Reader Requests: Is the Fed Really That Stupid?

In response to my op-ed on the Federal Reserve, a reader says: You claim that banks are not lending due to non-creditworthiness of potential customers. I say they don’t lend because they really don’t have to anymore because the Fed pays them interest on their reserves. That translates to unprecedented interest spreads on the loans that they do fund, as well as unreasonably low interest rates paid to depositors, many of whom are retired and rely upon bank interest for much of their income. In addition, these super-size banks are holding onto bad mortgages and not refinancing them as they are supposed to do. They would rather foreclose or wait until the market gets better so they can make more money on them. Also, what about TARP, which was supposed to get these bad properties off the banks’ books in order to strengthen their capital financial strength? The banks kept the bad assets, and the Treasury gave them money to boot.

The Fed pays 0.25% interest on reserves. In a healthy economy, banks should have no trouble finding borrowers who will generate a higher return than 0.25%. As you said, borrowing at 0.25% from the Fed “translates to unprecedented interest spreads on the loans that they do fund.” That’s an incentive to make more loans, not fewer. The problem is finding creditworthy borrowers. Remember, banks don’t need to lend the excess reserves from the Fed if they find creditworthy borrowers. They can find cash elsewhere. Interest on excess reserves isn’t holding them back.

I completely agree with your second point, re bad mortgages, refinancing, and TARP. However, most of these problems don’t fall under the Fed’s purview. TARP was a terrible deal for taxpayers, but it was administered by the Treasury, not the Fed. It also falls outside the purview of my op-ed, which was supposed to address actions taken during the recovery, not the recession.   Continue reading “Reader Requests: Is the Fed Really That Stupid?”

Quote of the Day: William K. Black

The EU is not lending money to Ireland, Greece, and Portugal to help those nations’ citizens.  The EU is lending those nations money because if they don’t those nations and their citizens and corporations will be unable to repay their debts to banks in the core.  That will make public the fact that the core banks are actually insolvent.  When the Germans and French realize that their banks are insolvent the result will be “severe banking crises and a return to recession in the core of the eurozone.”  The core, not simply the periphery, will be in crisis. The ECB and the EU’s leadership would be happy to throw the periphery under the bus, but the EU core’s largest banks are chained to the periphery by their imprudent loans.

— William K. Black (University of Missouri-Kansas City)

Quote of the Day: Christopher Caldwell

One Oklahoma bureaucrat complains that US authorities are trying to impose a “one-size-fits-all” regulatory regime. But one man’s one-size-fits-all is another man’s equality-under-the-law. Because it minimises compliance costs, simple regulation is exactly what a rational actor in a free market ought to want. The alternative — a jumble of authorities like the one that characterised the US banking system until 2008 — promotes jurisdiction shopping, regulatory arbitrage and one-off deals with interested legislators.

— Christopher Caldwell (Financial Times)

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We’ve Only Just Begun

A lot of readers want to know what I think about the financial regulation bill that Congress passed. Unfortunately, I’ve been too busy traveling to read it or keep up with this week’s commentary. I’ll address it in more detail in the coming weeks and months. For now, the best I can do is repost the two most important columns I’ve written during the regulation debate with a brief follow-up on whether this bill addresses those issues.   Continue reading “We’ve Only Just Begun”