Welcome To Fedville! The Federal Reserve, in Their Own Words, and Pictures, and Online Games
by Bill Sardi
Recently by Bill Sardi: Antioxidant Primer: PotentialHealth Benefits of Antioxidants and Pro-Oxidants
The Federal Reserve, in an attempt to paper over its soured relationship with the American people, has launched new features at its website, which includes programs for school teachers to explain to American children what the Federal Reserve does, as well as online videos, games, and speeches about — believe it or not — how to become a millionaire. You can view these features directly here.
Welcome to FedVille, a friendly town built just for kids where there is something to learn around every corner! (Federal Reserve Bank wording)
Here is how the Federal Reserve graphically presents Ben Bernanke, its current Chairman
Here is how the Fed explains to teachers how to play the game of banking in the classroom.
Explain to the students that they will get all of their dollars back before the end of the class and that you will pay a nickel for each dollar deposited in the bank during the class period. … Anyone who deposits a dollar in the bank at the beginning of the class will withdraw the dollar at the end of the class period and get one nickel (5 percent) in interest paid by you, the bank manager.
Explain to the students that banks review the creditworthiness of borrowers before making loans, but that in this classroom example, you are going to assume that a credit check has been conducted and that all of the students who apply will be getting loans. Explain that instead of giving cash to each approved borrower, you will open a bank account for each borrower and put the loaned money in the account. You will issue each borrower a receipt for money deposited in the new bank account.
Interest paid on your banked money: banks win, depositors lose
In what it calls "really bad drawings, really simple explanations," the Fed’s online "drawing board" creates a false example, showing that banked money will produce a 5% return as the bank uses their saved money to loan to others.
First, kids may get the false impression that banks pay 5% interest to use their saved money. In fact, today, banks offer just 1—2% interest on savings accounts, below the annual rate of inflation. Essentially the bank gets to use depositors’ money for a profit while the depositor loses money.
Furthermore, the Federal Reserve never says a word about bank depositors losing value of their banked money via inflation that is created by none other than the US Treasury Department working in tandem with the Federal Reserve itself as more and more money is printed (what is called fiat or print-at-will paper money) — thus diluting the value of existing money!
When the U.S. government spends more money than it collects in tax revenues, it borrows money to balance its budget, often from foreign countries, in particular China and Japan. This becomes "the national debt." Currently the U.S. collects about $2.4 trillion in taxes and spends $3.9 trillion, a $1.5 trillion shortfall. That is just too much money to borrow as the national debt is already about $12 trillion and paying interest on that debt is very burdensome. So the government covertly prints more money (counterfeiting) to make up for the shortfall.
As more money is printed and people run to spend it, demand for goods and services increase and so do prices! The Federal Reserve’s track record in controlling the rate of inflation is dismal.
If you were born in 1960 and are 50 years of age today, and your parents put $1000 in the bank in your name on the day you were born, you would need $7352 to equal the purchasing power of that $1000 placed in a savings account 50 years ago.
If your banked $1000 drew 4.0% interest over that time (it didn’t), compounded interest would pile up $7364 over that 50-year period. It’s a wash. The number goes up, giving the bank depositor the false impression he/she has more wealth, when in fact it has been eroded by inflation.
Students and teachers visiting the FR website never learn of this. (Here is an online government inflation calculator. Here is an online compound interest calculator so you can figure this out for yourself.) You will be dismayed to see how much the value of the US dollar has plunged over time. Inflation has only averaged 3.42% annually since 1913, but it has totaled over 2000% when compounded.
The FR website says the "simplest way to begin earning money on your savings is to open a savings account at a financial institution. You can take advantage of compound interest, with no risk."
Here is what the FR says:
The Rule of 72 can help you estimate how your investment will grow over time. Simply divide the number 72 by your investment’s expected rate of return to find out approximately how many years it will take for your investment to double in value. Example: Invest $5,000 today at 8 percent interest. Divide 72 by 8 and you get 9. Your investment will double every nine years. In nine years, your $5,000 investment will be worth about $10,000, in 18 years about $20,000 and in 27 years, $40,000.
