by NoOneImportant » Thu Jan 09, 2014 4:16 am
John, the Fed has initiated a new lever for member banks - being tested by the NY Fed. While through the QE the Fed has purchased bonds from member banks with newly printed cash printed from the QEs. Those banks, because of Fed lending restrictions, have noting to do with that "surplus cash" but to leave it on deposit with the Fed in the form of T-bill purchases, where the Fed pays .25% for the member bank's surplus cash in the form of the purchased Treasury bills. While on the surface it appears as though the Fed is injecting large amounts of cash in to the economy, that is not in fact the case. While the Fed does indeed purchase the bonds, it then restricts what the member banks may do with the received cash. Thus member banks find themselves in the position of having to choose whether to participate in very cheap loans to the private sector that are somewhat risky, or of having to leaving the cash on deposit with the Fed at .25% per annum in the form of short term T-bills.
The "new" Fed lever provides the following restriction on member banks. Borrowers must have a 700 credit score, up from 640, the borrowers from the member banks must provide an equity of 30% down payment for all loans, and the borrowers debt to equity must be low, as defined by Fed guidelines.
The Fed has constructed an arrangement where the Fed will ostensibly purchase bonds from the member banks - QE1, QE2, and QE3 - where the member banks get "cash" from the Fed for their low grade bonds/mortgages. Because of rigid Fed lending restrictions the member banks then purchase T-bills from the Fed with their surplus cash and receive .25% interest for that surplus cash - a painfully, and historically low interest rate. The "new" cash that the member bank has received is restricted from general distribution by the Fed's lending rules - the member banks may loan that surplus cash provided by the Fed only to the very best of the universe of borrowers. What the Fed has created via its rules and lending restrictions is a situation where, logically, the only place that the member banks may place their "surplus cash" is in the form of Treasury T-bills, or with the very best of the best borrowers. Thus the lion's share of the QE cash has avoided general circulation, and the resultant economic impact of 2.5 T dollars in QE cash.
The Fed is purchasing low grade bonds from member banks, then telling the member banks that they may only loan the resultant cash to the very best of the best borrowers. The result is that the Fed is compelling member banks to choose. Members must choose - logically - to keep their surplus cash on deposit with the Fed in the form of T-bills at very low interest rates - .25%, - or they may compete for the very best of the best borrowers - the only method of so doing is to repress interest rates to the threshold of pain to attract the best of the best borrowers - the Fed objective. The member banks are structurally constrained to keep the "new cash" out of general circulation by either keeping the cash on deposit with the Fed - in the form of T-bills, - or the members must place, in limited fashion, their cash in conformance with the Fed's lending restrictions with the very best of the best borrowers. The newly created Fed cash is not entered into general circulation. As such that cash is kept on deposit with the Fed as "surplus" cash in the form of T-bills, or it is disburse to a limited number of borrowers in the form of artificially low interest rates loans, as defined by the Treasury's payment of .25%, and the Fed's lending restrictions to member banks.
Essentially the Fed has created 2.5 T in new cash, then created the rules, circumstances, and guidelines where the only logical choice the member banks may take is to give the cash to an irresponsible Treasury that is the conduit for a government spending like drunken sailors.
Without the Fed's lending restrictions on borrowing the Fed faces a prospective tidal wave of redemption of Treasury bills as member banks find borrowers willing to pay higher interest rates for available cash, and thus the member banks redeem their T-bill holdings thus forcing an adjustment of Treasury borrowing rates, and causing the cost of Treasury borrowing to balloon out of control - thus destroying the Federal Budget by increasing the cost of Federal borrowing, and causing the Federal deficit to increase dramatically. In the final analysis: instead of the government borrowing 40 cents of every dollar it spends, that number would increase, and it would increases without governmentally imposed limits, as free market market forces would move interest rates higher because of a surfiet of available cash - a condition artificially restricted by the Fed's imposed lending restrictions.
What is happening is that the Fed is restricting the T-bill interest rates, then letting the member banks decide whether to choose between the best of the best borroers - at historically unsustainable low rates, - or the member banks may keep their cash on deposit with the Fed at artificially low T- bill rates - .25% T-bill rates - to meet political ends.
