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Help me understand the Federal Reserve
ShinyRedKnight
Registered User regular
Registered User regular
So, I'm embarrassed to say, I'm a Political Science major who barely understands the Federal Reserve.
I keep getting badgered by people who say Ron Paul's ideas, or similar ideas, are the way out of the recession. Now, for the most part, I can see why this is outright wrong; deregulation and the gold standard would take us back over a hundred years into an era of zero workers' rights, heavier pollution, even worse socioeconomic inequality, and an economy that is stagnant and inflexible.
However, I have no idea what to say about their Federal Reserve arguments. In fact, I have to argue with them based on their description of the Federal Reserve since I cannot offer one. Among these arguments is that they increase inflation (which I know is good in small amounts and necessary, but cannot explain why), that its controlled mainly by private banks (sounds false, but I can't prove it) and others.
Is there anyone who can help me understand the Federal Reserve and arguments for and against it, or at least has a YouTube video or website that isn't drenched with conspiracy theories? I've tried finding out myself, and that's all that seems to come up.
I keep getting badgered by people who say Ron Paul's ideas, or similar ideas, are the way out of the recession. Now, for the most part, I can see why this is outright wrong; deregulation and the gold standard would take us back over a hundred years into an era of zero workers' rights, heavier pollution, even worse socioeconomic inequality, and an economy that is stagnant and inflexible.
However, I have no idea what to say about their Federal Reserve arguments. In fact, I have to argue with them based on their description of the Federal Reserve since I cannot offer one. Among these arguments is that they increase inflation (which I know is good in small amounts and necessary, but cannot explain why), that its controlled mainly by private banks (sounds false, but I can't prove it) and others.
Is there anyone who can help me understand the Federal Reserve and arguments for and against it, or at least has a YouTube video or website that isn't drenched with conspiracy theories? I've tried finding out myself, and that's all that seems to come up.
PSN: ShinyRedKnight Xbox Live: ShinyRedKnight
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It's like an atheist trying to make sense of a religionist's worldview. Or a pro-choicer trying to counter the ideology of a Pro-Lifer.
Anyone saying the US should move from fiat-based currency back to commodity-based currency is stuck in some kind of timewarp, and does not really understand how the economy has evolved over the past 50 years.
The Fed has several functions, but the one the public is usually most interested in is its power to affect monetary policy by controlling the federal interest rate: http://www.federalreserveeducation.org/about-the-fed/structure-and-functions/monetary-policy/
the "no true scotch man" fallacy.
It isn't really terribly educational though; mostly it's about the problems he has with the governance of the fed. His explanation of what the Fed actually does is midway down, here:
"This is done by the Federal Reserve’s Open Market Committee (FOMC), which is composed of the seven members of the Federal Reserve Board of Governors (the chair, the vice-chair, and five other governors), plus the president of the New York Fed and, on a rotating basis, the presidents of four of the other 11 regional Fed banks.
"Each of the regional Feds has its president selected by its own board of directors. These boards, in turn, are composed of three classes of directors. Class C directors are appointed by the Board of Governors in Washington. The Class A and Class B directors are appointed by the member banks, with Class A directors representing banking interests and Class B directors representing local economic interests. The governors who sit in Washington are appointed by the president and confirmed by the Senate.
"The FOMC’s mandate, as defined by the Federal Reserve Act, is “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” This is conventionally called a “dual mandate” in that it references both employment and inflation. (Foreign central banks often have a single mandate to focus on inflation. Some describe the mandate in qualitative terms—like the United States does—whereas others have specific numerical targets.) The Fed pursues its mandate through so-called “open-market operations”—the buying and selling of bonds. In normal times, the Fed sets a target for short-term interest rates, announcing an intention to make them either higher or lower. Then it follows up with sales or purchases of short-term bonds. Buying bonds drives rates down, and selling them pushes rates up. But just as crucial as the Fed’s actions—if not more so—is the body’s announcement of its actions. After a meeting, the FOMC releases a statement describing its intention to shift rates up or down by a certain amount. Since market participants know exactly what the Fed is trying to do, private traders start buying or selling on the assumption that the Fed will hit its target, meaning that the quantity of bonds actually bought or sold by the Fed is rather modest in practice because private investors do most of the lifting. Purchasing bonds puts more money into the economy, creating conditions of “easy money,” and is known as “easing.” Selling bonds makes money “tight” by pulling it out of the economic system.
