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Please begin with an informative title:

I am not a rich man.  Thankfully my parents have done well enough to be able to loan my brother and I $100,000 to buy a foreclosed house that we are going to fully rehab and sell.  My brother and I are each putting $20,000 into material and assorted costs.  His $20,000 is going towards the $120,000 purchase price and my $20,000 is going towards material (when flipping a house, the rest of the money comes out of the sale price at the end, realtor commission, title transfer fees, our share of property taxes etc).  So I set up a business checking account at Chase, and I deposited a $20,000 check from my personal Bank of America account (Chase is offering $500 in free money for a minimum credit card purchase, which is why I did this transfer in the first place).  So thats the back drop, and now for the subsidy.


You must enter an Intro for your Diary Entry between 300 and 1150 characters long (that's approximately 50-175 words without any html or formatting markup).

Very few people understand the nature of fiat monetary systems and federal reserve banking, which is obviously why you won't hear about this particular type of big bank subsidy in the mainstream corporate media.  So here is a little example of how the system works.

Functionally, Chase and Bank of America issue their own private currencies.  We don't realize this fact anymore because the Federal Reserve system guarantees that all bank money clears at par with each other and with the Federal Govt's US Dollar.  But before 1913 and the creation of the Federal Reserve, private banks literally issued their own private bank notes (today, all cash is a Federal Reserve note).  And these private currencies had various floating exchange rates, the exact same way that state based currencies have floating exchange rates on the global market (1.33 Euro is equal to 1 US dollar today, or thereabouts, I didn't look it up so don't kill me on the example in the comments please, the point still stands).  

So with that laid out, what happens when you transfer one banks money to another bank?  This is where reserves come in.  Reserves are nothing more than checking accounts (on-demand accounts) at the Federal Reserve BANK.  You and I can't have checking=reserve accounts at the Fed, only banks, some specific financial institutions, and foreign Govts are allowed to these accounts.  So when I deposit my Bank of America check at Chase bank, Chase credited my account with $1500 in Chase dollars and the rest of the amount was withheld until the check cleared (most of you are probably familiar with this process).  Whats going on in the background is Bank of America sends $20,000 in reserves (US Dollars) through the FedWire system (BofA's reserve account gets debited $20K and Chase's reserve accounts gets credited $20K) to Chase.  And once all that happens, Chase credits my checking account with the remaining balance of Chase dollars.

Up to this point, this is a simple description of the operations of modern banking, and here is where the subsidy comes into play.  Chase is legally obligated to keep only 10% of my reserves at the Fed as reserves.  And Chase is paying me .02% interest on my money, but Chase is receiving at least .25% (over 10 times my rate) in free interest money on my reserves from the Fed.  This isn't money that taxes go towards, this is literally the Fed creating money out of nothing and giving it to Chase bank.  Now, I said at least before because Chase could use my $18,000 in reserves to buy T-bonds that earn a higher rate of interest (this interest would be coming from the Treasury and not the Fed),  or they can lend out these excess reserves in the interbank lending market, which is the way the Fed ultimately controls the nation's interest rate, but thats a story for another post.  Lets just keep this real simple to make the point.  The Fed is literally creating free money and giving it to Chase bank based off of the money that I have worked my whole life to acquire.  

I accept that this is the way of our modern fiat monetary system, and there are good reasons for why the system works this way.  I don't agree with them all but the point of this story is to demonstrate in a little different way than I normally do just how ludicrous the concept of the household budget analogy is when it comes to the US dollar issuer aka the Federal Govt.  I wouldn't mind this subsidy so much if politicians were using our fiat money creation authority to better the country but alas, they think we need to shrink the supply of money by running budget surpluses.  And this insane endeavor does nothing but hurt the country.  Anyways, I hope you all enjoyed the lesson.

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