you correct, but then he wouldve had to balance it out with the extra reserves. He simply skipped this step by drawing it below in on the assets side.

[yrebrac]

khan, love your work, but seems to be a major error in this video around the 9 minute mark. You say that grannie deposits the proceeds of selling her treasuries into the bank thereby creating reserves for the bank. Having watching all the preceeding videos this makes no sense - deposits are a liability for the bank not an asset and do not contribute to their reserves enabling further lending.

[WilliamNaville]

''maybe they buying from alot of peoples grandmothers'' had to chuckle

[MrLaymensterms]

@khanacademy

I notice when you drew green box representing the funds newly printed assets. Where does this balance out on the national budget? Where is the gold, or the goods to represent that currency? It seems to me that printing money just makes money less valuable in the long run.

[mylove1618]

what happens to the us dollar when fed funds goes up a lot?

[damienrockaterror]

End the privately owned federal reserve bank! The US government should make its own money not borrow it from a private banking cartel.

[gamevoodoo]

You're amazing.

[alagon]

"I care not what puppet is placed on

the throne of England to rule the Empire, ...

The man that controls Britain's money

supply controls the British Empire.

And I control the money supply." Baron Nathan Mayer Rothschild

[BlueTunisia]

Thank you for doing these videos! Thank you so much!!!!

[jakebarnes28]

So, the rate of inflation is the hedge on the risk of the Fed just printing money willy-nilly, right?

[personova]

Sal, think in terms of transactions, maintenance of accounts, being maintained by the FED. The banks lend what they want and the FED makes sure they have the appropriate reserves. Think of the FED as being full service. Hmm. Question, when are the reserve requirements verified? Every day? Every quarter? Over night?

[mrzack888]

so when the FED sell treasuries to China, it won't affect the target rate for US since it is Chinese that are holding the treasuries. if the fed sells treasuies to US customers only, then it would cause a raise in the fed fund interest rate?

[stefanobetty]

Fed gets interests on money just printing them??? if Fed is own by the government ok, if Fed is privat...they are a tipografy and get interest on the nominal value of their prints...right?

[hipbas]

Why does the Fed get interest on treasury securities (as assets on their book) when this interest "supposedly" goes back to the treasury as surplus. Isn't this a redundant system? Why can't the government just take over the role of the Fed and control the nations wealth and money supply? Central banks are powerful because they control interest rates which in turn control money supply leading to manipulated economic bubbles and busts and manipulation of the stock market. Abolish the Fed!!!

[Myrkul1029]

because it needs some money to fund its expenses ( the ppl working there, the cost of printing money etc..), and the REST it gives back to the state. The goverment IS controling the wealth and money supply, and it needs an institution to do it, it's only a question whether that institution is govement owned or private owned. And from what i understand although it is officialy stated that the fed private owned, it's essentialy govement owned, because the goverment chooses it's board of directors

[Myrkul1029]

and also the fed doesnt make any surplus, just enough money to keep itself going

[hipbas]

The Fed is privately owned.

100% of its shareholders are private banks.

There is a guaranteed 6% return to the banker shareholders. These stocks are different to private equity stocks and may not be sold or traded.

The banks also get interest from the taxpayers on their "reserves" held at the FED.

Taxpayers will be paying annual interest to the banks on at least $700 billion held in reserves.

Banks retain these reserves to accumulate interest and then lend on ten times that sum in loans

[stonecold641]

he almost said fuck at 3.42

[trotskij4]

he actually ment fu..nds

[bmlong137]

The system doesn't work for one reason. Politics will inevitably get involved with the central bank's operations in order to spend more money themselves to get more votes. This is perpetual, eventually spiraling the central bank out of control. This is why a fiat currency always fails...monopolistic greed from a monopolistic government. Now if it were controlled by a computer....

[FranceParisian]

Hi Sal,

What happens now to the world gold reserve? Who actually owns them now?

