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View Full Version : Is there a book on the Fed that explains all the insider info?




RCA
05-03-2008, 08:56 PM
Are there any Fed books for newbies that will clear up all of the confusion over "funds rates", "prime rates", "reserve ratios", etc.?

scooter
05-03-2008, 09:09 PM
I don't know if there is a book about how the Fed works. It would be a pretty boring one if it existed. But the three things you mentioned are not really that confusing.

The "funds rate" is the rate which banks charge each other for interbank lending of deposits at the Federal Reserve. If a bank needs some money to meet its reserve requirements, it can borrow Fed Funds that another bank has deposited to meet its short-term needs. The Fed Funds Rate is the target rate for these funds.

The "prime rate" is not set by the Federal Reserve. This is the rate which most banks use to set their scales for loaning to individual borrowers. It does follow closely with the Fed Funds Rate, however, because the prime rate is generally a few percentage points above fed funds.

The "reserve" ratio is just the percentage of reserves a bank must keep on hand to balance its outstanding loans. If a bank has say $100,000 in deposits, it can loan out $90,000 and keep $10,000 because it is required to have 10% reserves. To raise reserves, the bank can borrow fed funds from another bank to meet short-term requirements.

Another interesting rate is the "discount window" rate. If banks are not able to borrow fed funds from another bank, they can borrow directly from the Federal Reserve at the discount window. This rate is always slightly higher than the fed funds target rate.

Bruno
05-03-2008, 09:31 PM
I don't know if there is a book about how the Fed works. It would be a pretty boring one if it existed. But the three things you mentioned are not really that confusing.

The "funds rate" is the rate which banks charge each other for interbank lending of deposits at the Federal Reserve. If a bank needs some money to meet its reserve requirements, it can borrow Fed Funds that another bank has deposited to meet its short-term needs. The Fed Funds Rate is the target rate for these funds.

The "prime rate" is not set by the Federal Reserve. This is the rate which most banks use to set their scales for loaning to individual borrowers. It does follow closely with the Fed Funds Rate, however, because the prime rate is generally a few percentage points above fed funds.

The "reserve" ratio is just the percentage of reserves a bank must keep on hand to balance its outstanding loans. If a bank has say $100,000 in deposits, it can loan out $90,000 and keep $10,000 because it is required to have 10% reserves. To raise reserves, the bank can borrow fed funds from another bank to meet short-term requirements.

Another interesting rate is the "discount window" rate. If banks are not able to borrow fed funds from another bank, they can borrow directly from the Federal Reserve at the discount window. This rate is always slightly higher than the fed funds target rate.

Many people think when the Fed lowers the funds rate that interest rates on home loans are directly tied to it, when they are not.

For an interesting history of how we got in this housing boom mess, look at the ARM index and how the Fed manipulated it down after 9/11 to help us get in the mess we are in. http://www.hsh.com/indices/prime00s.html

Scooter - regarding the reserve ratio: Assuming that only 10% is required as a reserve in your scenario (I don't know if this is really the reserve rate or you were only using it as an example), do you think that there is still the possibility of bank runs because most banks only keep a small reserve of funds on hand? If so, are banks really better off under this system than during the bank runs of the Great Depression?

Thoughts?

scooter
05-03-2008, 09:39 PM
Home loans are generally more attached to long-term government bond rates, rather than Fed Funds. The funds rates generally revolve around much shorter-term debt, like credit cards or variable interest rate debts.

As for your question bruno, I don't think bank runs like that are possible in today's world. Because the money isn't backed by anything, the Federal Reserve would just create some cash to cover the deposits if a bank was getting moved on by all of its customers. The only way for a bank run to completely collapse an institution like happened in the Great Depression would be for every single bank to have a run happen at exactly the same time. That's pretty unlikely.

Bradley in DC
05-03-2008, 09:45 PM
Are there any Fed books for newbies that will clear up all of the confusion over "funds rates", "prime rates", "reserve ratios", etc.?

http://www.federalreserve.gov/

http://www.federalreserve.gov/pf/pf.htm

Seriously. Lots of fun stuff there. They even have comic books. I got a box of them and passed them out at the banking legislative staffers meeting. They explained why it's better to have the Fed than use fish as money. Really.

Bruno
05-03-2008, 09:48 PM
Thank you Scooter, and you too, Bradley. I'll check out the comic books. :)

LiveFree79
05-04-2008, 04:26 PM
I'd suggest two books:

Web Of Debt and Trades, Guns and Money. If anyone thinks our economic troubles are starting to resolve they are ignorant. These two books will tell you why. Also one small terrorist attack on U.S. soil will sink our economy. Ever wonder why those bad, well funded, evil terrorists responsible for 9/11 haven't pulled anything off since? Because our government, CIA , FBI, and NSA are very efficient intelligence gatherers who really care about protecting the average American and have stopped those bad evil islamofascists in their tracks.

Paulitician
05-04-2008, 10:42 PM
I was going to refer you to the Federal Reserve website but Bradly already beat me to it.

I can't think of any insider exposť of the Fed. Nonetheless, "The Creature From Jekyll Island" is a book that might interest you.

Bruno
05-04-2008, 11:04 PM
I was going to refer you to the Federal Reserve website but Bradly already beat me to it.

I can't think of any insider exposť of the Fed. Nonetheless, "The Creature From Jekyll Island" is a book that might interest you.

Strangely, one of the only informative books on the Fed like you mention is not available through our large, new public library system.

Paulitician
05-05-2008, 01:59 AM
Well, if you asked for them to order it or even if you wanted to donate it to them, and they refused it, that'd be strange I suppose. But I'm not really surprised. I'm not sure any library or bookstore near me has material on the Federal Reserve... never bothered to check.