Oct

7

The fed's quantitative easing policy per se is nothing but bad for banks.

1. QE forces the member banks to have excess reserves as assets on their balance sheet. These balances earn only .25% lowing the banking system's net interest margin, return on assets, and return on equity

2. To maintain high enough average net interest margins (that include the holding of excess reserves) to attract capital, banks tend to charge a bit more for loans to business and consumers, which causes more borrowers to go direct to credit markets and private lenders in general. In other words, qe tends to support disintermediation, as those who can avoid the banks.

3. QE lowers interest income paid by government to the economy, as per the $100 billion of fed profits turned over to treasury last year. Lower interest income makes the economy that much less credit worthy, thereby lowering its ability to borrow and service bank loans.

Bottom line: QE is a tax on the economy. And QE is functionally the same as the TSY not having issued the securities in the first place.

However I favor, for example, the TSY not issuing anything longer than 3 mo bills, which is functionally 'QE max'

Yes, it reduces aggregate demand.

But, for example, I'd rather get my aggregate demand, for a given size government, from lower taxes than from the TSY or Fed paying interest. But that's just me. 

Rudy Hauser writes: 

The fact that banks hold so much in excess reserves is because they apparently prefer the returns over those of equally short-term T bills. They appear to want to hold such safe short-term assets for whatever reason. One would expect them to want to earn higher returns at some point. Hence the concern as to whether such actions could lead to a drastic reduction in excess reserves and explosions in M1 and M2, with all its inflation risk. The Fed could try to offset this but whether the will to take necessary action will be there or the ability is somewhat questionable. But that does not appear to be a risk for the immediate future.


Comments

WordPress database error: [Table './dailyspeculations_com_@002d_dailywordpress/wp_comments' is marked as crashed and last (automatic?) repair failed]
SELECT * FROM wp_comments WHERE comment_post_ID = '8723' AND comment_approved = '1' ORDER BY comment_date

Name

Email

Website

Speak your mind

Archives

Resources & Links

Search