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Deposit Outflows Shine Light on Fed Program That Pays Money-Market Funds
- greenyoda 4y agoArchive without paywall: https://archive.ph/V8zPV https://archive.ph/V8zPV
- spullara 4y agoI think it is a terrible that most retail bankers are getting basically no interest in their bank account while the banks are earning nearly 5%. If you are too big to fail you should also have a minimum interest rate for deposits that tracks the federal reserve rate. Specifically, this should be regulated more tightly: Bank of America Advantage Savings† Standard Pricing Account Balance Rate % APY % Less than $2,500 0.01% 0.01% $2,500 and over 0.01% 0.01%
- JKCalhoun 4y agoI have an eTrade savings account making 3.75% (I know there are better out there now). But they've emailed to actively solicit me to move money from other banks into my eTrade savings. Sounds like Bank of America (and Wells Fargo, etc.) are going to see cash moving out of their banks if they keep up the BS low-interest rates.
- ghaff 4y agoWe seem to have this bifurcation between banks and brokerages chasing people who want their "cash" to earn a reasonable return given current interest rates and banks that are fine with basically paying nothing to all the people just leaving in money by default at near-zero returns. I've kept my current bank for various reasons but I'm much more aware of sweeping excess cash into my brokerage account.
- all2 4y agoWealth front cash accounts net up to 4.8%.
- gresrun 4y agoCurrently, cash accounts get 4.30%[0] [0] https://www.wealthfront.com/blog/why-is-wealthfront-cash-account-apy-so-high https://www.wealthfront.com/blog/why-is-wealthfront-cash-acc...
- deleted 4y ago[deleted]
- jjoonathan 4y agoWhenever we stimulate the economy, economists trip over each other to explain how giving money to poor people has high monetary velocity and causes maximum inflation, so instead we should give the stimulus to rich people. When we want to rein in inflation by paying people to save, I hear a thundering silence on the prospect of preferentially tackling the highest velocity money to obtain the most inflation control per dollar. Instead, we let banks get away with this (see parent post) and focus on paying rich people to save, when by the previous logic we ought to be doing the exact opposite. Hmmmmmm. It almost feels like the driving force here isn't good stewardship but rather the self-interest of well-heeled economic forces.
- ptero 4y agoIt is hard to come up with a setup where paying poor people takes that money to savings (i.e., gets it out of the circulation). I am not saying paying poor folks is always a bad idea, I just fail to see a single practical approach where this will lead to a reduction in M2. My 2c.
- jjoonathan 4y agoEncouraging banks to not stiff uninformed retail would be a good start (see: grandparent comment). Capped personal savings instruments would be the next step (see: I-Bonds).
- toast0 4y agoYou missed the whole idea "paying poor people to save" If you, say, give people $100 in a year if they keep $1000 on deposit for the whole year, you'd be paying them to save. Sure, the poorer people are going to go out and spend that $100 when it comes in. And if there's no new incentive to keep the $1000 in savings, they may likely spend that too. And you'd need to limit it to one offer per natural person, etc, or people with access to lots of money would endeavor to make many $1000 accounts to get the 2x market rate interest I made up. Maybe $1000 is too much to ask poor people for, but you could scale it down. If you do it right, you get both the policy goal of reducing velocity of money, because you're getting people to save rather than spend some money, and you also get the typical policy goal of distributing money to the poor because even if everyone can get this $100, it's more impactful to the poorer. Or you could do a savings account linked to a lottery. Every $1 in savings up to $X gets you a ticket, if the bank earns about the federal funds rate on the deposit, give half to the individual depositors, and pool the other half to share among the lottery winners. Might be more 'exciting' for some people and encourage more savings that way.
- xnx 4y agoIt seems like that is the retail bankers' choice to take a low rate. Viobank money market has 4.77% interest currently.
- roenxi 4y agoThere is no reliable process for anyone to work out what a proper rate of interest should be. The best policy is to break banks that are "too big to fail" up until they aren't that big any more. And then stop giving them free money. Pooling huge amounts of resources under the control of people who don't know how to manage it is pure waste, for no good reason. Giving them money on autopilot is even worse. And the whole idea of the federal reserve setting interest rates is bizarre, why is this market of all markets is the one where people want to try central planning? It is the perfect time to try a free market based approach. The US has been fighting the market on the price of money for decades and it is just putting them in a worse and worse spot. Was the fall of the Soviet Union not enough to convince people that economic central planning is a mistake? What on earth will it take.
- deleted 4y ago[deleted]
- mise_en_place 4y agoThey can only offer that because their long term 10Y, 30Y treasuries bought back during ZIRP yield around the same. BofA has the highest losses[0] iirc, out of all the banks, with their long term treasury holdings. Edit: linking article (I found it in a spreadsheet passed around Twitter at the time) [0] https://seekingalpha.com/article/4586797-list-of-banks-paper-losses-debt-securities-holdings https://seekingalpha.com/article/4586797-list-of-banks-paper...
- loeg 4y ago> They can only offer that because their long term 10Y, 30Y treasuries bought back during ZIRP yield around the same. I don’t think this explanation is plausible. 10-30 year bonds bought during 2020-2022 did not offer 5% yields. They were below 2.5% (30yr) and below 2% (10yr). Hence the “Zero” in ZIRP. Edit: I read the comment wrong but it’s still nonsensical the other way. ZIRP era bonds are already worth less. Banks can offer much closer to the ~5% safe rate than most are. Depositors are just largely insensitive to rates. The concept is called “deposit beta.”
- mise_en_place 4y agoWhy would they offer 5%? Deposits effectively form a credit spread between the risk free rate (treasury bond) and what the bank pays depositors. Each additional basis point is netted to the bank as profit no? For example, the yield spread between a 2Y treasury bond w/ a coupon @ 4.25% and a savings acct APY @ 0.01% would be 4.24%.
