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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Fed on social value of interbank market

Posted by WARREN MOSLER on April 25th, 2010

Excellent! About 6 months ago I handed out my ‘proposals,’ and we have made the below point on many occasions. Looks like real progress!

>   
>   (email exchange)
>   
>   On Sun, Apr 25, 2010 at 5:43 AM, Andrea wrote:
>   
>   It seems that Fed tries hard to see value in the interbank market but
>   they are close to admit it has none?
>   

FROM DIVORCING MONEY FROM MONETARY POLICY,
For example, market participants must monitor the
creditworthiness of borrowers. If the overnight market were
substantially less active, such monitoring may not take place on
a regular basis; this in turn could make borrowing even harder
for a bank that finds itself short of funds. Such monitoring may
also play a socially valuable role in exposing banks to market
discipline. It is important to bear in mind, however, that the
market for overnight loans of reserves differs from other
markets in fundamental ways. As we discussed, reserves are not
a commodity that is physically scarce; they can be costlessly
produced by the central bank from other risk-free assets.
Moreover, there is no role for socially useful price discovery
in this market, because the central bank’s objective is to set a
particular price. Weighing the costs and benefits of a reduction
in market activity is therefore a nontrivial task and an
important area for future research.

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