"When short-term rates are nearly zero, as has been the case recently, the Fed can’t generate looser money through this method. But it does at such a moment have the option of buying or selling longer-dated bonds and trying to influence the economy. When the Fed does this, it sets not a target interest rate but a target quantity of bonds to be purchased—hence the term “quantitative easing.” By misguided journalistic convention, a “normal” action to reduce rates from 3.75 percent to 3.50 percent is termed “cutting interest rates,” whereas recent QE measures were reported by some in the media in near-apocalyptic terms as the Fed printing billions of dollars and purchasing vast amounts of bonds. These descriptions are not inaccurate, exactly, but they lack context—printing money and buying and selling bonds are what the Fed does all the time."
In short, the fed is the agency the U.S. government charges with regulating its monetary policy. Part of the problem discussing it in a friendly bull session type of setting (or worse, on facebook or something) is that monetary policy is legitimately really complex and not that many people understand it, and so any attempt to discuss it in a non-academic setting quickly bogs down in terminology.
The other part of the problem is that most of the Ron Paul crowd's 'criticism' of the fed is just alarmist bullshit. The ownership thing is a perfect example: the actual regional Federal Reserve Banks are privately owned on paper, but controlled by the federal government by statute. The "owners" don't share in profits since the fed isn't operated for profit, and can't really exercise proprietary control or use their stake for financial leverage in all the ways we are commonly familiar with. The fed holds the reserve cash banks are required to maintain by law, and pays a minimal dividend (again, controlled by statute) in return.
Presumably all these folks wouldn't prefer that the U.S. government just owned and operated its own bank, so it's not clear what the private ownership point is really even about, other than to exploit people's apprehension about shadowy banker-types doing something nefarious.
that's why we call it the struggle, you're supposed to sweat
Reading Friedman would give you a better understanding of what they are trying to get across, even if misguided at this point in time. Friedman, at least, explains the rationality of human action behind broken government programs and what real options could be taken.
Similar philosophies, but one man is a very practical jew. The other, a well meaning individual who might have been right at one point, but that's not the world we live in now.
the argument for commodity standards is that they protect people from runaway inflation, but runaway inflation isn't a problem now and doesn't seem likely to become a problem in the future.
that's why we call it the struggle, you're supposed to sweat
Also let's keep mentions of religion out of this so I don't have to infract you.
the "no true scotch man" fallacy.
The biggest argument against the Federal Reserve is that during periods of serious economic jeopardy, they can take some pretty serious and ethically dubious steps to reign in the financial system, by printing huge amounts of money, making loans to basically anyone without much congressional oversight, and so on.
The Fed took a lot of heat during the 08 crises for making a lot of major moves under cloak of night that made for good political fodder for people like Ron Paul and Alan Grayson... some legitimate, some insane.
The biggest argument FOR the Federal Reserve is it serves as a bulwark against has already been mentioned earlier in this thread by @eat it you nasty pig. Making the US Dollar less susceptible to public hysteria, primarily
we also talk about other random shit and clown upon each other
that's why we call it the struggle, you're supposed to sweat
From my understanding so far;
So the Federal Reserve has three goals; healthy inflation, raising employment and encouraging consumer spending. This is all connected to the fact that we have a currency NOT based on a commodity, allowing the Federal Reserve to have an activist, responsive role in the economy, making the set goals a reality. Employment is good for obvious reasons, consumer spending helps create jobs, and inflation encourages the former two.
In reaching these goals, they have to print billions of dollars, tighten up money, or act in ways that may not be supervised. However, this is required so that they can respond quickly enough. To check this, the organization is a collection of private bank representatives and federal government representatives. The private bank representatives are under control of the Federal government, as those banks answer to Washington, DC.
So in the end, any argument against the Fed is based on a single organization having control over the economy and the resulting reach they have?
That does seem extremely alarmist... and ignores the fact that the Fed protects against that by representing national interests rather than having a totally deregulated economy where a few billionaires and monopolies can take control.
Do I have this right?
PSN: ShinyRedKnight Xbox Live: ShinyRedKnight
Erm, not exactly there on the origins, as the Federal Reserve came about in the early 20th century, well before the US fully moved away from the gold standard. The Federal Reserve has become more than it was initially due to the move away from precious metal backed currency to fiat currency, sure, but that is not the reason why we had it in the first place.
