Posted on 11/28/2013 7:36:55 AM PST by Kaslin
In the wake of all the misguided pleas for negative interest rates in Europe (hoping to get banks to lend), comes news US banks warn Fed interest cut could force them to charge depositors.
Leading US banks have warned that they could start charging companies and consumers for deposits if the US Federal Reserve cuts the interest it pays on bank reserves.
Depositors already have to cope with near-zero interest rates, but paying just to leave money in the bank would be highly unusual and unwelcome for companies and households.
The warning by bank executives highlights the dangers of one strategy the Fed could use to offset an eventual “tapering” of the $85bn a month in asset purchases that have fuelled global financial markets for the last year.
Minutes of the Fed’s October meeting published last week showed it was heading towards a taper in the coming months – perhaps as soon as December – but wants to find a different way to add stimulus at the same time. “Most” officials thought a cut in the interest on bank reserves was an option worth considering.
Executives at two of the top five US banks said a cut in the 0.25 per cent rate of interest on the $2.4tn in reserves they hold at the Fed would lead them to pass on the cost to depositors.
Banks say they may have to charge because taking in deposits is not free: they have to pay premiums of a few basis points to a US government insurance programme.
“Right now you can at least break even from a revenue perspective,” said one executive, adding that a rate cut by the Fed “would turn it into negative revenue – banks would be disincentivised to take deposits and potentially charge for them”.
Other bankers said that a move to negative rates would not only trim margins but could backfire for banks and the system as a whole, as it would incentivise treasury managers to find higher-yielding, riskier assets.
About half of the reserves come from non-US banks that do not have to pay the deposit insurance fee. Their favourite manoeuvre is to take deposits from money market funds and park them overnight at the Fed, earning millions of dollars risk-free. Cutting the interest on reserves would stop that.
Excess Reserves
Free Money Math
The Fed pays .25% interest on excess reserves.
A quarter of a percent on $2.4 trillion happens to be $6,000,000,000 (six billion) annually.
Time for Banks to Be Banks, Not Hedge Funds or Slush Funds
Printing money that just sits overnight at the Fed allowing banks to make risk-free profits on $2.4 trillion in excess reserves is of course ridiculous.
It is also ludicrous for banks to complain about the take-away of free money that it should not be getting in the first place.
The Fed has so distorted the economy that no true pricing mechanism exists on anything.
Should banks feel the need to charge depositors interest on deposits, then so be it. That's the way it should be in the first place.
100% Gold Backed Dollar
In a true free market economy, with a 100% gold-backed dollar (where one dollar represented a fixed amount of gold, as opposed to a fixed price of gold), banks would of course charge a fee for safekeeping and other services.
The closer we get to that model the better, regardless of complaints by banks or others.
Notice the emphasis on safekeeping.
A 100% gold backed dollar would not stop lending. It would stop fractional reserve lending, lending of money in demand accounts, and lending of money for greater terms than the bank has use of funds.
Banks could not lend money available on demand (checking accounts), but they could lend money in interest bearing accounts such as CDs, for the term of the CD.
Yep...
And what about us seniors, who are forced by the SSA to have our checks direct deposited?
Will we be charged too? This will be a real low blow.
The last thing we want is a gold back dollar. Gold is easily manipulated. It also doesn’t grow as fast as the population or the supply of goods in the economy which leads to deflation and causes deflationary depressions.
The banks are complaining and threatening because it’s in their interest to do so. If the FED does cut the rate, the banks will not charge depositors, they will find other investments.
Unfortunately good investements are in short supply, because our government trade rules still favor off-shoring industries to foreign countries. We need to raise the import tariffs and make investing in American companies a good investments again.
No, eliminate the corporate tax and cut regulation. That would bring back jobs. Higher tariffs would just make our products less competitive.
there's a difference between fiat money and BORROWED fiat money... the dollar should be created and backed by the USA, not simply borrowed from the Fed, that is insane
Higher tariffs don’t make our products less competitive, they make them more competitive. If foreign competitors can’t sell cheaply into our market, then our companies gain marketshare and become more competitive.
You can lower the corporate taxes by the amount you raise tariffs. But you could eliminate all taxes and all regulations and you still can’t compete with cheap overseas labor.
There is no reason we should let communist China influence our wage levels and employment levels in America.
Higher tariffs don’t make our products less competitive, they make them more competitive. If foreign competitors can’t sell cheaply into our market, then our companies gain marketshare and become more competitive.
You can lower the corporate taxes by the amount you raise tariffs. But you could eliminate all taxes and all regulations and you still can’t compete with cheap overseas labor.
There is no reason we should let communist China influence our wage levels and employment levels in America.
