The Financial Services Regulatory Relief Act of 2006 states, in part, “Balances maintained at a Federal Reserve Bank by or on behalf of a depository institution may receive earnings to be paid by the Federal Reserve Bank at least once each calendar quarter, at a rate or rates not to exceed the general level of short-term interest rates.”
The Federal Reserve is currently paying 0.25% on these reserve balances to member banks for these reserve balances. While that amount is minuscule, it is 25 times the 0.01% interest rate that the US government is currently paying on three month Treasury debt! As you can see by referring to the US Treasury’s website reporting the daily interest rate yield curve (posted at http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2011), the last time that the Treasury yield was 0.25% on one month Treasury debt was on February 17, 2009.
So, it appears that the US government has been violating the law by overpaying banks for an extended time. What is even worse than this possible illegal activity is how this has affected the behavior of banks. Because banks can obtain this above market interest rate from the Federal Reserve, they would prefer to leave it on deposit with the Fed, which is considered a safe debtor, rather than loaning the same funds to businesses looking to expand and create jobs that are considered less safe debtors. Thus, this apparent illegal activity also has the effect of harming the US economy.
With shenanigans like this, it does not surprise me one bit that people are protesting “Wall Street” and the financial services industry. While there are some merits to the positions of the protestors, they are failing to address the number one problem. Wall Street and the financial industry are working within the framework of government regulations. If governments permit certain profitable activities that are ethically questionable, people should not be surprised when large banks and other financial institutions engage in these practices.
But, there is even more about which to take the US government to task. Last week, the US government issued a preliminary report that September retail sales had increased by 1.1% over August, an increase that exceeded preliminary consensus forecasts. However, if you dig underneath the statistics, you find that retail sales actually declined from August to September.
First, the increase was touted as an increase in sales of cars and trucks. This component actually has nothing to do with changes in retail sales. What is measured is the shipment of vehicles from manufacturers to dealers. Shipments declined in August as manufacturers underwent model year changeover, so September shipments were bound to be higher than a month earlier. But I repeat that manufacturer shipments do not correlate to retail sales.
Second, the largest component in the increase from August to September was not car and truck sales, it was higher prices paid for petroleum products, especially gasoline and diesel fuel. These prices rose during September, which masks an actual decline in unit sales. Had petroleum prices remained unchanged, I suspect that the so-called good news of higher retail sales in September would have turned into a decrease!
So that you don’t think I’m only picking on government politicians a bureaucrats, let me go back to the banking industry. Last week, JPMorgan Chase announced its quarterly earnings of $1.02 per share, which was an increase from 92 cents per share in the year earlier quarter. However, this result was below consensus expectations.
Still, the results weren’t even as rosy as reported. Included in the $1.02 per share of earnings was a one-time profit of 23 cents per share for an accounting gimmick. Because public confidence has fallen in the creditworthiness of JPMorgan Chase, the value of its outstanding corporate debt has declined. So, in theory, JPMorgan Chase could go out into the open market and redeem its outstanding debt for less than face value.
Under current accounting rules, JPMorgan properly recorded a huge profit, equal to 23 cents per share, because the bank is so shaky that its assets are worth less. I don’t understand how any company deserves to record a profit because of how poorly it is operating, but it’s not me that made the rules.
The point I’m trying to make is that when financial markets are a mess because of regulatory distortions and accounting gimmicks, that makes me leery of owning paper assets. Physical gold and silver don’t need regulatory distortions or accounting gimmicks. You can sleep more soundly once you have your insurance position of precious metals.
Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes “Liberty’s Outlook,” a monthly newsletter covering rare coins and precious metals. Past issues can be found online at http://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online at http://numismaster.com/ under “News & Articles”. His bimonthly columns on collectibles can also be read at http://www.lansingbusinessmonthly.com under “Articles” and “Department Columns.”His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.