More QE Madness: Former Fed Vice Chairman Gives "GO" Signal To NEGATIVE Interest on Bank Reserves

By Dr. Pitchfork

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Will the Fed begin paying negative interest on reserves?  Well, not just yet, but that's one of the options Bernanke has left, says Fed apologist Alan Blinder:

In October 2008, the Fed acquired the power to pay interest on the balances that banks hold on reserve at the Fed...

So the third easing option is to cut the interest rate on reserves in order to induce bankers to disgorge some of them. Unfortunately, going from 25 basis points to zero is not much. But why stop there? How about minus 25 basis points? That may sound crazy, but central bank balances can pay negative rates of interest. It's happened.

Charging 25 basis points for storage should get banks sending money elsewhere. The question is where.  (from the Wall St. Journal, "The Fed is Running Low on Ammo")

Where, indeed.  Likely it will go into things like gold, oil, or longer-dated Treasuries, but it sure as hell won't help the real economy in the form of credit for small businesses.  Bank balance sheets are still riddled with non-performing assets, and loan loss provisions have been delusionally inadequate.  (Thanks, FASB.)  The banks wouldn't (and couldn't) increase lending without some sort of guarantee from Uncle Ben.  And surely they would never do that...

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Read Mish's take-down of Blinder's recommendations: 

Former Fed Vice Chairman vs. Mish:  Is the Fed Out of Ammo?

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Gary North called this months ago:  Negative Interest Rates

Comments

[DailyBail]

Just finished reading through everything...the Gary North column is really, really good...

[DailyBail]

http://www.lewrockwell.com/north/north758.html

The FED can get the banks lending and consumers borrowing by imposing negative interest rates in the one sector of the economy that it legally controls. It can offer banks a negative interest rate on their excess reserves.

Banks are holding about $700 billion in excess reserves at the FED these days. They are being paid the federal funds rate, i.e., the rate that banks charge each other for overnight loans. But banks are not borrowing overnight money these days. Why not? Because overnight loans were used to keep banks from falling below their legal reserve requirement limit. These days, banks are not lending. They are not flirting with the legal reserve limit. Instead, they are sending their money to the FED for safekeeping. The FED pays them just above zero.

Sound familiar? Think "storage fee." Bankers are terrified of this economy. They don't want to lose any more money. So, they give it to the FED for safe handling.

The FED can get banks lending again simply by charging banks a storage fee on their excess reserves. Put differently, the FED pays negative rates. At some point – probably around 1% – the banks will pull their money out of their excess reserves account and lend it to the Treasury at 0.1%. That's a better rate than negative 1%.

There is no problem with getting banks to lend – nothing that a 1% negative interest rate would not cure in 24 hours. If I am wrong, then the FED can hike the fee to 2%.

The FED's problem is this: as soon as the banks pull out their money and start lending, the fractional reserve process takes over. The doubling of the FED's monetary base, September to December, 2008, will lead to a doubling of M1 and a move of the M1 money multiplier into positive territory.

We would get mass inflation, then hyper-inflation. The FED has no intention of getting either one. So, it pays banks 0.1% on their excess reserves, leaving Keynesians to get all in a dither over the liquidity trap and zero-bound interest rates.

[John P]

Great picture. Charging interest on reserves as opposed to paying interest would be another way to force banks into riskier investments. But banks will instead buy the riskiest of all assets, US Treasury securities. A blissful circle jerk among friends.

[Dr. Pitchfork]

Good point, John P. Glad you liked the Ernest T.

[DailyBail]

More Debate on QE

http://www.nakedcapitalism.com/2010/08/more-debate-on-qe.html

Yves Smith's thoughts...she is too open to the idea in my view...

[S. Gompers]

I like Ernest better throwing rocks, I hope he hasn't sold out, LOL. Good piece Dr. Pitchfork, but there is a better way. End the FED, and return to our Constitutional right to print our own money.

http://www.silverbearcafe.com/private/08.10/oz.html

We have done it before very successfully. All bubbles and bursts have been engineered by central banks.



" Those who are opposed to this proposition tell us that the issue of paper money is a function of the bank, and that the Government ought to go out of the banking business. I stand with Jefferson rather than with them, and tell them, as he did, that the issue of money is a function of government, and that the banks ought to go out of the governing business."

William Jennings Bryan


"It is absurd to say that our country
Can issue $30 million in bonds
And not $30 million in currency.
Both are promises to pay
But one fattens the usurers
And the other helps the people.”

Thomas Edison