The only deflation that causes deflationary depressions is that which is caused by government-backed central banks who pump up the money supply artificially and then suddenly yank it away.
The deflation caused by a growing economy and a stable currency base is beneficial. For example, between 1873 and 1913 [which is when the Fed was formed], on the classical gold standard, deflation averaged around 1%/year and the American economy grew as it never had before and never has since.
And it was real growth based on real interest rates that were formed by matching the pool of saved funds with the demand for borrowed capital. It was not a "bubble" economy created by Fed-created paper dollars.
The Keynesian fears of that type of deflation are groundless with no history to back them up whatsoever.
“Higher tariffs don’t make our products less competitive, they make them more competitive. If foreign competitors can’t sell cheaply into our market, then our companies gain marketshare and become more competitive.”
Tariffs on imported goods gets tariffs put on our exported goods. Many products we buy today are nolonger made by anyone in this country. Tariffs would destroy the economy.
The Fed’s acting like the Dept. of Agriculture; buying “surplus” assets to buoy prices.
If the banks lack the capital to lend, lowering rates won't help lending.
Printing money that just sits overnight at the Fed allowing banks to make risk-free profits on $2.4 trillion in excess reserves is of course ridiculous.
No kidding. The banks used to hold guaranteed bonds yielding 2%-4%, before the Fed gave them cash yielding 0.25%.
In a true free market economy, with a 100% gold-backed dollar (where one dollar represented a fixed amount of gold, as opposed to a fixed price of gold),
A fixed amount of gold per dollar is a fixed price of gold.
A 100% gold backed dollar would not stop lending. It would stop fractional reserve lending
Banks took and lent deposits (that's all fractional reserve banking means) under our gold standard.
Keynes’ influence extends to the right as well as the left. Nixon said that we’re all Keynesians now, and it is the only economics taught at most schools. Its influence is pervasive and accepted widely as common sense.
In Bizarro World, maybe. lol
You can lower the corporate taxes by the amount you raise tariffs. But you could eliminate all taxes and all regulations and you still can’t compete with cheap overseas labor.
Labor is a small part of the cost of a product. Taxes and regulation are the job killers.
There is no reason we should let communist China influence our wage levels and employment levels in America.
China has nothing to do with wage levels and employment levels. China was here throughout our history and had no effect on us until we started killing ourselves with high taxes and regulation. It's our own laws that bring us down, by design by the socialists and communists of our own country emboldened by Wilson and FDR.
“Tariffs on imported goods gets tariffs put on our exported goods.”
China already has high tariffs on our goods.
According to the bls, Labor still accounts for 30% of the product costs of the manufacturijg we have left. The industries with really high manufacturing costs have long since been outsourced.
And even if you were right that it was taxes and regulations, that would also be a reason to raise the import tariffs. You aren’t right, I’ve crunched the numbers. But even so foreign manufactures pay much less tax than our domestic producers. At a minimum we should raise the import tariffs until foreigners are paying taxes equal to domestic producers.
At a minimum we should cut domestic taxes until domestic producers are paying taxes equal to or lower foreigner producers.
Thus in the 1930s, as France's central bank accumulated gold without issuing new currency, that gold was effectively withdrawn from the monetary base of the global economy, This aggravated the ongoing deflation of the Great Depression and deepened and extended its harms.
Similarly, Imperial China's policy of massive exports to the West while they accumulated gold caused such a loss of gold for Western nations and ensuing deflationary pressures that England and her European allies demanded commercial concessions from China in order to sell goods and thereby earn gold back from China. That led to the Opium Wars and the forced ceding of territories in China to European powers for trading concessions.
Moreover, even a gold backed dollar can be manipulated, as Fisk and Gould proved when they shorted gold and ran the market price up to ruinous levels. The US financial system seized up and many were ruined on what became known as "Black Friday," September 24, 1869. Only the announcement of a massive gold sale by the US government broke the panic and restored normal market function. In effect, President Grant and the US government manipulated the price of gold in order to counter the manipulations of Fisk and Gould.
Thus, contrary to the belief of many gold bugs, a gold standard is not a mechanism that can run by itself based solely on free markets. To the contrary, even a gold standard requires international coordination of the flow of gold and of monetary and trade polices, also a war or two from time to time, and that governments intervene in the gold market in order to counter destructive manipulations.
Eliminate the corporate tax and deregulate, and the explosion in jobs and profits should makes tariffs not even come into the mind of the economic illiterate whose shortsighted minds think that tariffs are good.
Suits me fine if my bank starts charging me to borrow my money from me. I need a good excuse to pull most of my cash out of the system anyway.
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