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They didn't use them before because it would have been illegal. The Fed has mandated a 10% liquidity for all major banks. See: https://www.federalreserve.gov/m

by spsful 7y ago

They didn't use them before because it would have been illegal. The Fed has mandated a 10% liquidity for all major banks. See: https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm

toomuchtodo 7y ago
Allowing banks to draw down their reserves in their entirety isn’t going to change their behavior is my point. You need something like the US Gov’s SBA loan program or similar, to lend directly to businesses that are in jeopardy of default or failure. This is beyond the risk profile of traditional retail bank lending (although you’re probably near junk bond or hedge fund territory; at this scale though, those venues are inadequate). The Fed is attempting to inject liquidity in the wrong spot of the economy. If you’re shooting for something like “TARP for Main Street”, this is a suboptimal path based on the incentives and historical behaviors of these regulated entities. Get the money velocity back up to speed ASAP. Edit: We could’ve had the infra in place to plug into banking, credit, and IRS data for companies, to enable rapid analysis, decisioning, and funding of operating accounts in times of crisis as part of the US Treasury Dept. Perhaps next time.
- lbotos 7y ago
  > Allowing banks to draw down their reserves in their entirety isn’t going to change their behavior is my point. If you are a bank in fractional reserve banking, who had a 10% capital requirement that is now lifted, you just got 10% more money to use to make money when it is getting increasingly hard for everyone to make money. And you think banks are gonna say, "nah, we wanna stay safe, we'll just sit on our hands"? I agree with you that monetary policy is not enough, we also need fiscal policy. That said we can't say the Fed isn't trying to do their part.
  - toomuchtodo 7y ago
    I work in financial services (although that doesn’t mean you should trust my opinion any more than you otherwise might; I also do not work at a bank). I am absolutely telling you, based on my research, banks will sit on that cash and not lend it out in an appreciable amount. Did banks lend more in negative interest rate policy environments? It does not appear so based on reports from the very central banks who put those policies into place [1]. Banks want (mostly) safe returns. “Borrow at 3, lend at 6, at the golf course by 3”, as the saying goes. You need action by an institution that prioritizes rapid injections of cash to accelerate monetary velocity over conservative lending practices, and where saving the economy (and we are clearly at the precipice as indicated by how fast the Fed is moving) takes precedence over appeasing shareholders. Disclaimer: My opinions are my own, and in no way, shape, or form that of any employer past, present, or future. [1] https://www.pnc.com/insights/corporate-institutional/gain-market-insight/the-upside-down-of-negative-interest-rates.html https://www.pnc.com/insights/corporate-institutional/gain-ma...
    - toomuchtodo 7y ago
      > Exclusive: Fed is ‘throwing money in the wrong place,’ says Sheila Bair, former top banking regulator | Published: March 16, 2020 at 6:50 a.m. ET > Sheila Bair, a top U.S. banking regulator during the 2007-’08 global financial crisis, said the Federal Reserve needs to quickly shift its focus to getting credit flowing to U.S. businesses crippled by the spreading coronavirus and workers losing their jobs. > “They are throwing money in the wrong place,” Bair said of an unprecedented move by the Fed on Sunday to slash benchmark rates to zero and start a $700 billion Treasury- and mortgage-bond buying program. > “This isn’t a financial crisis — at least not yet,” she told MarketWatch on Sunday evening following the Fed’s announcement, which drops the target U.S. benchmark rate to zero and aims to shore up liquidity for banks and investors in the $15.6 trillion Treasury and $8.5 trillion agency mortgage bonds markets. > “Lowering interest rates to zero doesn’t help if businesses can’t pay their loans back and they don’t have cash flow,” she said. “We need to get help out there, especially to small businesses and people already losing their jobs.” https://www.marketwatch.com/story/exclusive-fed-is-throwing-money-in-the-wrong-place-says-sheila-bair-former-top-banking-regulator-2020-03-15 https://www.marketwatch.com/story/exclusive-fed-is-throwing-...
      - lbotos 7y ago
        Because you may be in a position to educate me, how does the fed shift it's focus to getting credit flowing? a new loan program for businesses?
        toomuchtodo 7y ago
        Ray Dalio has some suggestions, although I don't think they go far enough. You literally want to get cash into the hands of businesses and people who will spend it. https://www.linkedin.com/pulse/implications-hitting-hard-0-interest-rate-floor-ray-dalio/ https://www.linkedin.com/pulse/implications-hitting-hard-0-i...

