How The Fed Has Failed America, Part 2

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The only way to eliminate the financial parasites is to stop subsidizing their skimming and scamming, and the only way to stop subsidizing the financial parasites is to shut down the Fed.

Before I explain how the Federal Reserve has failed America, let's do a little thought experiment. Let's imagine that instead of creating $3.2 trillion and giving it to the banking sector to play with--funding carry trades and high-frequency trading, for example--the Fed had invested in carry trades itself and returned the profits directly to taxpayers.

Before we go through the math, let's recall how a carry trade works: Financiers borrow billions at near-zero interest from the Fed and then use the free money to buy bonds in other countries where the return is (say) 5%. The financiers are skimming 4.75% or more for doing nothing other than having access to the Fed's free money.

If the bonds rise in value (because interest rates decline in the nation issuing the bonds), the financiers skim additional profit. If the trade can be leveraged via derivatives, then the annual return can be bumped up from 5% to 10%.

OK, back to the experiment. The Fed created $3.2 trillion in its quantitative easing (QE) programs. let's say the Fed's money managers (or gunslingers hired by the Fed to handle the trading) earn around 5% annually with various low-risk carry trades.

That works out to an annual profit of $160 billion (5% of $3.2 trillion). Now let's say the Fed divvied the profit up among everyone who paid Social Security taxes the previous year. That's around 140 million wage earners. Every person who paid Social Security taxes would receive $1,100 from the Fed's carry trade profits.

The point of this experiment is to suggest that there were plenty of things the Fed could have done with its $3.2 trillion that would have directly benefited taxpaying Americans, but instead the Fed funneled all those profits to financiers and banks.

The Fed apologists claim that lowering interest rates to zero benefited American who saw their interest payments decline. Nice, but not necessarily true. Try asking a student paying 9% for his student loans how much his interest rate dropped due to Fed policy. Or ask someone paying 19.9% in credit card interest (gotta love that .1% that keeps it under 20%)--how much did your interest drop as a result of Fed policy?

Answer: zip, zero, nada. The Fed's zero interest rate policy (ZIRP)funneled profits to the banks, not to borrowers.

And let's not forget that many Americans chose not to borrow at all. What did the Fed do for them? It stole the interest they once earned on their savings. Estimates vary, but it is clear that the Fed's ZIRP transferred hundreds of billions of dollars in interest to the banking sector, income forceably "donated" by savers to the banks.

Lowering interest rates to zero is effectively a forced subsidy of borrowers by savers. But that's not the only subsidy: who makes money from originating and managing loans? Banks. The more loans that are originated, the higher the transaction fees and profits flowing to banks. So incentivizing borrowing generates more profits for banks.

Humans make decisions based on the incentives and disincentives in place at the time of their decision. Lowering the cost of money (interest) to zero creates an incentive to gamble the money on low-yield bets. After all, if you can earn 3% on the free money, then why not skim the free 3%?

If speculators had to pay 6% for money and 7.5% for mortgages (the going rate in the go-go 1990s), then the number of available carry trades plummets. The only carry trades that make sense when you're paying 6% for money are those with yields of 10%--and any bond paying 10% carries a high risk of default (otherwise, the issuer wouldn't have to offer such a high rate of interest to lure buyers).

All of these incentives to borrow money at zero interest rate are only available to banks and financiers. And that's the point of the Fed's policies: to stripmine the bottom 99.5% and transfer the wealth to banks and financiers. Lowering interest rates to zero incentivizes carry trades and speculative bets that do absolutely nothing for America or the bottom 99.5% of taxpayers.

A self-employed worker pays 50% more tax than a hedge funder skimming billions of dollars in carry trades. A self-employed worker pays 15.3% in Social Security and Medicare taxes and a minimum of 15% Federal income tax for a minimum of 30.3%. (The higher your income, the higher your tax rate, which quickly rises to 25% and up.) The hedge funder pays no Social Security tax at all because the carry trade profits are "long-term capital gains" which are taxed at 15% (20% if the Hedgie skims more than $400,000 a year).

Despite the Fed apologists' claims that ZIRP and free money handed to banks and financiers create jobs and start businesses, there is absolutely no evidence to support this claim. The only beneficiaries of Fed policies are tax accountants for the banks and financiers and luxury auto dealerships. Since Porsches and Maseratis are not made in the U.S., the benefits of the top .5% buying costly gew-gaws and evading taxes is extremely limited.

Attention, all apologists, lackeys, toadies, minions and factotums of the Fed: is there any plausible explanation for the wealthiest .5% pulling away from everyone else since the Fed launched ZIRP and QE other than Fed policies? And while we're at it, how about publishing a verifiable list of companies that were founded and now employ hundreds of people because the owners could borrow millions of dollars at zero interest?