[carracer481]

IF the FED doesn't make money then explain how we owe them 40% of our massive national debt!

You are smart about how banks work but you are missing a crucial point, If they gave treasury money we wouldn't owe them money.

[mustardy]

they didn't give treasury money, they BOUGHT treasury notes on the open market

[Roshibear]

Thanks to these videos I get how OMOs work. What I am still confused over is how they work in an environment where the FED is already selling treasuries to finance it's budget deficit as this has the net effect of draining money out of the system which in turn would raise the interest rates. So then to lower interest rates the FED must be performing both actions simultaneously adjusting each in relative relationship to meet it's goals, is this correct?

[pitty031]

Lucidly explained, Please keep up the good work!

[AFGddddd]

great explanation. Thanks

[footlestool]

Sal, I'm confused about what happens after the Fed injects cash into the markets. I see why the bank (in your example) that is under its reserve ratio wants to increase its cash assets. But I don't see why the bank that is now over its reserve ratio (at 22%) would prefer to lend its excess to the first bank, rather than simply issue more loans to the public.

[footlestool]

I did some more research and seem to have an answer to my question. I didn't realize that adjusting the interbank loan rates makes it more/less enticing for banks to dip below their reserve ratios, because of the availability of cheap bank-to-bank loans. In other words, being able to quickly borrow cheap funds from another banks provides an incentive for banks to lend more on a daily basis. Does that sound right?

[seven8000]

I've also seen a lot of videos on youtube concerning the corrupt banking system, etc. in which printing money for the government by the fed and getting interest on that money (since the government pays interest on it's treasuries) is a way for the fed to make money which does get back to the government but to the stakeholders of the fed, which are are the owners of the private banks. Can you comment on that ?

[khanacademy]

The private member banks get a 6% dividend on the equity capital (about $20b) that they contributed to the Fed. Since they (historically) get no interest on reserve deposits (about $800b), the member banks don't make out too well from a yield point-of view ($1.2b/year on 820b with the fed). After this 6% is paid and the expenses of the Fed are paid, the rest of the money is returned to the treasury. Though it is officially private, the Fed is "owned" more by the government than by its members.

[sugarraygras]

@khanacademy It sound like it runs perfectly, but can you explain why America is going down the tubes along with the UK, while the poor pay the price through Welfare reductions and service cuts?

[FarhadTv]

@khanacademy What makes you think the bank is "owned" by the government? Don't you think that the government is "owned" by the bank?

[Keyguya]

@khanacademy

Where did all the other assets of the banks go? They got nothing but cash?

Money hungry banks don't provide their employees with even desks =(.

Also I assume that the black box is lent reserves - this was really confusing IMO.

BTW Bernanke is now saying that he could even pay for reserves to control inflation. There was an article about this at mises.com (be wary - lot of bad articles there also).

Congratz on being Peter Schiff show finally. We need more banking videos =).

[geiuy]

@khanacademy The Fed is NOT "owned" more by the government than by its members.

"The Fed is independent within government in that its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government"(wikipedia).They are not required to submit financial information and are not subject to IRS audits.

Do you really believe all these bankers are philantrophists?

[sgentry777]

Thanks. I'm slow though.

Can you pls explain...if a bank is below its reserve requirement, how does borrowing overnight from another bank fix that issue. Borrowing increases liabilities as well as assets/reserves so seems to me that the bank hasn't changed it's reserve ratio by doing so.

[khanacademy]

good question. Let's say that I have $95 in reserves and $1000 in checking accounts outstanding (so a 9.5% reserve ratio). I want to be at 10% so if I take in another $50 in reserves and also increase my liabilities by $50, my reserve ratio is now (95+50)/(1000+50) = 13%. I could get those reserves from taking them as deposits or borrowing from another bank (could view it as the other bank making a checking out deposit to get interest on their excess reserves).

[sgentry777]

I see. Of course. It's the leverage. Sorry. I'm "mathematically challeneged."

