> The way I understand it, the banks do not simply get money from the Fed. Combined with negative interest rates that would be "money for free".
I don't understand this. Under a negative interest rate scenario, wouldn't the banks be paying the Fed for the privileged of keeping their money there? Where is the "free money" coming from?
I was talking about the scenario where the Fed gives out a credit in exchange for securities. This usually is accompanied with postive interest rates such that the banks have to pay back more.
Are you talking about the scenario where the banks deposit money to the Fed?
> Are you talking about the scenario where the banks deposit money to the Fed?
Yes, I thought that was what negative interest rates refer to.
> I was talking about the scenario where the Fed gives out a credit in exchange for securities.
Are you describing quantitative easing? Because my understanding that was just the Fed buying securities (usually government ones) on the open market at market prices like any other buyer. I think the big difference in the negative interest rate scenario is the selling bank would have less incentive to then take the cash and park it in the Fed afterward.
If it's a straight bailout, my guess is the Fed would be in a strong position to set the terms so it wouldn't have to pay the bank to take the money.
To my understanding banks go to the Fed when they need money as in dollar notes instead of money as in credit balance. The Fed does not buy the house, it just takes it as security. Meaning it takes the right to physically get the house if the terms of the credit are not fulfilled but it won't actually do anything physical as long as the terms are ok.
This makes an interesting situation for the banks. When you have a house (or the rights to one) to use as security, you can give it to the Fed and get free money for it. Now you have more money and can do stuff.
If you don't have the house, you might actually want to get one in order to get the free money. This makes the money not so free because with a great house come great responsibilites.
If the Fed bought those houses outright it would have many houses but the Fed does not need many houses, so that wouldn't make much sense. It would work financially to some extend and increase the money supply and give incentive to build houses but it wouldn't actually directly create anything beneficial to anyone.
I don't understand this. Under a negative interest rate scenario, wouldn't the banks be paying the Fed for the privileged of keeping their money there? Where is the "free money" coming from?