John, the Fed has initiated a new lever for member banks - being tested by the NY Fed. While through the QE the Fed has purchased bonds from member banks with newly printed cash printed from the QEs. Those banks, because of Fed lending restrictions, have noting to do with that "surplus cash" but to leave it on deposit with the Fed in the form of T-bill purchases, where the Fed pays .25% for the member bank's surplus cash in the form of the purchased Treasury bills. While on the surface it appears as though the Fed is injecting large amounts of cash in to the economy, that is not in fact the case. While the Fed does indeed purchase the bonds, it then restricts what the member banks may do with the received cash. Thus member banks find themselves in the position of having to choose whether to participate in very cheap loans to the private sector that are somewhat risky, or of having to leaving the cash on deposit with the Fed at .25% per annum in the form of short term T-bills.
The "new" Fed lever provides the following restriction on member banks. Borrowers must have a 700 credit score, up from 640, the borrowers from the member banks must provide an equity of 30% down payment for all loans, and the borrowers debt to equity must be low, as defined by Fed guidelines.
The Fed has constructed an arrangement where the Fed will ostensibly purchase bonds from the member banks - QE1, QE2, and QE3 - where the member banks get "cash" from the Fed for their low grade bonds/mortgages. Because of rigid Fed lending restrictions the member banks then purchase T-bills from the Fed with their surplus cash and receive .25% interest for that surplus cash - a painfully, and historically low interest rate. The "new" cash that the member bank has received is restricted from general distribution by the Fed's lending rules - the member banks may loan that surplus cash provided by the Fed only to the very best of the universe of borrowers. What the Fed has created via its rules and lending restrictions is a situation where, logically, the only place that the member banks may place their "surplus cash" is in the form of Treasury T-bills, or with the very best of the best borrowers. Thus the lion's share of the QE cash has avoided general circulation, and the resultant economic impact of 2.5 T dollars in QE cash.
The Fed is purchasing low grade bonds from member banks, then telling the member banks that they may only loan the resultant cash to the very best of the best borrowers. The result is that the Fed is compelling member banks to choose. Members must choose - logically - to keep their surplus cash on deposit with the Fed in the form of T-bills at very low interest rates - .25%, - or they may compete for the very best of the best borrowers - the only method of so doing is to repress interest rates to the threshold of pain to attract the best of the best borrowers - the Fed objective. The member banks are structurally constrained to keep the "new cash" out of general circulation by either keeping the cash on deposit with the Fed - in the form of T-bills, - or the members must place, in limited fashion, their cash in conformance with the Fed's lending restrictions with the very best of the best borrowers. The newly created Fed cash is not entered into general circulation. As such that cash is kept on deposit with the Fed as "surplus" cash in the form of T-bills, or it is disburse to a limited number of borrowers in the form of artificially low interest rates loans, as defined by the Treasury's payment of .25%, and the Fed's lending restrictions to member banks.
Essentially the Fed has created 2.5 T in new cash, then created the rules, circumstances, and guidelines where the only logical choice the member banks may take is to give the cash to an irresponsible Treasury that is the conduit for a government spending like drunken sailors.
Without the Fed's lending restrictions on borrowing the Fed faces a prospective tidal wave of redemption of Treasury bills as member banks find borrowers willing to pay higher interest rates for available cash, and thus the member banks redeem their T-bill holdings thus forcing an adjustment of Treasury borrowing rates, and causing the cost of Treasury borrowing to balloon out of control - thus destroying the Federal Budget by increasing the cost of Federal borrowing, and causing the Federal deficit to increase dramatically. In the final analysis: instead of the government borrowing 40 cents of every dollar it spends, that number would increase, and it would increases without governmentally imposed limits, as free market market forces would move interest rates higher because of a surfiet of available cash - a condition artificially restricted by the Fed's imposed lending restrictions.
What is happening is that the Fed is restricting the T-bill interest rates, then letting the member banks decide whether to choose between the best of the best borroers - at historically unsustainable low rates, - or the member banks may keep their cash on deposit with the Fed at artificially low T- bill rates - .25% T-bill rates - to meet political ends.