- bagacrap 4y ago
- lotsofpulp 4y agoThere are a ton of banks offering 4%+. That people do not want to do the 5min of work of signing up for an account online is their choice. https://www.investopedia.com/best-high-yield-savings-accounts-4770633 https://www.investopedia.com/best-high-yield-savings-account...
- deleted 4y ago[deleted]
- loeg 4y agoThere are literally two obscure banks at that link offering savings accounts over 4. I would not call that “tons.” There are a ton offering over 3, sure. Or over 4 if you lock it up in a CD for a few months. Money markets and T-bills are yielding in the 4.7 range. Some <12 month CDs quote 5% or better.
- cowsandmilk 4y agoYou stopped at the ads. Scroll down and there’s a text based list with many more including 3 banks paying 5.00% or better.
- lotsofpulp 4y agoIt is an ad laden link. Here is a better one: https://www.doctorofcredit.com/high-interest-savings-to-get/ https://www.doctorofcredit.com/high-interest-savings-to-get/ CIT savings connect is 4.5% with no BS, and it is not obscure. https://www.cit.com/cit-bank/bank/savings/savings-connect-account https://www.cit.com/cit-bank/bank/savings/savings-connect-ac...
- loeg 4y agoQuite a few of the Doctor of Credit links are MM, not Savings, for what that's worth. Several savings offerings above 4% but I would argue mostly at small banks you've never heard of. Similarly, I've never heard of CIT Bank -- they appear to be a small regional bank in the bay area.
- nytesky 4y agoI thought the intention was for Fed to slow economy, and the flows locked up in this program would be doing that rather than being lent out. What is issue?
- drexlspivey 4y agoThe issue is that people are moving their deposits out of banks and banks are facing liquidity issues.
- zie 4y agoThat's the Bank's problem. They know exactly why everyone is running to MMF's. Banks can fix it whenever they want, by being less greedy. So far they don't seem very motivated. Banks provide us with insurance against our future liquidity risk, up to the $250k or so FDIC limit. MMF's do not have that same level of insurance.
- kasey_junk 4y agoBank a&l regulations are more strict than money market funds.
- zie 4y agoExactly.
- bagacrap 4y agoYes those greedy banks that are selfishly trying not to go out of business
- zie 4y agoBanks arguably still serve a purpose, but when most risk is externalized by the govt, the incentive for banks is to let the govt take the risk for you, leading to things like SVB. The govt should not take the risk away from being an equity shareholder in a bank, that's wrong. I'm fine with them taking the risk away from customers of the bank, that's what FDIC is all about. Most customer money in banks is not FDIC insured anymore and that's a problem. Perhaps $250k/account is not enough insurance these days, but that's a different discussion If banks can't survive, that's the equity shareholders problem, just like any other business. What happened with CS, when their govt decided to bail out the equity shareholders makes me very unhappy. The equity shareholders knew the reputation of CS was trash, and continued for decades to ride it further down the drain. They deserved to get flushed for having decades to fix the problem and refusing.
- spaceman_2020 4y agoDoes anyone really think they can wrangle themselves out of this mess and get back to a "normal" deficit and balance sheet? Everything they do feels like duct tape.
- coffeebeqn 4y agoIt is duct tape. The world economy keeps getting into states it’s never been in before. They can’t pull up the manual for the current state of the world and apply the steps
- ProjectArcturis 4y agoThis comment is true, but also you could have said the same thing any time in the last 40 years and it would have been true then too.
- rybosworld 4y agoThe problem is policy makers don't do anything until the system breaks. We can all see that the train is veering off the tracks but parliament, senators, prime ministers, etc. don't fix things before they break. The Fed and other central banks are fairly limited in what they can do. Adjusting interest rates up and down is like adjusting the water levels of the ocean. It has broad effects when what we probably need are lots of smaller, targeted actions, like tax reform. That said, the central banks are a huge part of the problem because they also tend to act way too late. We should never have had 0% interest rates for as long as we did.
- amerkhalid 4y ago> The problem is policy makers don't do anything until the system breaks. This is off-topic but it reminds me of a conversation with my plumber. I tend to fix things before they are broken. It seems that this would avoid catastrophe. I have used same plumber for almost 10 years and apparently I had been calling him prematurely for many minor issues. He was, of course, happy to take care of those issues. Finally, after 10 years or so, we are friends enough where he told me that I should wait a lot longer before calling him. Basically, if I am not panicking and begging him to come over within 24 hours then I should wait. Even with potential water damage, I would have saved money overall. I don’t know how to calculate this but maybe it is cheaper sometimes to fix a catastrophe than to preventively fix something.
- SilasX 4y agoDespite the title, it looks like a lot of the focus of the article is on the money flow out of banks and into MMFs, which puts a lot of stress on banks that (like SVB) have too much of their assets in long-term bonds that they want to hold to maturity, but can't, if there are too many withdrawals. So I thought I'd point out of a recent HN discussion of a Financial Times article about that: https://news.ycombinator.com/item?id=35316449 https://news.ycombinator.com/item?id=35316449
- FooBarBizBazz 4y agoFirst -- I don't get this distinction between "banks" and "MMFs". MMFs hold various bank securities, usually, right? If "banks are failing", why would MMFs be any better, except for diversification? Second -- this talk about "MMFs" doesn't distinguish between different kinds of MMFs. Some hold Treasuries. Others hold other Treasury obligations, or government debts. Most hold stuff from banks. How can you generalize across all these? Third -- how can an ordinary person get the repo rate? Are there funds full of only these agreements? That do nothing but roll them?