Get real--no new business can borrow Fed money for zero interest. The only entities that can borrow the Fed's free money are banks and other financial parasites.

The truth is the Fed incentivizes and rewards the most parasitic, least productive sector of the economy and forcibly transfers the interest that was once earned by the productive middle class to the parasites. Though the multitudes of apologists, lackeys, toadies, minions and factotums of the Fed will frantically deny it, the inescapable truth is that the nation and the bottom 99.5% would be instantly and forever better off were the Fed closed down and its assets liquidated.

The only way to eliminate the financial parasites is to stop subsidizing their skimming and scamming, and the only way to stop subsidizing the financial parasites is to shut down the Fed.

Source: Wealth, Income, and Power (G. William Domhoff)

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Colonel Klink's picture

Dear Federal Reserve,




PS - Your demise can't come soon enough.

El Oregonian's picture

The FED is one of the seven plagues of the bible.

Colonel Klink's picture

Moneychangers in the granite towers.  We need to kill them ALL.  History rhymes once again.

TSTM's picture

And don't forget the enabling "dual mandate" which serves as a plausible reason for any action the Fed wishes to take, be it loosening or tightening. The perfect setup for banks to convert zero interest money obtained during the boom into hard assets during the bust end of the cycle.

TruthHunter's picture

" let's do a little thought experiment."


But...92% would rather die than think.


(1% think, 7% think they think)

Hayabusa's picture

Am I the only one who sees it?  The FED is doing what it was designed to do.  Why do you think the FED was

created in 1913?  All fiat systems are based on a growth/inflation model and all eventually fail.  Right now the FED in unison with Washington and the banksters are in the process of squeezing the last bit of wealth out of the 99% they can get.  Once the sponge is dry and the 1% are cash heavy the ruling class will hit the reset button and the losses they take will be nothing in comparison to what the 99% take.  Once the 99% is broke, tired and hungry they will go along with almost ANY plan put forth by the USSA talking heads.  The destruction of the middle class is no mistake... it is purposeful and when it's complete get ready for some sudden changes that benefit them most and us least.  The sponge can only be squeezed so long before it's time for the margin call... when that happens, you'd better have a plan B.

EvlTheCat's picture

When was the FED ever out for American interests?  They can't fail at something they never intended to do.

Colonel Klink's picture

Minutes from the first FR meeting:

First rule of the Federal Reserve is never tell the truth about the nature of the the scam. (laughter)

duo's picture

The Fed was created to finance WWI.  Both sides, IIRC.

HardAssets's picture

EvlTheCat:  "When was the FED ever out for American interests?  They can't fail at something they never intended to do."


Yep.  Its like saying home invasion robbers somehow failed their victims.


Lost Word's picture

An Intellectual link about Jews, Freemasonry, Sex, and the French Revolution.

Must be somehow related to the Fed?


USA USA's picture

WOW, I saw your Green Icon and almost Down Arrowed you automatically!

nickels's picture

A successful parasite doesn't kill its host, and I'm not feeling very well.


Colonel Klink's picture

It's usually best for the host if they purge the parasite from their system at the earliest possible chance.

Winston Churchill's picture

Purging a tapeworm this large will not be easy.

Colonel Klink's picture

Unfortunately at this point the host may be dead either way.  Best way to remove a tapeworm this large is with a rope and a lamp post.  Or cut the multiple heads off with a guillotine.

Let's roll'em!

alfred b.'s picture


   Gov't-supported criminals!


buzzsaw99's picture

scratch "failed" add "successfully screwed"

Racer's picture

Frauderal Reserving it all for themselves

Peconic Bay's picture

The Fed does participate in its own carry trade. It prints money for free and purchases Treasuries in the open market.  The interest income is used to fund the Fed's own operations and the left over profit is returned to the US Treasury.  The whole process basically creates an interest-free vehicle for the US Government to borrow money.  It is a perversion of free market principles of the worst order.

Lost Word's picture

And when the Fed sells the Securities they bought with self-printed imaginary money?

Is that considered profit?

Given back to the US Treasury?

Or recycled into new US debt.

Tinky's picture

Today must be Rhetorical Question Day at ZH.

Hubbs's picture

Ain't ever gonna happen unless through uprising, violent revolt, and blood in the streets. Too many people besides the bankers on the dole, and comfort level well above the threshold for violent uprising. And I certainly not willing to fight in the streets when the majority are just willing to sit and watch sports on TV, and whine, and continue to use the banks and vote for the same useless half pint parasitic  politicians.  So we will just have to endure it.

