Tuesday, April 19, 2011

Could the Fed make the banks go on a hiring spree?

After all, the banks are being paid by the Fed for a service... I presume.

I find it amusing to read these words from a PDF linked by the St. Louis Fed.

If the money supply were to grow at a rapid rate, the resulting increase in economic activity could cause inflation to accelerate and expectations of future inflation to increase.The Fed, however, remains confident that its programs [read QE], including incentives for banks to retain their reserves, will prevent such an outcome. For example, the Fed pays banks interest on reserves at Fed banks. If the interest rate on these reserves is higher than the return banks could receive from alternative investments (the banks’ opportunity cost), reserves will remain idle.
1. So far there has been little demand for these excess reserves. 
2. Why would banks take on more risk when they, apparently, don't believe the risk-reward of lending at such low rates is any good.
3. Free money to help Uncle Sam sounds very nice to me. I'd take it.

So it explicitly says it is paying the banks a good spread over borrowing costs in order to 'stimulate growth' (or get some $ from tax payers?).

Man... I so wish the brazilian Treasury would get rid of its US Treasuries holdings and settle all its debt in USD to get no exposure to foreign currencies. We're doomed.

St Louis Fed - Quantitative Easing Explained

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