Comments on: More Bad News- Professional Edition Fed Report http://wallstreetexaminer.com/2008/11/07/more-bad-news-professional-edition-fed-report/ Be prepared. Stay ahead of the herd. Sat, 11 Feb 2012 07:42:42 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: tv http://wallstreetexaminer.com/2008/11/07/more-bad-news-professional-edition-fed-report/comment-page-1/#comment-93776 tv Sun, 09 Nov 2008 13:58:12 +0000 http://wallstreetexaminer.com/?p=3340#comment-93776 Let's talk about this a second. The EFF, or effective Fed Funds Rate, has traded at 0.23% on average since shortly after the target was lowered to 1%. This is a spread of 75 basis points, roughly. The "discount" on deposited reserves was 35 basis points. Therefore, were I a bank I could borrow as much as I wanted at 25 basis points and deposit it as "excess reserves" at The Fed (instead of lending against it) and earn an absolutely risk-free return of 40 basis points. Who pays the 40 basis points? You, the taxpayer. What is the change they proposed likely to actually do? Increase the EFF? Probably not. More likely it will increase the amount you, the taxpayer, pay banks to 75 basis points. This is called a "liquidity trap" and is one of the problems with allowing The Fed to pay interest on reserves - they have a direct line to the Treasury for that money, which of course means that you, the taxpayer, are the one who ends up paying. Did Congress object to funneling off yet more of your money to the banks where they could (and are) stashing those funds with The Fed instead of lending them out? Oh, Chris Dodd and Barney Frank have made much noise about the Tarp, but have either of them made noise about rescinding the ability of The Fed to pay interest on reserves? Nope, because, in all probability, they don't understand it - and if they do, they sure as hell are counting on you not understanding how all this works. Never mind that The Fed has found itself powerless to impact the real economy. Remember that Ben Bernanke, back in September of last year, said that he was lowering interest rates and that monetary policy had a "transmission delay" of six to twelve months. http://market-ticker.denninger.net/archives/651-Yes-We-Will-Have-A-Depression.html Let’s talk about this a second. The EFF, or effective Fed Funds Rate, has traded at 0.23% on average since shortly after the target was lowered to 1%. This is a spread of 75 basis points, roughly.

The “discount” on deposited reserves was 35 basis points.

Therefore, were I a bank I could borrow as much as I wanted at 25 basis points and deposit it as “excess reserves” at The Fed (instead of lending against it) and earn an absolutely risk-free return of 40 basis points.

Who pays the 40 basis points? You, the taxpayer.

What is the change they proposed likely to actually do? Increase the EFF? Probably not. More likely it will increase the amount you, the taxpayer, pay banks to 75 basis points.

This is called a “liquidity trap” and is one of the problems with allowing The Fed to pay interest on reserves – they have a direct line to the Treasury for that money, which of course means that you, the taxpayer, are the one who ends up paying.

Did Congress object to funneling off yet more of your money to the banks where they could (and are) stashing those funds with The Fed instead of lending them out? Oh, Chris Dodd and Barney Frank have made much noise about the Tarp, but have either of them made noise about rescinding the ability of The Fed to pay interest on reserves?

Nope, because, in all probability, they don’t understand it – and if they do, they sure as hell are counting on you not understanding how all this works.

Never mind that The Fed has found itself powerless to impact the real economy. Remember that Ben Bernanke, back in September of last year, said that he was lowering interest rates and that monetary policy had a “transmission delay” of six to twelve months.

http://market-ticker.denninger.net/archives/651-Yes-We-Will-Have-A-Depression.html

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