TheRideNeverEnds's picture

Well the market is going straight up so they must be doing something right.  

Hell look at the tape, every tick is an up tick.   The FED has reversed the velocity risk to the upside, we stair step painfully down then woosh straight back up in an instant. 

gjp's picture

Market being led by the most-shorted again, here we go for the five hundredth time ...

It's time for a ZH post noting the market's strength.  Let's try using that ZH indicator in the opposite direction for once.

pragmatic hobo's picture

off topic ... but according to cme data copper futures are in backwardation ... how can this be?

unplugged's picture

How do we shut down a private company?  How do we shut down Best Buy?  Walmart?  Fed?  JPM?  etc...

Colonel Klink's picture

Stop doing business with them.  Withdraw your money from the system (banks, stocks, bonds) and place it into honest money (Ag/Au) until it comes apart.  If even 10% followed this advice, the system would crack.  At 20% the system would implode.

TSTM's picture

Stop using credit - period. No debit, credit, or plastic of any kind. It's the only non-violent weapon we have against them.

22winmag's picture

How can something fail when it was never intended to succeed?

madcows's picture


sfisher's picture

Our elected officials have no excuse for allowing this to continue.  The US Government should issue its own currency if it needs to steal from the people through inflation.  It is inexcusable that we suffer inflation and need to pay taxes to pay interest and principal back to the Fed that created the money from nothing.

Colonel Klink's picture

But, but, don't they have collateral to back up all that issued currency?  Gold, stawks, Bondz, and mortgage bullshit securities?

I Write Code's picture

It might have been excusable for a few months or even a year or so, in order to salvage the banks themselves, but we're long past any such arguments.

Would that some presidential candidates, and I mean mainstream, run against this stuff.

praps's picture

The government is responsible for distribution of wealth, not the Fed.

TSTM's picture

If you control the money supply, tax laws are irrelevant.

kellycriterion's picture

Money is being funneled to banks and GOVERNMENTS. Government dominates the OPM mafia and it isn't close. As impressive as the ramp on the banking cartel side has been the last 25yrs, it's all under the umbrella, complicity, protection of government power.

Have ya heard about oh say, history or current events? Political gangsters can muddle through with little assistance if necessary.

Have ya looked in the mirror lately?

1. Hypochondria Care
2. Global Empire
3. Ponzipensionitis
4. Educavitation and Diploma Mills Unl
5. Free Stuff Armies

None of the above existed anywhere near their current form not all that long ago. Oh there was the corruption, self indulgent consumption, empire building complex presence. Corruption can't be eliminated but it can be limited.

Old lefty blame game diversions won't result in limits, just reshuffle players and rationalizations.

novictim's picture

Nice article.

But we need to get back to -why- policy, not just Fed policy, is devised for the benefit of those who have the most.  

It seems we need a constant reminder that the political system in the USA is entirely broken at the federal level. And we need solutions.  

Ukraine has provided one way to bring about reform.  

Regardless of what you think about the Ukraine revolutionaries, they did something we can only dream we sit on the couch and watch reality TV.

...or "get active" and participate in a equally USELESS drumming circle protest bullshit rally/march. 

kellycriterion's picture

Btw it was rumored this site was popular among Libertarians. It seems more like an echo chamber for old lefties and skinheads.

Colonel Klink's picture

They Huffpo may be the site for you.

novictim's picture


But be prepared to bend over and let TPTB know your identity, connect you to FaceFuck(book) so that they (the nameless parasites who own your job) can FIRE you or blackmail you...and expect your comments to be heavily censcored by the AOL secret police.

Huffpo = Grab Ankles.

Colonel Klink's picture

It was semi-sarcasm on my part.  Anything to send them away from ZH.

novictim's picture

No, there are a helathy contingent of libertarians here.  They believe in the tooth fairy as well. And in the "Free Market".  And the Easter bunny.

alangreedspank's picture

There's a bit of both. ZH does some WS and bank bashing where it's due, but lefties do it for different reasons.

Colonel Klink's picture

Don't forget skinheads!  Because lefties and skinheads have so much in common.

No middle ground for ZH. /sarc

moonman's picture

You can always take your 4 weeks and 6 days of membership here and go fuck yourself. We won't miss you

luckylongshot's picture

You are spot on about the parasitic private banks being the problem. I read regularly that the core problem today is capitalism although noone seems to know what comes next. However this srticle suggests that capitalism is not the problem. Instead it is the parsitic private bank infestation that is killing capitalism. This is a much easier problem to fix.