Monday, January 18, 2010

What is the Definition of Insanity??


I was a bit surprised to see in a New York Times editorial today a comment on something that I have been teaching in class as a form of insanity in the banking/govenment relationship as of late "TARP"..
...Here’s what’s happening: By lowering the short-term interest rate it controls to virtually zero and creating lending programs, the Federal Reserve has enabled banks to borrow cheaply. The banks re-lend that cheap money, but not necessarily to consumers and businesses. They can, for example, lend it to back to the federal government by buying Treasury securities, and earn a nice spread between their cost of funds and Treasury yields.
So, let me get this straight---Banks recieve bailout money from Congress, who borrowed that money to bailout the banks (Debt #1). Instead of loaning that money out, they LOAN it BACK to Congress (Debt #2..The Federal Reserve lends money to banks at approx. 0% interest rate...Said banks THEN LEND that money TO Congress (Debt #3) and earn interest FROM Congress (I mean taxpayers) ...Rinse and Repeat...As the banks pay back the Fed and Congress pays back the banks, it seems this money, originally meant to be lent out to people and  businesses who may actually stimulate the demand (consumers) for a good or service, or  businesses that may actually create a new good or service, is just circulating between the Fed, Banks, and Congress.  How can this possibly help our economy?  I am just a dumb ol' high school teacher, but I dont see how this promotes economic growth...Seems like it just promotes LARGER bank profits at the expense of the taxpayer.   Is THIS the reason for record bank profits in the last two quarters?  GeeWhizz!!!  Some one please educate me!!! :)
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