However, the FR website goes on to explain that "if you want to find out the rate of return you need to make your money double. For example, if you have some money to invest and you want it to double in 10 years, what rate of return would you need? Divide 72 by 10 and you get 7.2. Your money will double in 10 years if your average rate of return is 7.2 percent."
Pray tell, who is making 7.2% on their money these days, or ever? Not too many people, certainly not bank savers.
No other entity in America could get away with making the false claim that you could become a millionaire in 45 years by saving regularly. In the FR’s example, saving $2743 a year beginning at age 20, assuming a 10-percent return that is compounded annually, would produce $1 million in the bank by age 65. Of course, not even the most astute investors today can brag about 10% returns on their money. The current return on saved money is less than 2%, below the annual rate of inflation. Why the FR has chosen to mislead school kids in this manner is beyond comprehension.
The FR also states that tax-deferred savings programs, like 401(k) plans, "make up the best one-two punch in investing" by combining tax deferment with employer contributions. But the Fed obviously doesn’t want to discuss the average 30% decline in the value of 401(k) plans over the past year or so.
Certainly the Federal Reserve knew that American banks were side-stepping their traditional role to check on the credit worthiness of every borrower. Yet the FR wants school teachers to say that banks are responsible to "review the creditworthiness of borrowers before making loans." They didn’t. "Liar’s loans" abounded (these are loans where income and employment were not checked prior to loan approval), and America ended up with the economic mess that it is now in. Below is the simplified loan application form that 9th—12th graders are supposed to fill out in the FR’s "classroom bank" example.
Date: ____________________, 20____
I am applying for a loan of: 1 2 3 (circle one) dollar bills from this bank.
FOR BANK USE ONLY
Loan Approved? Yes No CLASSROOM BANK 123 Market Street Anytown, USA 12345
The FR Drawing Board: The Federal Reserve returns all profits to the government (Not!)
The FR website conveniently forgets to show how the Fed acquires U.S. paper money in the form of "Federal Reserve Notes" for the cost of printing — ~6.5 cents each, regardless of denomination, and then puts them into circulation. Some money is actually electronically created and there is no cost for that.
The Fed claims the 12 banks that comprise the Federal Reserve system "returns to the U.S. Treasury all earnings in excess of operating expenses."
But the Fed talks out of two sides of its mouth here.
It says on its website that the "Federal Reserve Banks’ stock is owned entirely by the commercial banks that are members of the Federal Reserve System with dividends paid to stockholders semiannually at a fixed rate of 6 percent." So whatever the Fed turns back to the government, it’s after the 6% cut. It is not likely that school children will figure out this double-speak at the FR website.
Selling a fractional banking system
The Fed’s online "drawing board" (see below) explains the U.S. banking system is a fractional banking system, that is, whatever people deposit in savings accounts is used as a 1/10th fractional reserve for the loans it makes.
American kids will never learn at the Fed’s website that banks, using the depositors’ money, make 9-fold more money out of thin air, and then loan out that money at a rate of interest.
For example, $1000 in a savings account @ 1.5% interest would generate just $15 in interest over a period of a year. The bank then turns that $1000 into $10,000 and loans out $9000 of it @ (let’s say, for this example) 5% interest. The bank makes 5% × $9000, or $450 profit. The bank depositor makes just $15 for providing the reserves. Sound fair? Remember now, that $15 in interest is eroded by inflation.
- You deposit $1000 in a saving account — $1000
- Bank pays you 1.5% annual interest $15*
- Bank uses $1000 as 10% reserve to make
- $9000 loan @5% interest
- Bank makes $450 profit
*You lose because the annual rate of inflation erodes the purchasing power of your banked money. If rate of inflation is only 3% ($30 on $1000), then you lose $15 in purchasing power.
Bank runs are taboo
You can tell that the Fed is wary of bank runs and wants to teach kids that bank runs are taboo. But it is the threat of a bank run that is the only recourse the public often has to force bankers to discipline themselves. So be good girls and boys and never even think of running to the bank to withdraw all your money.