by spsful 7y ago

toomuchtodo 7y ago

Allowing banks to draw down their reserves in their entirety isn’t going to change their behavior is my point. You need something like the US Gov’s SBA loan program or similar, to lend directly to businesses that are in jeopardy of default or failure. This is beyond the risk profile of traditional retail bank lending (although you’re probably near junk bond or hedge fund territory; at this scale though, those venues are inadequate). The Fed is attempting to inject liquidity in the wrong spot of the economy. If you’re shooting for something like “TARP for Main Street”, this is a suboptimal path based on the incentives and historical behaviors of these regulated entities. Get the money velocity back up to speed ASAP. Edit: We could’ve had the infra in place to plug into banking, credit, and IRS data for companies, to enable rapid analysis, decisioning, and funding of operating accounts in times of crisis as part of the US Treasury Dept. Perhaps next time.

lbotos 7y ago
> Allowing banks to draw down their reserves in their entirety isn’t going to change their behavior is my point. If you are a bank in fractional reserve banking, who had a 10% capital requirement that is now lifted, you just got 10% more money to use to make money when it is getting increasingly hard for everyone to make money. And you think banks are gonna say, "nah, we wanna stay safe, we'll just sit on our hands"? I agree with you that monetary policy is not enough, we also need fiscal policy. That said we can't say the Fed isn't trying to do their part.
- toomuchtodo 7y ago
  I work in financial services (although that doesn’t mean you should trust my opinion any more than you otherwise might; I also do not work at a bank). I am absolutely telling you, based on my research, banks will sit on that cash and not lend it out in an appreciable amount. Did banks lend more in negative interest rate policy environments? It does not appear so based on reports from the very central banks who put those policies into place [1]. Banks want (mostly) safe returns. “Borrow at 3, lend at 6, at the golf course by 3”, as the saying goes. You need action by an institution that prioritizes rapid injections of cash to accelerate monetary velocity over conservative lending practices, and where saving the economy (and we are clearly at the precipice as indicated by how fast the Fed is moving) takes precedence over appeasing shareholders. Disclaimer: My opinions are my own, and in no way, shape, or form that of any employer past, present, or future. [1] https://www.pnc.com/insights/corporate-institutional/gain-market-insight/the-upside-down-of-negative-interest-rates.html https://www.pnc.com/insights/corporate-institutional/gain-ma...
  - toomuchtodo 7y ago
    > Exclusive: Fed is ‘throwing money in the wrong place,’ says Sheila Bair, former top banking regulator | Published: March 16, 2020 at 6:50 a.m. ET > Sheila Bair, a top U.S. banking regulator during the 2007-’08 global financial crisis, said the Federal Reserve needs to quickly shift its focus to getting credit flowing to U.S. businesses crippled by the spreading coronavirus and workers losing their jobs. > “They are throwing money in the wrong place,” Bair said of an unprecedented move by the Fed on Sunday to slash benchmark rates to zero and start a $700 billion Treasury- and mortgage-bond buying program. > “This isn’t a financial crisis — at least not yet,” she told MarketWatch on Sunday evening following the Fed’s announcement, which drops the target U.S. benchmark rate to zero and aims to shore up liquidity for banks and investors in the $15.6 trillion Treasury and $8.5 trillion agency mortgage bonds markets. > “Lowering interest rates to zero doesn’t help if businesses can’t pay their loans back and they don’t have cash flow,” she said. “We need to get help out there, especially to small businesses and people already losing their jobs.” https://www.marketwatch.com/story/exclusive-fed-is-throwing-money-in-the-wrong-place-says-sheila-bair-former-top-banking-regulator-2020-03-15 https://www.marketwatch.com/story/exclusive-fed-is-throwing-...
    - lbotos 7y ago
      Because you may be in a position to educate me, how does the fed shift it's focus to getting credit flowing? a new loan program for businesses?
      - toomuchtodo 7y ago
        Ray Dalio has some suggestions, although I don't think they go far enough. You literally want to get cash into the hands of businesses and people who will spend it. https://www.linkedin.com/pulse/implications-hitting-hard-0-interest-rate-floor-ray-dalio/ https://www.linkedin.com/pulse/implications-hitting-hard-0-i...