Tom Paine 1949
Diamond Member
- Mar 15, 2020
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The devil is always in the details when we talk about “bailouts” and “arranged buyouts” of banks and failing corporations.
The two special Fed funds provided for recent bailouts and for borrowing to prevent regional bank runs offered to loan money to banks at very high rates (around 4.75%) which most banks don’t want and will not touch. Those that do temporarily need these primary “discount borrowing windows” will as soon as things re-stabilize very quickly pay off these debts as in the past — there is cheaper money widely available to banks in the system.
What we are seeing now is an accelerated flight of assets to larger banks, a well-recognized historic development. Most of the $17 trillion or so of U.S. bank assets are in checking accounts or savings accounts which still pay almost nothing to ordinary customers, though as customers wise up and the Fed tightening policy works its way through the system middle-class folks are becoming aware that much higher interest rates are available through Treasuries and “Brokered CDs,” or even just “internet” divisions of the biggest banks.
This is a positive development, as the goal should be to align savings closer to inflation and to increase the cost of borrowing, discouraging and not encouraging the speculative investments that have led to an “everything asset bubble” since 2008. Banks themselves finally are becoming more careful about lending — another positive, since the effect of money “printing” and “easy credit” depends not just on the amount but on the velocity of money in circulation which is related to the expected profitability of using it.
Here is a graph showing how fast the special money provided to banks (to stabilize them) by the Fed in the recent past was returned, along with some expert commentary by Wolf Richter:
***
Banks have $17 trillion in deposits. Much of it is commercial checking accounts that pay 0%. And the national average for savings accounts (Feb) is 0.35%.
A small number of banks of the 5,000 banks offer savings accounts with 3-4%. All the big banks — they hold the majority of deposits — are close to 0% with their savings account interest. Banks offer some brokered CDs to raise some cash at 5% but that’s a minuscule portion of their deposits.
As the panic settles down, you will see bank borrowing at the Fed plunge because this is A BAD DEAL FOR BANKS.
It keeps them alive, and that’s why they’re borrowing, but as soon as they can, they pay back those loans. Look at the chart, how it plunged the last two times!!!
***
In short, financial doomsday has not arrived. Powell and the Fed have been doing a reasonable job since they were surprised by the spike in inflation, which had 15 years of unsustainable easy money pressure behind it, as well of course as Covid and Covid re-opening disruptions, a war in Europe, etc.
I am hoping for a healthy big slide in the irrepressible (and deluded) stock market, and a return to the social ethic of hard work and saving, as opposed to investing in distorted and speculative financial products. The rich will remain rich. The poorest and least able to compete will remain desperate. The first priority must be for the working class, skilled workers and professionals — and the real economy — to be protected.
The two special Fed funds provided for recent bailouts and for borrowing to prevent regional bank runs offered to loan money to banks at very high rates (around 4.75%) which most banks don’t want and will not touch. Those that do temporarily need these primary “discount borrowing windows” will as soon as things re-stabilize very quickly pay off these debts as in the past — there is cheaper money widely available to banks in the system.
What we are seeing now is an accelerated flight of assets to larger banks, a well-recognized historic development. Most of the $17 trillion or so of U.S. bank assets are in checking accounts or savings accounts which still pay almost nothing to ordinary customers, though as customers wise up and the Fed tightening policy works its way through the system middle-class folks are becoming aware that much higher interest rates are available through Treasuries and “Brokered CDs,” or even just “internet” divisions of the biggest banks.
This is a positive development, as the goal should be to align savings closer to inflation and to increase the cost of borrowing, discouraging and not encouraging the speculative investments that have led to an “everything asset bubble” since 2008. Banks themselves finally are becoming more careful about lending — another positive, since the effect of money “printing” and “easy credit” depends not just on the amount but on the velocity of money in circulation which is related to the expected profitability of using it.
Here is a graph showing how fast the special money provided to banks (to stabilize them) by the Fed in the recent past was returned, along with some expert commentary by Wolf Richter:
***
Banks have $17 trillion in deposits. Much of it is commercial checking accounts that pay 0%. And the national average for savings accounts (Feb) is 0.35%.
A small number of banks of the 5,000 banks offer savings accounts with 3-4%. All the big banks — they hold the majority of deposits — are close to 0% with their savings account interest. Banks offer some brokered CDs to raise some cash at 5% but that’s a minuscule portion of their deposits.
As the panic settles down, you will see bank borrowing at the Fed plunge because this is A BAD DEAL FOR BANKS.
It keeps them alive, and that’s why they’re borrowing, but as soon as they can, they pay back those loans. Look at the chart, how it plunged the last two times!!!
***
In short, financial doomsday has not arrived. Powell and the Fed have been doing a reasonable job since they were surprised by the spike in inflation, which had 15 years of unsustainable easy money pressure behind it, as well of course as Covid and Covid re-opening disruptions, a war in Europe, etc.
I am hoping for a healthy big slide in the irrepressible (and deluded) stock market, and a return to the social ethic of hard work and saving, as opposed to investing in distorted and speculative financial products. The rich will remain rich. The poorest and least able to compete will remain desperate. The first priority must be for the working class, skilled workers and professionals — and the real economy — to be protected.
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