Anyone see a flaw in this?
One thing I see is that it’s one more expense tossed on us, paying that interest.
Another is that it’s a crooked scheme once again to benefit only the banks. Why do the banks borrow money at 0% from the gov, then give it right back to the the gov to get 2% or whatever?
The q I see is, given that they messed up by giving the money to the banks in the first place, is that the best [or only] way out of it?
Of course they could just make a law, taking the money back by force, like they do so many times to everyone else.
This is akin to something I’ve been pondering for a few days now. US banks are currently holding how much money at the FED? Ten trillions? More? If even a fifth of that hits the real world it’s goodbye Mr US dollar. But what if that money was used to buy US government debt? Banks get a better yield and clean their “debt” with Uncle Sam, the US government can continue spend like crazy in a mildly inflationary scenario (mildly rising prices can always be blamed on the Chinese or the Arabs) and even lessen its dependence on foreign bonds buyers like China and Russia. That would allow a few extra years of keeping the world on suspended animation until Bernanke and Obama can retire quietly. If the Resources War doesn’t break out first of course.
So problem one. How can they NOT inflate?
Problem two: banks will park assets at the Fed and loan to the government instead of the private sector. Kind of hard to collect taxes to pay for all this crap when the only economic activity going on is government boondoggles.
My prediction is that the Fed/Treasury will regulate how much of bank assets should be with the Fed, loaned to the gov, etc. Government will centrally plan the allocation of capital in the US and we are f***ed.
Peter Schiff has a word or two about this, at about the 6 minute mark:
The Federal Reserve is pretty confusing, and I think it does it purposefully. At first, Ben Bernanke said that worries of inflation should be juxtaposed with the fact that “lending is low” (which, is not completely correct, given the money being funneled through investment banks to investors in securities and commodities). Now, inflation may really be an issue, so the Federal Reserve is offering interest-bearing term deposits, which are basically time deposits at the central bank, meaning that unless we’re missing some details, the money supply will actually be greater when the time deposit contract has expired (because the bank now gains that interest). To actually be lucrative, this interest rate has to be greater than current negative interest rates, as well (which, will increase as the rate of inflation increases).
What I’m not sure of is, if much of this money was pumped in through open market securities or just to bolster reserves, then what why can’t the Federal Reserve sell these same securities to reduce the size of the money supply? And, if Bernanke was so worried about a 1937-esque recession, and the main prognosis given by monetarists and keynesians alike was the Federal Reserve’s attempts to ristrict the money supply (see linked article), then why is the Federal Reserve doing this?
I think that this is only a means by which to assuage the fears of the less-knowledgeable average citizen, and does not actually represent any real attempt to restrict the size of the money supply. Although I am generally a fan of the Wall Street Journal, it seems that recently they have been completely blind to reality when it regards the Federal Reserve. It’s similar to The Economist’s sudden leftist swerve, when it comes to financial regulation.
Maybe because no one wants to buy them. Who would want to buy a toxic asset from the Fed? Even if there was a buyer, do you think that the buyer would want it back at the same price the Fed paid for it? Probably not.
That’s a polite way to describe their activities…