Fed Disclosure of Member Bank Borrowings
Posted by WARREN MOSLER on May 12th, 2009
(email exchange)
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> On Tue, May 12, 2009 at 10:35 AM, wrote:
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> We are talking trillions of dollars from our pocket…
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The Fed is lending to its member banks. That is the same as the banks taking in deposits insured by the FDIC. Banks specific loans are only seen by regulators as a matter of public purpose.
Do you want every loan by every bank revealed? If so, lobby congress, as the majority in congress doesn’t want that.
Your beef is with congress, not the Fed.
Also, loans to member banks are not ‘dollars from our pocket’ unless they aren’t repayable, and the regulators monitor banks for capital compliance and they’ve done an ok job so far in that regard. Relatively few FDIC losses given the magnitude of the slowdown.
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> Where is accountability for keeping the dead alive?
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Funding banks is not keeping the dead alive. All banks are always publicly funded via FDIC insured deposits. So happens the Fed is offering funds cheaper and for longer term than the FDIC, so it’s getting the business.
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May 12th, 2009 at 8:00 pm
“All banks are always publicly funded via FDIC insured deposits.”
Mish and others have called for an end to FDIC protection. This protection makes the market lazy and dependent on the fed. If the market had to do its own due diligence on which banks were making good loans and which ones were giving away free money to illegal aliens for trucks and houses in Miami like my bank, then things would be different. Personally I don’t like it that an illegal alien got a free house in Miami and the depositors that knew that BS was going on didn’t have to pull thier money out because they knew the FED would protect them, talk about MORAL HAZARD, FDIC is horrendous. We are all socialists now.
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May 12th, 2009 at 8:33 pm
“So happens the Fed is offering funds cheaper and for longer term than the FDIC.”
Is the fed irrelevant? Greenspan and Lazear seem to argue that is the case. They both just said that in 2004 they began to raise rates, but investors were willing to take more risk and throw more capital at cheaper rates, so housing prices kept going up. This dumbfounded Greenspan and was not was his historical experience would have predicted.
Reversely, even if the fed goes to NEGATIVE interest rates, if the capitalists are not willing to take any risk, perhaps they will never re-enter the market. So if FED actions are no longer making impacts on the market, why pay all those guys all that money and have all that red tape and bueraucracy sucking up resources? Abolish the fed, abolish FDIC insurance, make them study physics and bioscience instead of how to finance pot farms.
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May 12th, 2009 at 9:03 pm
as per my proposals, the liability side of banking is not the place for market discipline. Regulation is for assets and capital.
moral hazard comes only when shareholders are bailed out, rather than assume the risks they are getting paid for.
i have also proposed the Fed set rates at 0 and leave them there permanently, and then do only regulation and supervision.
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Curious Reply:
May 13th, 2009 at 2:21 pm
Yes, 0% interest makes sense, but who would buy US treasuries if they paid 0% interest? There would be no incentive to buy them, so the government would loose its ability to borrow. So as long as the government wants to borrow, they have to keep the interest rate artificially high, no?
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Scott Fullwiler Reply:
May 13th, 2009 at 2:42 pm
Government bond sales are for interest rate maintenance, not for “borrowing.” If the Fed wants a positive overnight interest rate target, either the Fed or the Treasury must issue debt to drain the undesired excess reserves, or the Fed must pay interest at the target rate on them.
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Curious Reply:
May 14th, 2009 at 1:44 am
Yes, thanks for the correction Scott. So what would happen, if the fed set the interest rate at 0? Assuming continuing government deficit spending, the result would be excess $ reserves, which means inflation. To prevent inflation, the government would be left with just 1 choice: cut spending. And that is the reason why the fed will never set the rate permanently at 0. Correct?