Here is how the Federal Reserve Bank explains it:
What would happen if all of the people that have deposit receipts came to the bank on the same day to withdraw money in cash? Not everyone would be able to get money out. The bank would have to make decisions about which depositors got their money out, or the bank would have to stop honoring withdrawal requests.
Bank reserves are the amount of deposits not loaned out by banks. A bank’s reserves can be calculated by subtracting a bank’s total loans from its total deposits. Ask the students to calculate Classroom Bank’s current reserves. (Answers will vary.) Write this number on the board. If the total reserves are 0, ask the students why this would cause a problem.
The Federal Reserve requires most banks to hold a portion, up to 10 percent (fact check, some banks cheat on this reserve requirement-author’s insertion), of their deposits in reserve. These are called required reserves. Ask the students whether Classroom Bank is currently meeting a 10 percent reserve requirement. Throughout history, there have been episodes where too many people tried to take their money out of their banks at the same time. During such episodes, banks usually ran out of cash and therefore couldn’t honor withdrawal requests, and many banks went bankrupt. When a bank goes bankrupt, it’s called a bank failure. When many depositors run into a bank at the same time to get their money out, we call that a bank run. When a bank run that begins at one bank spreads to other banks and causes people to generally distrust banks, we call that a bank panic.
Students learn at the Fed website that pulling money out of savings accounts threatens the system that provides money to businesses and individuals who need loans. But why should Americans park their money in U.S. banks and continue to lose money?
Furthermore, if bankers make unsound loans, they dump the risk onto the government, which in turn costs citizens once again. Banking today has no risk and it behooves bankers to act irresponsibly since the government is going to bail them out every time.
Fed "Drawing Board" shows low interest rates breed market bubbles
Surprisingly, the Fed’s own "drawing board" video does show that low interest rates increase demand for home loans which could then create a bubble in the economy where the demand for homes is artificially driven by cheap money, and this false demand temporarily drives home prices up. (See the graphic below.) But of course The Fed takes no responsibility for holding interest rates low for an agonizingly long time, which created false demand for home loans, often by less-than qualified home buyers.
This graphic calculator (above) displayed at the Federal Reserve website instructs that a low rate of interest offered to American banks (called the Federal Funds Rate, one-quarter of 1% in this example) will result in newspaper headlines that scream "Rising Inflation Fears!" But the Federal Reserve says its prolonged low interest rates had nothing to do with the current economic collapse (??!!??). You can play "The Fed Chairman Game" by clicking here.
Failed oversight of American banks
The Federal Reserve website goes on to say that the Federal Reserve has oversight over the 8000-plus American banks.
The Fed says "By writing bank regulations and examining bank operations, the Fed seeks to ensure that banks are operating in a safe and sound fashion so that when people put money in their bank, they will be confident that the risks of a bank failure are slim."
So why didn’t somebody at the Federal Reserve resign for failing to exert oversight over American banks? Why isn’t the Chief Executive of the nation demanding resignations?
Yet the FR didn’t exercise oversight when American bankers began to offer risky loans, low teaser interest rates, nothing as a down payment, and "liar’s loans" where the buyers’ income and employment were never confirmed. Where was the Federal Reserve when all this was happening? The FR might as well have put a "gone fishing" sign on their front door over the past few years.
While the Federal Reserve says it "has supervisory and regulatory authority over a wide range of financial institutions and activities," it failed to take action against most American banks that depleted their reserves and now solely exist on bailout money to meet reserve requirements.
Bank your money and become a millionaire
Incidentally, for all the kids that dream of becoming millionaires in America, Federal Reserve Chairman Ben Bernanke personally introduces the Fed’s "Building Wealth" program in an online video that can be accessed here. It’s among the best government propaganda your kids can watch. Hey kids, trust Ben, you’ll make a million dollars.
Building equity quicker
A more egregious deception offered at the FR website is its "Building Equity Quicker" chart. The chart encourages home owners to pay down their home loans in 15 instead of 30 years. With U.S. homes overvalued by at least 30%, and years before homes will begin to gain in value, the FR publishes a chart that appears to encourage new home ownership. Why would any American in their right mind buy a home that is due to be devalued over the coming months? Recently Bank of America wrote down the principle of thousands of its home mortgages by 30%.
