Replies

Can anyone tell me why banks need the Fed to tell them what they should be charging their customers for interest?

If the free market is such a good thing (and by and large I believe it is) then why can't interest rates be subject to free market pressures as well?

Credit card companies charge whatever interest they can get their customers to tolerate. Why not so for banks?

I think a bank voluntarily belongs to the Federal Reserve system. There are benefits. But to oppose what the Fed and its members do would be nearly impossible because of their size.

By law the Federal Reserve is supposed to maintain a constant domestic value for the dollar, while also trying to achieve full employment. It fails miserably at both. In practice the Federal Reserve exists to blame all bad things like inflation on the private economy rather than on the government where it belongs.

"Can anyone tell me why banks need the Fed to tell them what they should be charging their customers for interest?
If the free market is such a good thing (and by and large I believe it is) then why can't interest rates be subject to free market pressures as well?"

That's a good question. I'd have to answer it by saying that when you say "banks" you're lumping together "lending institutions" with "depositary institutions". A combo lender/depositary inst could easily, easily get itself into serious [lack of funds] trouble should it lend out a "nominal" amount of its' deposits when suddenly, a big depositor wants to draw/cash a big fat check. What does the bank do when it cannot cash a check out of depositors' funds? It has to borrow from the Fed. And so, very schematically, you can see the value of this ONE aspect of Fed "lender of last resort" activity. Lest you think this is total fantasy, I have actually walked into a Bank of America and tried to cash a $4000. check and had the teller tell me they DIDN'T HAVE enough funds on hand to cash the check! I was going to buy some silver, LOL. But I couldn't believe it. $4000? Gotta be kidding me. Yes, it was near the end of the day on a Friday, but 4 grand for the B of A? That ain't spit!

"Credit card companies charge whatever interest they can get their customers to tolerate. Why not so for banks?"

Well, not exactly, there are usury laws limiting interest rates, though if you look at some of 23.9% "penalty" rates some CCs charge, you may doubt the statement.

On the level you're speaking about, even extrapolated to national banks with multi-state operations, the Fed's willingness to supply currency and credit to member banks and by extension most other retail establishments we think of as "banks" is IMO rooted in preventing the type of "bank runs" that occurred during the depression and keeping a high degree of confidence in the banking system in general. And much as I personally am down on the Fed, this aspect is important.

So...if banks want to expand their business (borrow from depositors and lend out the funds at margin) then they BETTER not get themselves into a situation; either by making bad loans OR competing for lending biz (via low interest rates) such that they get into a jam and have to borrow from the cookie jar at a rate that's HIGHER than what they may be charging their customers.

Now....when the Fed gets into expanding and contracting the money supply, fiddling with interest rates, and coming to the rescue of the biggest players on Wall Street...then I would argue that they are not only exceeding their mandate, but also distorting the economy annd financial markets in ways that are complex and convoluted. But you didn't ask about that, so I won't go there!