Gold Investment

ARLINGTON HEIGHTS, IL

By A.B. Dada
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When the Fed “injected liquidity” by keeping interest rates low, banks were able to partake of the inflationary dollar by loaning it out to anyone at almost no interest rate. Banks were happy — they could get easy money, turn it into easy loans, see some of it come back in deposits — deposits that let them create more debt through the hilariously low reserve ratio.

But now the Fed is lowering the rate of their liquidity injection — they’re still creating money, they’re just not doing it so quickly. Banks that built new branches, hired new bankers and hoped for more growth are now stuck — they need money to build their reserves, which lets them loan out more money just to keep the doors open. What is a bank to do?

One bank, Bank of America, decided to entice deposits by offering free equity trades if you make a hefty deposit. By requiring a $25,000 deposit, they give you 30 free trades which don’t cost them much in terms of volume. That $25,000 deposit is huge though — as long as you keep that money in their accounts, you’ll get 30 free trades a month. Considering the low reserve ratio, that $25,000 deposit for BofA means an increase of $25,000 towards their 10% reserve ratio. They’re now able to go a little nuttier — and by loaning out the rest, they could be looking at a $15,000 a year profit from your $25,000 deposit. $15,000 in exchange for giving you up to 360 free trades is an awesome profit margin — $41 per trade if you take the maximum. If you only trade 10 times a month, they’re making $150 per trade!

These are the sneaky ways that banks make money, even if the FRB isn’t letting them make it as easily as before. Remember, inflation doesn’t just come from the Federal Reserve “injecting liquidity” into the market, it also comes out of other terrible government regulations — such as the reserve ratio that lets banks extend themselves 900% over what they really have to pay out.

Discuss this at the gold investment forum.