4 ms·

Why are we even doing the dance that banks need to keep short term assets on hand to satisfy deposit outflow? Can't they just buy whatever government bonds they

Why are we even doing the dance that banks need to keep short term assets on hand to satisfy deposit outflow? Can't they just buy whatever government bonds they want (if the federal government defaults and does not honor its debt there are bigger issues than some regional bank) and give them to the Fed in exchange for freshly minted money? It's the end result in either case, but a lot of uncertainty and friction is added for some reason. Why?

ClumsyPilot 4y ago
Banks lend money to the US government so that a different branch of government can loan the money again to the banks? The whole thing sounds like a charade
- HPsquared 4y ago
  The "real" circular economy.
- inconceivable 4y ago
  wait until you realize that the deposits that first republic received last week came from the big 4 banks... which were flush from cash they received from transfers from smaller banks like first republic. we are living in financial clownworld now.
  - 29athrowaway 4y ago
    https://youtu.be/1aVYJ-krSMA?t=5 https://youtu.be/1aVYJ-krSMA?t=5
- soheil 4y ago
  By having banks buy government bonds and/or lend money to the government, they are essentially investing in the stability of the government itself. This can help build confidence in the government and the banking sector, which can contribute to overall stability. Of course, there are still real risks and challenges that exist, such as potential default by the government or problems within the banking system.
- checkcircuits 4y ago
  That's because it is a charade. The fed's entire job is basically a dependency injection in an otherwise free market. Money creation in a modern economy is literal magic and while they may claim it's tied to "metrics" these metrics are tenuous at best. Unfortunately, the clown show has been run for the last 20 years by people who do not have the country's best interests at heart. We are now reaping what was sown with the 20 years of free money to banks.
  - chii 4y ago
    > We are now reaping what was sown with the 20 years of free money to banks. This argument ignores the "black swan" events of covid, ukrainian invasion by russia, supply bottlenecks of various kinds, and trade tensions with china, all happening at the "same" time within the last 3 years.
tripletao 4y ago
Under previous policy, the Fed would lend only against the market value of an asset. The FMV of a long-term bond declines when interest rates increase, so that didn't help. This is roughly how the SVB failed. Under new policy, for the next year, the Fed will lend against the par value of certain assets purchased before the crisis. That's an undercollateralized loan, so it's a subsidy to banks that took excessive interest rate risks. Those banks are still worse off than if they hadn't taken that risk though, since the interest cost of the loan is greater than the interest paid by the asset. This policy change has no direct cost to the public if the loans are repaid. If a bank gets such a loan and then fails anyways, some losses will be socialized. https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm https://www.federalreserve.gov/newsevents/pressreleases/mone...
haileys 4y ago
> and give them to the Fed in exchange for freshly minted money? Is this not essentially QE?

ClumsyPilot 4y ago

Banks lend money to the US government so that a different branch of government can loan the money again to the banks? The whole thing sounds like a charade

HPsquared 4y ago
The "real" circular economy.
inconceivable 4y ago
wait until you realize that the deposits that first republic received last week came from the big 4 banks... which were flush from cash they received from transfers from smaller banks like first republic. we are living in financial clownworld now.
- 29athrowaway 4y ago
  https://youtu.be/1aVYJ-krSMA?t=5 https://youtu.be/1aVYJ-krSMA?t=5
soheil 4y ago
By having banks buy government bonds and/or lend money to the government, they are essentially investing in the stability of the government itself. This can help build confidence in the government and the banking sector, which can contribute to overall stability. Of course, there are still real risks and challenges that exist, such as potential default by the government or problems within the banking system.
checkcircuits 4y ago
That's because it is a charade. The fed's entire job is basically a dependency injection in an otherwise free market. Money creation in a modern economy is literal magic and while they may claim it's tied to "metrics" these metrics are tenuous at best. Unfortunately, the clown show has been run for the last 20 years by people who do not have the country's best interests at heart. We are now reaping what was sown with the 20 years of free money to banks.
- chii 4y ago
  > We are now reaping what was sown with the 20 years of free money to banks. This argument ignores the "black swan" events of covid, ukrainian invasion by russia, supply bottlenecks of various kinds, and trade tensions with china, all happening at the "same" time within the last 3 years.

tripletao 4y ago

Under previous policy, the Fed would lend only against the market value of an asset. The FMV of a long-term bond declines when interest rates increase, so that didn't help. This is roughly how the SVB failed. Under new policy, for the next year, the Fed will lend against the par value of certain assets purchased before the crisis. That's an undercollateralized loan, so it's a subsidy to banks that took excessive interest rate risks. Those banks are still worse off than if they hadn't taken that risk though, since the interest cost of the loan is greater than the interest paid by the asset. This policy change has no direct cost to the public if the loans are repaid. If a bank gets such a loan and then fails anyways, some losses will be socialized. https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm https://www.federalreserve.gov/newsevents/pressreleases/mone...

haileys 4y ago

> and give them to the Fed in exchange for freshly minted money? Is this not essentially QE?