Even within the context of a gold standard, there is still the issue of whether or not to have a centralized banking authority. The US had a central bank in the early 1800s too, which was killed under Andrew Jackson's administration. Back then paper money was just a promise to a certain amount of gold (or earlier on silver too), and without a central bank you would have either private banks or state banks issuing the notes. Banks lend out more than they keep in reserves, and the private banks would issue more notes for gold than they kept gold on hand, so that created a risk of rendering the paper money worthless in a bank run if too many people showed up demanding gold at the same time and the bank was unable to honor its promises. Having a giant hodgepodge of different paper moneys for the US dollar with different riskiness based on the stability and perceived stability of the issuing banks was a giant mess. They dealt with that problem by trying to create a more regulated national banking system with a more uniform currency with the National Banking act in the 1860s, but that still didn't completely deal with the problem of periodic bank runs and financial crises.
There were a lot of banking panics in the late 1800s and beginning of the 1900s the resulted from the under-regulated banking system without a central banking authority to control the currency and perform the very important role of a lender of last resort. You'd have some banks engage in reckless behavior and runaway speculation (sound familiar?) which would lead to their collapse, but the resulting panic would cause liquidity problems that would hit other banks too that weren't insolvent beforehand.
The Federal Reserve itself is sort of an odd compromise between private control of the banking system (centralized or not) and a fully nationalized central bank under direct control of the federal government. The upside of not having it entirely controlled by the federal government (like say having the US Treasury Secretary and the head of the Federal Reserve be the same guy) is that there is a dampening of how much the ever changing political whims of the government affects the handling of monetary policy. So if the political leaders freak out and say "raise interest rates!" or "rapidly expand the monetary supply!" the Federal Reserve can ignore them if they think that's a bad idea without the risk of the President immediately firing them and replacing them with someone who will follow orders. This has its downsides too, especially if the interests of the powers running the Federal Reserve become too insular and disconnected from that of the public at large.
Edit: added the mention of the National banking act. The Panic of 1907 was the main impetus for creating the Federal Reserve, as people got tired of relying on JP Morgan (the man) to backstop the banking system.
Well, the issue of having a central bank (in this case the Federal Reserve) goes beyond just whether or not you have a fiat currency or a commodity backed currency. But in the current context of our monetary system with a fiat currency, they act to muck around with the monetary supply and try to push on the levers of the economy through the actions mentioned by the others of doing things like buying and selling bonds to try to change interest rates.
I'd recommend reading up on fractional reserve banking to start to really get an idea of how our monetary system works. It can be hard to understand and a bit maddening, but if you really want to understand the hows and whys of something like the Federal Reserve then you should probably start there. Because a question like "what counts as being money?" is a whole lot harder to answer than you might think.
For the Ron Paul type goldbugs, sometimes the complaints can conflate their issues with the Federal Reserve, the gold standard, and fractional reserve banking all together when really they are their own giant issues individually in their own right. One of the examples already mentioned, but the monetary base for the Federal Reserve initially was gold, whereas now it is just numbers on a computer or a piece of paper backed by their word and the word of law. A common complaint against the gold standard is that what the economy needs out of the monetary base and how big it is doesn't necessarily have anything to do with the amount of gold physically dug out of the ground and stuck in a vault somewhere, so having someone be able to adjust the monetary supply on the fly as need be is extremely helpful for smoothly running the economy. But even if you accept the complaint that the temptation of the power of fiat currency can lead to larger problems like runaway printing of money and inflation, that is still separate from the demand for something like ending the federal reserve. And even that is separate from some of the demands I've heard for full reserve banking, which is more akin to something like Islamic banking and finance.
I'd recommend trying to understand each of these parts by themselves if you really want to have a full understanding of what is going on for use in a discussion of monetary policy, and try to nail down what critiques of the system are actually specifically critiquing. That is somewhat difficult though, so it is understandable if you want to limit yourself to something a bit simpler like arguing for or against the gold standard and the Federal Reserve's ability to enact monetary policy.
Edit:
For example, from the wikipedia page on fractional reserve banking linked earlier:
That recommendation goes far beyond just "bring back the gold standard" or "go back to the good old days of the 1800s banking system". That's more like nuking the whole thing from orbit.
