The creation of money is called most astounding sleight of hand ever invented. The creation of money is now privatized, as it is now being hold by a private banking cartel instead of congress. Most people think that government is the authority behind the issuance of money, but actually this is not the case. Except of the coins, the banks create all money, not the government. Federal Reserve Notes are issued by a private banking cooperation named the Federal Reserve, and lent to the government. Moreover Federal Reserve Notes and coins together compose less then 3% of the money supply. The other 97% is created by the commercial banks as loans.

This seems unbelievable that banks create money, they lend. Same was the feeling of jury in Landmark Minnesota case, until they heard the evidence. First national bank of Montgomery vs. Daly (1969) was a courtroom drama worthy of a movie script. Defendant Jerome Daly opposed the bank’s foreclosure on his $14,000 home mortgage loan on the ground that there was no consideration for the loan. Daly, an attorney representing himself, argued that the bank had put up no real money for his loan. Associate Justice Bill Drexler recorded the courtroom proceedings; he said his role was to keep order in the courtroom. Drexler had not given much mental acceptance for defense and watching this The Bank President Mr. Morgan took a stand and admitted that the banks routinely created money for loans and that this was standard banking practice. Presiding Justice Martin Mahoney and the jurors all agreed that it seems like a fraud.

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These myths have been made popular in the mainstream mainly by Keynesian economists trying to influence public policy.

Myth No. 1: The Key Element of Economy is Consumption

Consumption is, in reality, important in a free economy: especially the freedom of consumers to buy goods in unrestricted markets. However, it is investment (savings) – the total opposite of consumption – that holds the key to long term economic growth.

Consumption-promoting public policies, like low interest rates, do so at the expense of savings. Fewer saving means less investment; and an economy that consumes all its resources without saving or investing, will eventually end up bankrupt.

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Federal regulators have seized the Omni National Bank of Atlanta. It has become the 21st bank in 2009 to fail. As the recession began, it has become the 46th bank in the list to fail. Six former branches of Omni National Bank will be operated by the Sun Trust Bank of Atlanta until April 27. This closure has caused the highest unemployment in a quarter century.

The status of the bank on March 09 was that it was containing $956 million in assets and in deposits $796.8 million. It was shut by the Office of Comptroller of Currency and Federal Deposit Insurance Corporation (FDIC). FDIC has further announced that Omni’s six branches will be controlled by SunTrust Banks Incorporation of Atlanta.

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There are certain misconceptions in the minds of people related to factors that determine mortgage rates. Let us try to explore these in details to find real truth behind these myths.

Mortgage rates moves with Federal Reserve’s  Fund Rate

Many consumers are misguided about the different factors in the economy that affects mortgage rates. There is a common misconception among borrowers and also some members of the media that the Federal Funds Rate set by the Federal Reserve is related to mortgage rates, but when the Fed cuts the Fed Funds Rate and mortgage rates are not affected accordingly then this concept of people proves to be wrong.

The reason behind this is that mortgage rates are determined by Mortgage Backed Securities (MBS) and the current coupons they are trading at.MBS are traded every business day just like stocks and other bonds. As MBS’s demand increases, its price goes up and its yield goes down and thus resulting in lower mortgage rates.

In a more simple way we can say that mortgage rates are anything that increases investor demand to buy mortgages resulting in lower mortgage rates. For example when investor pulls out their money from stocks they usually try to invest in safer fixed income investments and MBS is one option they have. So when stocks decline that also increases the demand for MBS.

Another factor that could increase investor demand for mortgages is deflation.MBS and other bonds are fixed income investments so due to inflation the return on that type of investment diminishes. If there is deflation then the fixed investments remain attractive. On the other hand, if inflation is high then investments like MBS are less attractive and demand decreases which ultimately results into an increase in mortgage interest rates.

The reason that mortgage rates often increase when the Fed lowers rates is because the lower Fed rate Stimulates the economy and become a reason of higher inflation in the future which is a bad sign for mortgage bonds that is why mortgage rates usually increase when the Fed cuts their rate.

Mortgage Rates are based on the 10 year Treasury bonds

Another misconception is there in the minds of some people that mortgage rates are based on the US 10 year Treasury bond. Many times it happens that the MBS market moves within a certain spread compared to the 10year but sometimes there is a large disconnection between the MBS and 10year US treasury bonds.The problem that we are currently facing is to keep mortgage rates higher so that they could be given more traditional spreads. There are days where the yield on the 10yr will drop while the yield for MBS will increase when normally they would move in a similar path.

Here are some thought provoking quotes on money and banking.   I hope you will enjoy reading them. They become even more interesting as you see them in perspective of current global financial crisis.

“The bank hath benefit of interest on all moneys which it creates out of nothing.” — William Paterson, founder of the Bank of England, 1694.

“All the perplexities, confusion and distresses in America arise not from defects in the constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation.” — John Adams, letter to Thomas Jefferson.

If congress has the right under the Constitution to issue paper money, it was given them to use themselves, not to be delegated to individuals or corporations. — US President Andrew Jackson.

“The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.” — US President Abraham Lincoln

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