Thinking About Rates
You see, in an effort to smooth out the crests and troughs of the American economy, the Open Market Committee of the US Federal Reserve Bank has taken interest rates from their highest level in almost twenty years to the lowest in over fifty years. Now, the pendulum swings back ever so slowly. I fear the Fed’s policies have accentuated problems, not fixed them!
When the Fed raised rates a quarter of a point for the eleventh time in that many months on September 20th, I began a column on interest. A national debt of $8 TRILLION costs Uncle $ugar an additional $20 BILLION in yearly interest for every quarter point (.25%) increase. I was attempting to flag the impending "category 9" financial hurricane that will hit the national government, many state and local governments, and every household across the nation burdened with near 100% financed real estate and/or carrying mega-credit card debt.
This column was mind-boggling and mind-numbing, both because of the sheer scope of numbers involved and because the differing benchmark rates (hardly part of everyone’s daily vocabulary, though they should be) are so misunderstood. Two rates that I (and the bankers I had audited) have erroneously used interchangeably for twenty-plus years were really distinctly different.
I usually pre-screen my technically oriented columns using a diverse group of friends and neighbors (and read them aloud to my little black Scottie, Macintosh II) before they are published. The feedback on this one was a universal "huh?" And, Mac II crawled under the bed before I finished! I really needed to lay some foundations in the definitions and the historical background for the column to make any sense.
There is a time value to money saved, borrowed, or lent; and that is called interest. The Fed impacts our lives in more ways than we realize. They set the rates of interest charged and paid nationwide. By doing so they regulate the expansion and contraction of our whole economy. The Fed acts as a "funds clearinghouse" for financial institutions by matching those with excess deposits (more liabilities than assets) to those with excess loans (more assets than liabilities). This may seem backwards; but you must realize that on the books of the financial institution the debits and credits are effectively reversed. Loans are assets to them, and deposits are liabilities.
The Open Market Committee of the Fed meets monthly and sets the Fed Funds rate. This is the one at which banks lend funds to each other overnight, and the Fed keeps it on target by supplying as much liquidity as there is demand for at the targeted rate. The Fed supplements this inter-bank transferring of funds by supplying credits in its own right to institutions in need of further "liquidity." The Discount rate refers to the interest charged on these Federal Reserve "provided" funds. It rises (and drops) in sync with the Fed Funds rate but traditionally carries a 1% higher cost to the borrowing institution and hence to the ultimate borrower.
“Prime” (or prime rate) rate refers to the interest charged to borrowers with high creditworthiness and an established relationship to the lending institution. This reflects the cost of interest paid to the depositors, or the applicable rate paid to the correspondent institution/Fed plus a mark-up covering the lender’s administration costs and profit. Those not meeting the criteria for a loan at Prime pay an additional premium that depends on the perceived lending risk level. Prime generally rises (and drops) in sync with the Fed Funds rate.
Credit card rates are a defined in terms Prime plus a mark-up percentage. The mark-up can change at the discretion of the card’s issuer in accordance with their criteria and notification policies. LIBOR, the London Inter Bank Offered Rate, with no direct ties to the Fed Funds rate, is also used. Do you know how all your interest rates are determined, and why they fluctuate? You should! I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.
Copyright 2005 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at firstname.lastname@example.org.
To "Audit" this column, and to learn more about the subjects discussed, please check out:
Copyright © 2005 The Baltimore Chronicle. All rights reserved.
Republication or redistribution of Baltimore Chronicle content is expressly prohibited without their prior written consent.
This story was published on October 4, 2005.
Local Stories, Events
Ref. : Civic Events
Ref. : Arts & Education Events
Ref. : Public Service Notices
Books, Films, Arts & Education
06.11 Underpaid Adjunct Professors Sleep in Cars and Rely on Public Aid [The disease of rapacious-capitalism infects the education system]
Ref. : Letters to the editor
Health Care & Environment
06.15 So much plastic is being made that "recycling has no impact" [Non-recyclable plastic must be made illegal to manufacture, use]
06.15 We must transform our lives and values to save this burning planet [Increased ice melt in polar latitudes has been disguising reality in the middle latitudes. This effect will soon be replaced by record heat as ice volume and seasonal melting increasingly declines.]
06.15 This all-male council in Texas just voted to ban abortion [1:59 video; Bad assumptions foment ignorant actions...]
06.10 Conservatives should change how they think about global warming. I did [Another crisis issue conservatives won't acknowledge...]
06.10 Scottish Power to build vast battery to improve wind energy supply [Who won't understand this?]
06.10 Greenpeace activists board BP oil rig as it is towed out to sea [Fossil fuel company conduct should be illegal...]
News Media Matters
US Politics, Policy & 'Culture'
06.15 'Eye-Popping': Analysis Shows Top 1% Gained $21 Trillion in Wealth Since 1989 While Bottom Half Lost $900 Billion [More equality or bring back the guillotines!]
06.15 White House physicist sought aid of rightwing thinktank to challenge climate science [When your President is a quack he naturally surrounds himself with sycophants]
06.13 Why are we still pretending 'trickle-down' economics work? [We aren't ‘laffing’ now! In Trump-world all the worst people are celebrated. Ref.: 3:07 Idiocracy Courtroom Scene]
06.14 Justice Denied, Delayed, or Done Right? Serious Concerns as Prosecutors Throw Out Charges in Flint Water Crisis Cases [A very flawed prosecution using suspiciously limited evidence has been thrown out, a stronger case will be brought using newly found, voluminous evidence.]
Economics & Corrupt Capitalism
06.11 The problem with billionaires fighting climate change? The billionaires [Bloomberg's sanity to control greed to save the life-on-earth (and continuing profits) is unfortunately rare]
06.09 Elizabeth Warren’s economic nationalism vision shows there's a better way [As like championed by Economist Joseph Stiglitz]
International & Futurism
06.15 Africa’s Lost Kingdoms
06.15 The US must stand with the people of Hong Kong [But this attacks Xi's authoritarianism, which Trump is most envious of for himself...]
06.13 What does it mean to be genetically Jewish? [Doing a mental dance with archanery: could a significant number of Russians and Palestinians be intentionally included or excluded as genetically Jewish? And why would Israel do this?]
06.12 Extending the US Embargo on Cuba & Hurting the People [Doing what's cruelest]