In reality, this chart says it is no time to be buying a home. The Federal Reserve wants you to think otherwise. Value of homes may have dropped, but prices have not. Owners are largely unwilling to take a loss selling their home and banks are reluctant to write off a portion of the principle on these over-valued homes. Unless Americans experience a dramatic upswing in their incomes, and the glut of homes on the market diminishes (20 million empty homes in America now), it is not likely home values are going to rise within the next few years. Most new home buyers will face devaluation of their home value, likely to be ~30%.
The FR website does attempt to deliver its version of events that have led to the current economic downturn. So what does the FR website say about the economic collapse?
According to the Federal Reserve Bank of San Francisco, its website, The Economy: Crisis & Response, "is where you will find information and analysis on what caused the financial crisis, what the Fed did in response, and what the road ahead might look like."
The Federal Reserve Bank of San Francisco explains that, "The financial market turmoil that began in 2007 led to a severe global economic downturn. Here you can find out about the cause of the crisis, the effects on global financial markets, and the spillover into the broader economy."
And what ignited the financial crisis?
According to the Federal Reserve: "A rapid reversal of U.S. house prices set off a chain of events that eventually led to the global financial crisis," including "easy credit." (There’s that cheap money that the FR created. But the FR insists its low interest rates had nothing to do with the financial crisis.)
This article won’t go into all the gibberish the Federal Reserve delivers to duck responsibility for the economic downturn. However, here are a few snippets from their website:
"If we take a good hard analytical look at the last recovery, we see that the low fed funds rate was not the standout, and standalone, culprit that many assume. This is a crucial matter to consider right now, when rates are very low — in my opinion, totally appropriately — because some are predicting that these rates will fuel another bubble." — Eric S. Rosengren, President and Chief Financial Officer, whose speech "Asset Bubbles and Systemic Risk" is posted at the FR website.
But boys and girls, didn’t we just learn (displayed above), when playing "The Fed Chairman Game" that low interest rates will create inflation and bubbles in the economy?
In Alan Greenspan’s now infamous speech, entitled "The Crisis," as Federal Reserve Chairman during the economic crisis, he says "If an effective way to defuse a leveraged bubble without a major impact on economic growth is discovered, it would be a major step forward in organizing our market economies."
There! Greenspan pins the donkey tail on himself. His low interest rate policy throughout the first ten years of the new decade created a false economy for which he then says, in effect (I’m putting words in his mouth), "show me a way to get out of this mess once a false economy has been created."
As Oliver Hardy used to say to Stan Laurel, "this is another nice fix you got me into." Yep, we are forever hooked on cheap money, low interest rates, and the inability to raise interest rates without harming the false economy. Thank you, Mr. Greenspan.
The chart you will never see at the Federal Reserve website
This is a chart you will never see at the Federal Reserve website. It graphically shows how paper money is sold to the Federal Reserve bank for the cost of printing (6.5 cents per paper dollar, regardless of denomination), who in turn lends it to the nation’s banks at a relatively low rate of interest, and those banks then fractionate banked money received from depositors by 10-fold (making money out of thin air, a.k.a. counterfeiting), and then charge ~5% annual interest on that fractionated money.
In the current banking environment, depositors lose money via inflation which is actually created by an increase in the money supply, and then banks use depositors’ banked money as a required reserve and make a killing on the fractionated amount (9-fold more). Over the life of a 30-year home loan, typically the mortgage interest will cost 48% of the total amount paid on the home.
If the Federal Reserve had any track record of success in its mission to control inflation (also known as the erosion of the purchasing power of your money), it would have an image to reclaim. But it only has a record of failure. At least it is consistent and predictable.
The public has never really paid much attention to the Federal Reserve bank till Congressman Ron Paul pointed his finger at this secretive bank that has resisted audits while putting a positive spin on its decades-long inability to control erosion of the value of the U.S. dollar, self-interpreting its own lousy track record, basking in its own self-adulation and blaming other factors for the recent unprecedented meltdown of the American economy.
The Fed portrays the central bank as being "independent" rather than what it really is — out of control, non-transparent, un-audited, secretive and irresponsive to the public.