Basically, yes. Libertarianism monetary policy requires willful disbelief/ignorance of the drawbacks of currencies pegged to commodities and of the history of unregulated oligarchs establishing themselves as tyrants. But as was noted above, this stuff can get incredibly complex, to such an extent that no one person can understand all of it. That’s why libertarians love bringing it. They can throw their own crazy theories around and people who are not dedicated macroeconomics geeks often don’t know how to argue back. It’s similar to the way creationists have an endless supply of junk science to back their claims, knowing that few individuals have the knowledge to refute all of it.
The basic assumption that Paulbots make is this: All economies started as barter. Gold became the first and oldest money, because gold makes barter more simple. The Federal Reserve system is evil because it takes us away from gold.
The problem? There's absolutely no evidence to back this scenario up. None. Zip, zero, zilch. Over 1,000 pre-monetary economies have been observed, both past and present. Barter does not appear in any of them. Which therefore means that there is no need for gold. In fact, there are three key arguments on why gold couldn't have been the earliest currency: 1) There is no evidence that scales existed with the necessary level of precision, even though the technology to build those scales would have been available if they needed them. 2) They had no way to measure the purity of gold, at least not until Archimedes. 3) Gold makes you an easy target for thieves, since they can essentially steal all your money and melt the gold down so that there is no record of any crime.
It turns out that most pre-monetary societies are "gift based" economies. Instead of saying, "I'll trade you 20 chickens for a cow," you ask your neighbor for a chicken when you need one, and he gives it to you. And at some point, he asks you for something in return. Keep in mind that this is all very informal, because it's about building social relationships and trust. It's not supposed to be a cold calculating system of exchange with fixed values, like the Paulbots imagine it to be.
Case in point:
Paulbots imagine a system where all exchanges have to be exact and measured. Pre-monetary societies do not work that way.
Gift based economies are based on the idea of debt. I give you a chicken, but now you're in my debt. I did you a favor, now you owe me a favor. And it turns out that the oldest form economies are actually credit systems, which predate gold currencies by thousands of years. i.e., you go to a shop, and the shop keeper writes you a tab. Every now and then, you give the shop keeper something that he needs to pay off that tab. Credit systems have many advantages over gold. 1) Adding a note to your ledger is a lot easier than measuring out a precise quantity and purity of gold. 2) Your ledger has no value to a potential thief, because he can't cash it in, where as a sack of gold coins obviously carries value. 3) Since the entire system is built on trust, even if your ledger gets damaged or lost, there is still a good chance that your friends will honor their debts.
The other thing is that the gold standard has never existed the way that Paulbots have claimed it did. In many cases, gold existed as virtual currency, notations on a ledger. In the time of Charlemagne, transactions were measured out in gold and silver coins, even though the coins themselves didn't actually exist. When gold currency did exist, it was usually government issued, and traded for far more than the bullion value the same way that dollars bills are worth far more than the paper that it's printed on. You can't get "back" to a system that we were never on in the first place.
I recommend checking out David Graeber's book, "Debt: The First 5,000 Years." Here are some interviews:
http://www.nakedcapitalism.com/2011/08/what-is-debt-–-an-interview-with-economic-anthropologist-david-graeber.html
http://www.nakedcapitalism.com/2011/09/david-graeber-on-the-invention-of-money-–-notes-on-sex-adventure-monomaniacal-sociopathy-and-the-true-function-of-economics.html
http://www.bloomberg.com/video/8-3-graeber-on-book-debt-the-first-5-000-years-vSxKj4B_QVmja8zpDha40w.html
Debating the Federal Reserve is like debating the validity of Obama's birth certificate. WND doesn't give a shit about whether or not the birth certificate is legitimate or not, the agenda is to present Obama as an illegitimate president. The people debating the Federal Reserve don't care if the Federal Reserve is a legitimate organization, their agenda is to bring back the gold standard. So the first step is to cut straight to the point.
In other words, let's say you're debating someone who claims that there is a car that runs on water. You're not going to get anywhere by trying to discuss the inner workings of an internal combustion engine, because that requires a lot of technical knowledge. But you can try to discuss the theory of thermodynamics.
Debating the gold standard boils down to this: Does it make my life better? If it doesn't, then what's the point? If it does, then how? The gold standard is essentially the same as any other con, the promise of something for nothing. It's no different from the car that runs on water, the miracle cure for cancer, the get rich quick scheme that you can do from home, etc.