Scott Fullwiler Reply:
May 15th, 2009 at 10:49 pm
The inflationary effect of a deficit is the same whether you sell bonds or not. In fact, if you sell bonds, this is actually more stimulative, since there is the addtional interest payment. Remember, excess reserves do not enable more bank lending than without the reserves. There is no additional stimulus from having a reserve balance circulating compared to having a bond circulating. The former is an overnight account at the Fed; the latter is a time deposit at the Fed. Also note that nobody is ever constrained in their spending by holding a Treasury instead of a deposit. The Treasury is wealth, is the most liquid security, and is the most valuable asset to use as collateral. In short, it is the size of the deficit that matters for inflation, not whether or not a bond is sold.
May 12th, 2009 at 10:03 pm
“moral hazard comes only when shareholders are bailed out, rather than assume the risks they are getting paid for.”
My local city council had the local pension funds invested with folks like vanguard and fidelity who then invested in the banks. Police, firemen, pollution control, etc etc. The devil is in the details. Sometimes too much complexity is the evil in network design that needs to be simplified.
How does a college professor in materials science finding new high grade lightweight metals to be used in mosler super cars, or a undercover drug agent stopping gangs from selling crack rock to sada and sole and mia have the time to properly investigate the bad loans that a crappy bank made? Certainly you don’t advocate not bailing out these people do you?
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May 13th, 2009 at 2:01 pm
Friends, if the rate was set to zero the fed would be working for free? A private bank working for free?
Furthermore SOMBODY recently said I did not know what you are talking about. However that post disappeared?
MACRO level economics, supply and demand of everything needed to sustain life. Bukaka sees it as a fractional reserve system controlled by the “Investor Class†with too many HUMAN MONKEYS greedily basing their status on the number of $$$ in the bank or spread sheet, with the biggest problem being the HUMAN MONKEYS who will do anything to get a bigger number. Including 911, moving jobs to other countries to exploit the weak and unorganized, playing both sides of wars and just about all other problems we see now!
No way should John Q have to take a 30 year loan for a house and pay triple back, or work 20 plus years to pay for his education.
If we need to keep lines on the earth (tribes) I like the GDP numbers controlling the worth of the currency and the profits going to help the underdeveloped and the whole system controlled by an informed public. ( Informed Public YEA RIGHT!)
Those of you who do not understand BUKAKA are stuck in the box, the acronyms before your name have put you there. Dissent? Don’t think it and do nothing, I got a new one (TMI) Too Much Indoctrination!
A lot of what is discussed here is like arguing about art
The next one who says I am the CraZy Dude is going to get a hex put on them! KIDDING!
Peace
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May 17th, 2009 at 1:52 pm
Scott: “The inflationary effect of a deficit is the same whether you sell bonds or not”
I’m having hard time understanding the above. Bonds are just another type of asset. If the government deficit spends without issuing bonds, the number of assets to invest in doesn’t change, yet the amount of $ to be invested increases (by the amount of the deficit). So we have more $ chasing the same number of assets = prices rise = inflation. No?
Scott: “excess reserves do not enable more bank lending than without the reserves”.
Agreed, I am concerned about the new excess reserves themselves (= the amount of the deficit spending).
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May 17th, 2009 at 4:01 pm
Hi, Curious
Two things.
1. There’s never a shortage of financial assets. If you are holding a deposit, but would prefer to earn interest, you can convert to a cd, for instance, or just transfer to a money market account. But, to some degree (probably not much, though), yes, there is a market supply effect from no Tsy’s; Warren and Bill Mitchell did a paper on this on CofFEE’s website a number of years ago. This is what we mean when we say bond sales are for interest rate maintenance.
2. Overall, what happens to asset prices in the broader context mostly depends upon whether the Fed pays interest on reserves. If not, then without bond sales by either the Fed or the Tsy, the overnight rate falls to zero. In that case, other rates follow to the degree there is some arbitrage with the Fed’s target rate, and then, yes, there is an increase in these financial asset prices. If the Fed pays interest on reserve balances and sets the remuneration rate equal to its target, then there may be no effect on financial asset prices, since the target rate need not change even with no bond sales.
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