I have not seen too many people comment on this; here’s one guy mentioning it last August. The punchline is that amongst other favors, private bankers have managed to use the financial crisis such that they now receive a stream of billions of dollars in income from the Federal Reserve. Moreover, this amount could rise substantially over the coming years.
The banks now receive “interest on reserves” from the Fed, a policy that was instituted back in October 2008. This means that when a bank keeps its reserves parked with the Fed, then it will be paid interest on them; this didn’t happen before October 2008. There are various ways to describe this policy, but one accurate way is to say at this point the Fed began paying banks to not make loans to their customers. The rate is currently a measly 25 basis points (0.25%), but it is expected to increase in the near future.
Specifically, the Fed has said that if and when it begins raising interest rates (probably later this year), it will not follow the textbook approach of selling off assets from its balance sheet, and thereby draining reserves from the system. On the contrary, the Fed will raise interest rates by increasing the amount the Fed itself pays to bankers, to keep their money parked at the Fed. For example, if the Fed wants the short-term rate (what’s called the “federal funds rate”) to rise to 1 percent, then the Fed will increase the amount it pays to banks for their reserves (perhaps to a bit less than 1 percent). If the banks can earn a guaranteed 1 percent from the Fed, then they would never lend their reserves to anybody else–even each other–for less than that.
One implication of this plan is that the Fed will be on the hook for funneling huge amounts directly to the banks. These wouldn’t be loans, these would be interest payments–direct income for the banks. Right now excess reserves are about $2.4 trillion. Assuming this is the ballpark for the next year or two, and that the Fed eventually raises its target rate to 3 percent, that would involve annual interest payments of $2.4 trillion x 3% = $72 billion.
Notice that this is effectively coming right from the taxpayers, in the sense that the Fed has been remitting its excess earnings to the Treasury, making the federal budget deficit lower than it otherwise would be. So, other things equal, if the Fed pays bankers $72 billion annually to not make loans to their customers, then that is effectively coming from the taxpayers.
I daresay before the crisis, if any banker had proposed such a scheme, that it would not have met with the public’s approval.