[jonald77]

You mentioned that any surplus' after paying its fees would go back to congress. Is that correct? I was under the impression that the federal reserve was a private corporation that could function without regulation as it saw fit. You're saying that assets that they hold which produce income pay their bills and any additional monetary gain beyond that goes to congress?

[spitius]

Looks like Sal is defending the Federal Reserve System.....why so?

[jonald77]

you're correct, he believes that the FRS creates productivity and stimulates the economy through growth in the money supply. The fallacy that he doesn't assess in these videos is that the FRS is not sustainable. It helps to create a boom/bust economy, and eventually bleeds economies dry because the banks are the leaches, sucking the lifeblood out of the system.

[FranceParisian]

I guess this is incorrect! I need to research more on this and if I am wrong I would welcome correction

[jonald77]

If you want a good basic rundown of why the system is unsustainable, there is a good presentation at chrismartensen . com. Its a series of power point presentations with him talking, but its very informative. The banking and debt information especially. He's a retired fortune 50 VP who sold his house and got out of the market 2 years ago because he realizes what happens in the boom/bust cycle created by the Fed. I have followed his advice for the last 2 years, and have done well in this market.

[FranceParisian]

Hey thanks a lot, will definitely check it out. Very kind of you to share this site.

[jackuy12345]

i dont think u have any idea of what u talking about

[jonald77]

u need to do some research on the banking system

[jackuy12345]

You obviously have no idea what you are talking about and probably never went to college. Or if you did, you did not pay attention. btw, nice copy paste right there from wiki or other website lmao u have no idea what u talking about u just copy paste

[jonald77]

Yes I went to college, and got a minor in economics. I have never copied anything from wikipedia. What in particular do u have a problem with in my discussions? Or are u just trying to be a douche?

[jackuy12345]

yea maybe u did go to college but u didnt pay any attention to the teachers cuz what u say right there is stupid and does not work on our economy world right now. if u can figure how to save the economy then everybody can save the world, but its not true, not even ppl from hardvard knows how to save the economy so stop bullshitting random stuff out

[jonald77]

ur an idiot. The system is unsustainable. I'm not telling you that I have the answer to fix this system. I am saying that we need to build a new system based on good math. This one cannot last. Fiat currency systems always lead to ultimate destruction, usually from overprinting. The dollar will continue to fall in the future, but I am prepared for it. I would suggest you do the same.

[jackuy12345]

HERE COMES AGAIN FOOL u r just a all talk old retard that is useless to this world, seriously? if u can save america then fucking go on the news and tell all the ppl in wall street what they suppose to do then!! do something good besides talking shit with me right here, u r just a all talk fool

[jonald77]

i have yet to hear you make an intelligent comment. I don't think you know a thing about banking. Follow along with the rest of the sheeple then.

[jackuy12345]

wow so u saying u r intelligent and u know many stuff about banking? why dont u go to white house right now and tell obama what u can do and u can save the whole world!!! like u can do that? no cuz u suck

[jdrizd2]

I see now what you are getting at. The fed adjusts the interest rate by printing money, which the central bank gets treasury notes for, to allow banks to make loans to each other, which allows them to do more business. So if the government wants money for all these bailouts, won't that affect the bond market?

[charlybrown1000]

And, i you lt me, I would like to ask about two things:

1. Bibliography on these financial videos that you used to know all of this.

2. Could you do some videos for an european viwer/fan (spanish). For example: nacionalizations in europe of Fortis Bank or ING...).

Thanks for everything!!!

[khanacademy]

I mainly use Wikipedia and the Federal Reserve Website to double-check my understanding from myexperience/education. I do plan on going over many of the current bank rescue schemes shortly (I want to make sure that the basics are out there)

[Sexisttroll]

@khanacademy yeah quick question is the m1 equal to the liabilities?

[charlybrown1000]

Sal, Could you go al little inside on the balance sheet of the banks and central bank when the open market operations are made?