Interest rates

Interest Rates and Government Created Money

1. It is thought that the Federal Reserve System controls interest rates in the United States -- but that is far from the truth. The control of interest rates is mostly illusory. -- it might be fair to say it is a hoax.

2. The Fed has absolutely no control over interest rates between companies, private individuals and corporations. Those interest rates are strictly determined by the negotiated contracts between the people involved.

3. The Fed has no control over what banks can charge each other -- other than setting the Fed Funds Rate which is the suggested overnight rate of interest between banks that belong to the Federal Reserve System. And as I understand that -- the banks can ignore that rate. The "Prime Rate" is usually about 3 points higher than the Fed Funds Rate and is the price banks usually charge their best customers.

4. The Fed can’t set the interest rates on government bonds. Under the present system - those rates are (poorly) determined by an quasi-open market.

5. In my opinion -- the government should never borrow money -- it should create whatever money it needs and thereby save the interest it now pays. Such money creation is mandated and therefor approved by the Constitution and Common Law that stretches back to the days of Sovereign States.

6. If such a system of money creation by the government were attempted, all kinds of so-called experts on the subject will undoubtedly come out of the woodwork and claim that allowing the government to create money would guarantee runaway inflation.

7. Is it better for (a) the government to create money out of thin air or (b) the Federal Reserve to create money out of thin air and lend it to the government? We now use (b). That is a travesty of sound capitalistic principles and an abomination.

8. I think that objection is total nonsense. The government can easily be controlled by Laws that mandate money can only be created for projects that will each reasonably be expected to pay for itself over some period of time less than 10 years. That will not be inflationary in the least. The created money can either be spent or lent into the economy. Either way will work.

9. Legislation should be passed that will allow Congress to set government interest rates when the government lends money for various national projects.

10. When and if the government borrows money -- the interest rates should be a result of negotiations between the government and lenders. The government should rarely have to borrow. If it ever borrows, it should be for the benefit of the borrower.

11. It would be a good idea if the government would always offer government bonds for purchase by American Citizens that would carry an interest rate of 4 to 6%. Such bonds would be an incentive to save and would give citizens a good place to put their savings --- so they wouldn't be tempted by risky offers.

Martin R. Carbone -- 11/22/08