Why can't I borrow like a bank?

John W. Schoen Senior Producer • Profile • E-mail

With the Federal Reserve busy raising interest rates, Doug in Minnesota is steamed that banks get a better deal when they borrow from the Fed than he does when he borrows from a bank. Meanwhile, in Wisconsin, Kimberly and her husband are wrestling with one of the toughest but most basic personal finance questions: just how do we go about making a will?

BANKING BOONDOGGLE?
It doesn't seem fair that the (Federal Reserve) member banks can borrow money at the so-called discount rate and lend it out at whatever higher rate they want. If only all businesses and individuals could get the same deal. Seems like they can't lose. Am I oversimplifying?
-- Doug G., Rochester, Minn.

That’s why they call it the “discount” rate. Think of it as the wholesale price for short-term money. Usually, if you buy in volume, you get a good price. So maybe if you routinely borrowed billions of dollars overnight, you could get the same deal.

But the Fed's "discount window" is only one place to raise money. Banks and other finance companies can, and do, borrow directly from the capital markets by selling what’s called commercial paper. (At this writing, there's about $1.5 trillion of the stuff sloshing around in the system.) When General Motors lends money to car buyers, for example, it sells billions of dollars worth of debt to finance those loans. It's the same process the U.S. Treasury Department uses to raise the cash to pay for the federal budget deficits that Congress can’t seem to get under control.

In each case, the market -– not the Fed -- decides how much it’s going to pay for this long-term debt. When GM wants to borrow, the market takes a look at its credit rating. Riskier borrowers pay more -- in the form of higher rates. The process is not a whole lot different than a lender looking at the “FICO” score assigned to you by the credit agencies. (But GM gets a better deal by borrowing billions than you do when you borrow $50 to fill up your gas tank with a credit card.)

In much the same way, a lot of the money you borrow originates with sources other than that “discount window” at the Fed. When you look for a mortgage, the money you get to buy your house likely comes directly from the capital markets, not a bank vault. Your mortgage gets bundled up with lots of others that are packaged together, chopped up into pieces and then sold to investors as “mortgage-backed securities.” The process frees up more money to lend to the next borrower, but it also means the market sets the rate charged for the money you borrow. That’s why the Fed has little or no control over long-term interest rates.

The same market forces drive savings rates. In the old days, the only way most consumers could get paid interest on their money was by depositing it in a bank. That savings rate was also set by regulators -– giving the bank another way to mark up money. They’d pay you one rate for savings and lend the money out at a higher rate to borrowers.

Today, you can buy certificates of deposit, Treasuries, or shares of money-market mutual funds that invest in a variety of savings instruments in volume. As a result, banks pay very little interest on (and to) savings accounts these days. There are much better ways to make money. Like charging you a fee every opportunity they can find.

PROPERTY POLL
Why not ask for a vote among your MSNBC.COM readers whether they think "eminent domain" actually is viable in their eyes? I suspect a majority are like me -- thinking it SUCKS !
-- Norman A., Arlington, Texas

We did. And you’re right.

Of the nearly 120,000 MSNBC.COM readers who voted, something like 98 percent said they opposed the idea. We can’t say whether or not that’s a record negative response, but it’s got to be pretty close.

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