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Posted: 8/16/2007 8:03:48 PM EDT
The Federal Reserve has been raising interest rates for some time.

This seems to be one of the main causes of the current stock market problem as the lenders are getting stuck with loans that aren't being repaid by people with adjustable rate mortgages and those staying out of foreclosure are spending more on interest and less on everything else.

Here's the question:

When the Fed raises the interest rate, where does the extra money go? General revenues? What does the government do with the extra interest money it collects?

Sadly, this looks like a secret tax since so many things involve financing whether it be consumers directly through morgages or businesses who pay more to borrow and pass those costs to consumers.
Link Posted: 8/16/2007 8:31:27 PM EDT

Originally Posted By Shootin1st:
The fed doesn't directly control the interest rates that you or I pay for a mortgage. To simplify a little...they control the rates that banks are charged for the money that they must pay to obtain the money that they lend to you/each other.

The guvmnt doesn't "make money" by changing these rates. Remember, the guvmnt has debts of it's own that are affected by increasing rates. And, you are incorrect in stating that the guvmnt "has been raising interest rates for some time." If anything, the guvmnt has held the rates artificially low in the wake of 9/11 so as to grow the economy out of that hit.

Please remember, interest is paid to compensate the lender for many factors, including the time value of money, risk, etc. And, the guvmnt is far more often a borrower than a lender, since they don't have money of their own.


I understand that but the discount rate the central bank charges banks who borrow from it is several points higher than it was a few years ago, they have been raising the rate and anything tied to that rate, like adjustable rate mortgages goes up, too.

Now if a bank that used to get its money from the Fed used to pay 3% per annum and now pays 6%, on a million dollars (simplified) they are paying the Fed $30,000 more.

Where does that $30,000 go?
Link Posted: 8/16/2007 8:43:40 PM EDT

Originally Posted By jimb100:
I understand that but the discount rate the central bank charges banks who borrow from it is several points higher than it was a few years ago, they have been raising the rate and anything tied to that rate, like adjustable rate mortgages goes up, too.

Now if a bank that used to get its money from the Fed used to pay 3% per annum and now pays 6%, on a million dollars (simplified) they are paying the Fed $30,000 more.

Where does that $30,000 go?


To the entity the Fed owes a million to.
Link Posted: 8/16/2007 10:43:08 PM EDT
No, the stock market problem isn't the interest rates, it's that lending institutions went around giving massive loans to people who had no business being loaned a nickel.

"You make $200,000 a year working as a taco-stand meat-fryer, Mr. Sanchez? Ah, and I see you have your Matricula Consular card, so clearly that must be your real name and you can legally live and work here. Ok, you're qualified for a $1,000,000 mortgage loan at 6.25% interest! Sign here, and enjoy your new home in Malibu."

Of course, it's not just Dirty Sanchez, it's also Susie the Manicurist who just bought a shack that was badly hacked together on land out in the middle of nowhere because she was afraid she wouldn't be able to afford it if she didn't buy it now, so she paid $200,000 for a dump that is worth maybe $120,000. And her income couldn't pay for a $120K mortgage, much less a $200K no-money-down mortgage, so she's screwed, the bank is screwed, and the investors are screwed.

Now, those loans aren't being repaid, financial institutions worldwide are taking major hits, nobody is quite sure just how bad it's going to get, and even though it's already bad IT'S GOING TO KEEP GETTING WORSE.

The Fed could cut rates, but only at the risk of causing the U.S. Dollar to slip against other currencies in countries whose central banks already have higher rates (encouraging foreign investment there). Of course, even if they don't cut rates, the dollar will slip because nobody is going to want to buy dollars so that they can finance crappy home loans any more.
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