After the financial crisis, the Federal Reserve manipulated interest-rate policies with the aim of stimulating the economy and reducing the national debt, yet, in recent years, those same policies have resulted in the Fed making 50 percent of its interest payments to foreign investors.
Foreign banks, accounting for less than 20 percent of all U.S. holdings, are supplying the Fed with additional capital reserves, and in exchange they have been the beneficiary of “nearly half of both the $4.7 billion in interest the Fed paid banks so far this year… and the $5.1 billion it paid last year,” reports the Wall Street Journal.
The idea behind these economic reserves is to forcibly increase the capital circulating within the economy, and the Fed has offered .25 percent interest payments to banks in order to incentivize investing into said holdings. But why are domestic banks not taking advantage of this low-risk investment opportunity?
The majority of foreign investments into federal reserves are from loans taken outside the United States and are unavailable to domestic banks. These loans accrue interest at a measly average of .10 percent, and coupled with the .25 percent payout, they guarantee foreign investors a .15 percent return on capital lent to the Fed.
Meanwhile, since 2008, U.S. regulations require that domestic banks maintain a ratio of equity to total assets of at least 6 percent, while most foreign banks must only maintain an equity ration of percent. With limited capital to invest, such a low-rate payout forces U.S. banks to search the market for investment opportunities that offer a higher reward but incur much greater risk.
“Moreover, the Fed’s plans for raising interest rates make it likely [foreign] banks will see those payments grow in coming years,” and the burden of increased payments will fall onto the shoulders of American taxpayers.
William Poole of the Cato Institute, and former president of the St. Louis Federal Reserve had this to say on the subject:
“The fact is that the Fed is going to be paying very large amounts of interest to banks. It’s highly likely that some politicians will notice that and given the proclivity of some politicians anyway to demagogue issues, the Fed is going to have some political explaining to do.” (RELATED: Corporate Tax Avoidance Is Like Renouncing Citizenship, Obama Says)
These foreign-funded reserves are not the only evidence that this administration’s policies are not benefiting our fiscal institutions. (RELATED: Do Corporate Inversions Really Cost Much Tax Revenue?)