Fed adopts plan to let banks set up the equivalent of CDs to drain money from the economy

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Will's picture
Will
Status: Bronze Member (Offline)
Joined: Oct 27 2008
Posts: 81
Fed adopts plan to let banks set up the equivalent of CDs to drain money from the economy

While we all sit and watch another Triple E catastrophy unfold before our distracted eyes down in the Gulf of Mexico, the FED sees an opportunity to attempt a stealth move with an always suspect Friday night press release:

Fed adopts plan to let banks set up the equivalent of CDs to drain money from the economy

 

I can't wait to read the blogs (including CM and community) analyze this move!

Will's picture
Will
Status: Bronze Member (Offline)
Joined: Oct 27 2008
Posts: 81
Re: Fed adopts plan to let banks set up the equivalent of ...

I'm rather shocked that, so far, I have not seen this mentioned on any financial blog (at least the ones I know of), nor any comments from the CM community.  Am I the only one who:

1)  wonders if this will work?

2)  sees the TBTF banks getting another sweet deal, i.e., we loan them trillions with no interest, then we pay them interest to take it back?

Maybe I'm an idiot, but this seems like it is at least somewhat newsworthy and I can't believe I am unable to find any commentary or analysis almost 48 hours after the plan was released to the public... 

goes211's picture
goes211
Status: Diamond Member (Offline)
Joined: Aug 18 2008
Posts: 1114
Re: Fed adopts plan to let banks set up the equivalent of ...

I thought the FED already could pay interest on reserves.  Is the difference with this that they are term deposits?

Will's picture
Will
Status: Bronze Member (Offline)
Joined: Oct 27 2008
Posts: 81
Re: Fed adopts plan to let banks set up the equivalent of ...
goes211 wrote:

I thought the FED already could pay interest on reserves.  Is the difference with this that they are term deposits?

I don't know, that's why I was looking forward to hearing what other more knowledgeable folks had to say.  Also, Dr. M has stated before that ANY press release that goes out late Friday after market close is done so for a reason and deserves additional scrutiny...

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: Fed adopts plan to let banks set up the equivalent of ...

Reserves, in principle, are quite short-term. Banks are required to settle their reserve positions with the Federal Reserve every two weeks. The interest the Fed pays on reserves, currently 0.25 percent, is closely related to the Fed funds rate, an overnight rate.

The 'term deposits' cited in the article would allow banks to earn higher interest rates by committing funds for longer periods -- e.g., 3, 6 or 12 months.

Apparently, the Federal Reserve needs flexible tools to prevent its doubling of the monetary base during the recent crisis from stoking inflation. They want to be able to control the rate at which this massively expanded pool of reserves filters into the real economy, as easily as turning a dial.

Like most central planner schemes, I doubt it will work. If the global economy bounces back as predicted, and the slack gets taken up, prices are going to soar. Meanwhile, governments are emitting debt at fantastic rates. In a notorious paper by Sargent and Wallace entitled 'Some Unpleasant Monetarist Arithmetic' (1981), Sargent and Wallace of the Minneapolis Fed argued that if the fiscal authorities (e.g., Obama and the KongressKlowns) flood the market with government debt, inflation is going to rise despite the best efforts at monetary restraint by the central banksters. Forget it, Ben!

http://mcb.unlp.googlepages.com/sargent_wallace.pdf

Meanwhile, a banker cartel paying interest to its own members means lower profits turned over to the government. The banksters are grabbing more of their monopoly profits for themselves. But the biggest ones (JPM, B of A, et al) are effectively government banks anyway. So it's all within the family ... with a capital 'F.' Capische?

 

 

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