Have you ever had a guy approach you with a pyramid scheme with the promise of getting rich, but when you pressed him for details on where the money was coming, he really couldn't answer with something specific? Either you're dealing with someone who is actively trying to scam you, or you're dealing with a true believer who is stuck in denial. In any case, they are going to do everything they can to avoid your questions, usually by trying to distract you with all the nice things you can buy with your newfound wealth. The same thing happens with the gold bugs. They'll tell you that your life will be so much better off once we get rid of inflation. But they're never specific on how. The key is to remember that there is no such thing as a free lunch. It's not your burden to show that the Federal Reserve is awesome, which is about as likely as convincing WND that Obama is a legitimate citizen. The burden is on them to show that the gold standard actually improves things. The burden is always on the person who wishes to change the status quo. Because if both of you agree to disagree, the status quo stays in place. It is their job to change your mind, not the other way around. Therefore, you should never allow them to put you on the defensive. It needs to always be the other way around.
For instance, here's a popular libertarian youtube video explaining why the Federal Reserve is evil. It's mainly just a bunch of anti-semitic drivel meant to stoke paranoia and fear, but the actual "meat" of how the Federal Reserve makes your life worse in a tangible way isn't explained until 22 minutes in:
The argument is that if you had a time machine and bought gold in 1955, you would lose 15% of your profit due to the capital gains tax, some of which would be due to inflation. This is the best possible scenario they could come up with on how the economy would be better off without a Federal Reserve, and not only does it involve a time machine, but the actual harm from the Federal Reserve is insignificant. Even if inflation was infinite, the capital gains tax is still only 15%. You would still maintain 85% of your wealth. Another common argument is "Money has lost 95% of it's value since 1913!" But few people have money leftover from 1913, the vast majority of Americans spend money as soon as they make it, so the entire point is irrelevant.
One of Ron Paul's arguments is that if we weren't on the gold standard, then gas would only cost 10 cents per gallon, one silver dime, and the oil crisis would be solved! The problem is that he didn't actually do anything to solve the oil crisis. He didn't make oil more available, or reduce our dependency. In other words, it's the false promise of something for nothing. He just shifted the problem, so that instead of being faced with an oil shortage, we are now faced with a silver dime shortage. In economics, this is known as money neutrality.
http://wallstreetpit.com/64990-ron-pauls-money-illusion/
Paulbots insist that we would all have more purchasing power if we were on the gold standard. But where does that additional purchasing power come from? This is never explained. They might insist, "Oh, there's no additional purchasing power, we're simply maintaining the purchasing power we already have." But that's the economic equivalent of proposing perpetual motion. If I say, "I want this car to run at 60mph, indefinitely," then this requires a constant input of additional fuel. If I say, "I want every coin ever produced in history to maintain the same purchasing power, even after the purchases are consumed," then this requires a constant input of new purchasing power.
Let's say that there are 10 apples, and 10 gold coins. I spend 5 coins, and I eat 5 apples. There are still 10 coins in the economy, but now there are only 5 apples. As goods are consumed, money no longer maintains the same purchasing power. Therefore, even if no additional money is printed, then inflation still happens. On the other hand, if the number of apples suddenly increases while money supply stays the same, then you experience deflation instead. Which is bad.
http://en.wikipedia.org/wiki/Deflation#Deflationary_spiral
Some Paulbots will claim that a gold standard will take purchasing power away from the wealthy elite and return it to the poor. Again, they never explain how. It's like listening to Amway insist that their business plan is designed to crush the Walmarts of the world and put more power back into the hands of the people. In fact, inflation tends to hurt the rich, because the rich people are the ones with money. You can't lose value on money you don't have. And if you're in debt, as most poor people are, then inflation actually makes it easier to pay off your debts. Deflation makes it harder.
Another claim is that inflation favors rich people, because rich people get the money first, and spend it before inflation has a chance to kick in. This is nonsense for four reasons. 1) Rich people get their money first even under a gold standard. 2) The entire point of being rich is that you have more money than you actually spend. Since I'm not spending the money right away, it doesn't really matter if I get it sooner or later. 3) Inflation is less than 2% annually right now. It's fairly insignificant compared to all the other advantages that rich people have. 4) Inflation is constant. There's no such thing as "before it kicks in." Yes, the money may lose value after a rich person gives it to his poor employee. But the money also loses value after a poor employee spends his money on a wealthy corporation.
