There is another potential alternative, although it has never been tried. If the Fed plans to spend tens of billions of dollars buying assets, why not put the money into the system by offering the capital to banks at a negative .5%? The reasoning against this is the the Fed would be paying the banks interest on the money they borrow instead of the tradition model of the banks paying the Fed. The odd program might have two effects. The first would be to increase bank lending to business and consumers. With the Fed paying interest for bank borrowing, the risks of bank lending would drop. The other by-product is that banks could rebuild their balance sheets damaged by losses from investments like mortgage-backed securities, with capital being underwritten by the Fed. It's crazy, but it might work. Douglas A. McIntyre is an editor at 247wallst.com.
The odd program might have two effects. The first would be to increase bank lending to business and consumers. With the Fed paying interest for bank borrowing, the risks of bank lending would drop. The other by-product is that banks could rebuild their balance sheets damaged by losses from investments like mortgage-backed securities, with capital being underwritten by the Fed.
It's crazy, but it might work.
Douglas A. McIntyre is an editor at 247wallst.com.
What do you think of it ?
And if it does restart lending, why does it restart mainly the "good" lending, not the scammy lending?
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
If the focus is on building up banks income stream while engaging in lending, the direct route is for the Fed to shift from doing repo loans against finance sector crap to doing repo loans against consumer finance, car loans, and loans to small business.
But then, doing repo loans with finance sector crap was the big idea that Bernanke had that got him the chairmanship of the Fed ... helping out the productive and household sectors of the economy is not something he's shown any interest in doing. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