As for the debate on whether or not inflation is good, the answer is, it depends. Inflation encourages people to spend or invest their money sooner rather than later, before it loses its value. If you have more jobs than workers, than inflation is bad, because production can't keep up with demand for goods. But if you have more workers than jobs, than inflation is good, because it encourages people to spend more in the short term which encourages employers to hire more employees. One of the biggest problems with libertarians is that they're still stuck in this 18th century mindset where we have a worker shortage, which is why they accuse all unemployed people of being lazy. They simply can't wrap their heads around the idea that there are more workers than jobs.
Funny how inflation didn't make it hard on poor people under after Reagan went into office.
Thanks for the updates guys! This is more than I have been taught in classes...
Watching the video now.
PSN: ShinyRedKnight Xbox Live: ShinyRedKnight
like, the interviewer is trying really hard to get the subject around to addressing our popular conversation about the deficit head on, but our popular conversation is so bereft of actual merit as a discussion of economics that it's all but impossible. She can't even really answer a lot of his questions because their basic assumptions (stuff like the 'fiscal cliff') don't make any actual sense.
which to be honest, is the long and short of the gold standard folks
that's why we call it the struggle, you're supposed to sweat
Blaming the Fed for things like the impacts of the Gramm-Leach-Bliley act is absurd.
Inflation is really interesting. It has costs and benefits. For instance an unexpected rise in inflation transfers wealth from lenders to borrowers. If the inflation is stable, however, this problem can be avoided entirely. Inflation is also associated with something called the "shoe-leather cost" essentially the cost of going to the bank more frequently (pretty minimal except in extreme situations).
The most interesting phenomenon in my opinion is "money-illusion" or some variation of that. It has to do with people having a harder time interpreting prices and/or wages etc. It can make the market arguably less efficient (people might make "bad" decisions"), but it has some upsides. It makes it easier for firms to cut wages when necessary, because they can do it without lowering nominal wages, and so they don't raise as much of their workers' ire. People don't like to get a nominal pay cut. When they get a pay cut because there wage stagnated relative to inflation, they don't mind/notice nearly as much. Wage flexibility is important for a healthy economy.
You're in luck! Experimental economics is a growing field. This is from my alma mater, but that is small fry compared to what's going on elsewhere, I'm sure.
Unfortunately, as relevant to this thread, ideas in macroeconomics (which deals with the large scale things like inflation, unemployment, and exchange rates) can generally not be verified by experiment. You're talking about a system with millions of actors making very complex decisions.
Experimental economics is more suited to testing hypotheses about consumer and firm behaviour, for example. The experimental economics I participated in tended to be based on things like auctions or Search Theory.
Also, to OP, it sounds like you'd benefit from a Macroeconomics 1 course. I know that may well not be what you want to be told in a H/A thread, but perhaps if sitting through a course is too much of an investment for you, borrowing an introductory macroeconomics textbook from a library could still be up your alley. Basic macroeconomics will introduce you to the ideas of inflation and central banking, but admittedly may not help you with the legal grounding of the Fed and it's "private"-ness (I'm not from the US so I don't understand that bit either). Some texts may cover a bit of the gold standard, but not all will do so. In addition to the things you say you don't know about the Fed, some of the things your post suggests you do think you know may not be correct either. Drawing a link between a gold standard and financial deregulation, and heavier pollution seems to me to be long chain of causality.
http://newnations.bandcamp.com
which is a good thing, since it's not much of a game
we also talk about other random shit and clown upon each other
Which is a lot like arguing that employers give money that employees can spend on things that the employer doesn't approve of, like illicit drugs that interfere with job performance, or child pornography. Therefore, all Ron Paul supporters should be okay if the employer forces them to take a massive pay cut so they can't afford those things anymore, or they should be okay if the employer only pays them in company scip at the company store.
Oh yeah, if they bring up the "Federal Reserve gave $15 trillion in handouts number!", keep in mind the following things:
1) These are loans, not handouts.
2) These loans are counted in such a way where the same loans are renewed daily and therefore counted multiple times. So a $10 billion loan renewed daily for 30 days is written down as $300 billion total.
3) Many of these loans are interest free because you're talking about billions of dollars, where the money to pay off the interest simply does not exist. This is very different from, say, getting a loan on your car, where you account for the interest payment in your salary.
4) Although the Federal Reserve effectively creates money from thin air when they loan out money, once the loan has been repaid, the money is extinguished. In other words, suppose I write out an IOU for an item. Once the IOU has been redeemed, it is no longer valid.